by Frank Schnittger
Fri Sep 24th, 2010 at 07:41:31 AM EST
Bailing out Anglo-Irish Bank is not only economically stupid and politically terminal; it is immoral. My title encapsulates two notions that are extremely unpopular in contemporary thought: The notion that a nation can be said to have distinctive traits, and the notion of immorality itself. Of course all the usual caveats apply: to speak of Ireland as being immoral is not to generalise about all Irish people, and to speak of immorality begs the question of whose and what moral rules you are applying.
However I wish to start form this perhaps slightly absurd starting point to illustrate the absurdity of the situation Ireland now finds itself in: Three years ago Ireland had one of the most "modern" economies in the world, with a high standard of living, low national debt and a relatively advanced industrial, social and political infrastructure. Now all of this has been put at risk by the debts of the banking sector, and, in particular, by the debts of the Anglo-Irish Bank - a business bank with a narrow client base amongst the "developer" community many Irish people had never even heard of before the crisis struck.
My point simply is this: whatever the economic arguments for and against bailing our this relatively obscure bank - all of which seem to revolve around the impact of a bank failure on the international "investment community" which Ireland now relies on to fund its hugely inflated national debt - what is the moral impact of making ordinary taxpayers liable for the debts of a failed private bank?
Irish GNP has declined by 17%, the Debt/GDP ratio is likely to rise from 25% to 136%, an extra 10% of the Irish workforce have already been unemployed, many small businesses have failed because of a withdrawal of working capital by cash starved banks, many home-owners are in mortgage arrears or in negative equity, many of our most vulnerable citizens have had their social and medical services cut - and for all of these there will be no bail-out. Only the anonymous and mostly foreign banking entities who where bond-holders (risk investors, not depositors!) in Anglo-Irish Bank will be bailed out - to the tune of c. 30 Billion or almost 20% of Irish GNP.
And despite the bail-out, and the supposed credibility this is claimed to impart to the Irish state in the eyes of international investors; interest rates on Irish debt are now exceeding 6% imposing an increasingly unsustainable burden on the Irish economy and tax base. This is almost 4% above German Sovereign Debt rates - the very country who's banks are said to be the major holders of Anglo-Irish bonds.
Indeed, it can be argued that international investors are punishing Ireland for being so stupid as to nationalise and bail-out the bank in the first place. It is as if they are saying "We're immoral when it comes to money, so what the hell do you think you're doing by paying us back?" This isn't playing by the rules. The concept of "Moral Hazard", that investors should reap both the rewards and losses of their investment decisions is central to the ideology of Capitalism itself.
Making taxpayers who had no hand, act or part in the success or failure of a bank liable for its failures isn't just economically stupid, it is immoral, even by the "rules" of capitalism itself. Ireland is effectively allowing itself to be extorted for fear of other consequences, and in so doing it is undermining not only its own relatively advanced economic infrastructure, but the moral and social order of Irish society itself.
Even the Financial Times has called on the Irish Government to change this "perverse policy":
FT.com / Comment / Editorial - Ireland's dilemma
The Irish public has already taken plenty of pain in the form of spending and wage cuts. Before asking for more, Mr Cowen should change a perverse policy that pushes up interest rates and crimps growth. Ireland was not highly indebted before the crisis, with sovereign borrowings of just 25 per cent of GDP. Private sector analysts now fear that gross public debt may reach up to 136 per cent in 2014, once Dublin's guarantees and estimated losses are added to its sovereign borrowings. Much of this reflects the state's acceptance of open-ended exposure to private liabilities across the banking sector - a policy that unnerves markets and jacks up sovereign rates.
Ultimately, given the government's determination to shrink the primary deficit, the main determinant of debt sustainability will be the interest rate. Getting market rates down will therefore be more important to control the deficit than cutting a couple more percentage points of GDP from public spending (a course that anyway might further harm a growth path that looks set to lag the government's own projections).
Mr Cowen should cut the umbilical chord to the banking system by making it credible that bondholders will no longer be protected against all losses. This could only be done after enacting a special resolution regime such as the one the UK has adopted. It might mean an Irish banking system with fewer liabilities and more foreign ownership. But it would cut sovereign yields and set the deficit on a sustainable path.
The Irish public has been stoical about austerity but anger is now crystallising around the banks. Mr Cowen has a sobering choice: to allow a wipeout of creditors or face wipeout at the next election.
In fact as an opinion poll for TV3 today makes clear, Cowen faces an electoral wipe-out in any case:
RTÉ News: Curran responds to poor FF poll results
The poll for TV3 was the first since the controversy over Taoiseach Brian Cowen's controversial radio interview and showed that support for him was at 11% and at 22% for Fianna Fáil.
The Millward Brown Lansdowne poll for TV3 also shows a big rise in support for Labour, with Eamon Gilmore as the most popular choice for Taoiseach after the next election.
Labour is the most popular party with 35% support, while Mr Gilmore is the choice of 36% of voters as the next Taoiseach.
Fine Gael is in second place, with 30% support, while just 19% opted for Mr Kenny as Taoiseach.
To put this into perspective: Fianna Fail has led 20 of the past 25 Irish Governments since its foundation in 1932 and has generally achieved well over 40% of the vote. Few have any confidence that an alternative Government led by Fine Gael or Labour would pursue a radically different course because many see the situation now as irrevocable: mistakes have been made which would be extremely difficult to undo.
Meanwhile, the ECB and European Commission continue to press Ireland for further cuts it public expenditure, as if it had been expenditure on the poor, ill and aged which had been the cause of our financial difficulties, and Germany displays increasing indifference to the well-being of the EU as a whole - as if it wasn't German banks which are large beneficiaries of the bail-out.
So is it Ireland's immorality here which is ultimately at fault, or is it the craven stupidity of an Irish Government which seems to think it has to do the bidding of it's masters in global debt markets and German dominance within the EU? The Irish electorate are clearly assigning blame to the Irish Government, even when the opposition parties are not articulating a clearly different policy. It seems that the Irish political and business leadership class in general see Ireland as having no option but to do the bidding of our global financial and European political masters.
But herein lies the fundamental immorality in my view: No one is arguing that Irish taxpayers are legally or morally liable for the private debts of international banks and investors who foolishly invested in Irish banks. The argument is simply that "There Is No Alternative" (TINA). In accepting that logic the Irish leadership class is doing the global financial and European Political community no favours: Moral hazard is an unavoidable part of the capitalist system. By caving in to the extortionate demands of larger players, Ireland is undermining the international system as a whole - never mind the damage done to the Irish citizens who can afford it least - and who had the very least responsibility for the crisis in the first place.
Our political mistake is to see the international investment community as one coherent corporate body which will punish us for any default - when in fact investors are individual actors who have little sympathy for competing investors who make bad decisions. Our immorality lies in accepting that the poor should suffer for the sins of the rich. That is something that is not even congruent with capitalism red in tooth and claw. It is back to the robber barons of disaster capitalism; of government by conquest rather than consent.
At least we haven't entirely lost our sense of humour, however. Writing in today's Irish Times, FRANK MCNALLY argues that Ireland should be split into two independent entities: Good and Bad Ireland...
Time for Good Ireland to tell Bad Ireland to split - The Irish Times - Fri, Sep 24, 2010
"Good" Ireland would retain most of the national territory, including islands and seas; all working parts of the economy; success in the arts and sport; a reputation for friendliness; any remaining tours of Riverdance , etc. "Bad" Ireland (BI) would take over the mess left by the construction bubble. In this respect, BI wouldn't be so much a country - at least initially - as an asset company with impaired loans.
Its vast debts thus moved "off-balance-sheet", Good Ireland would (one hopes) soon recover a triple-A credit rating and be borrowing money again at under 3 per cent, like the Germans. Bad Ireland, meanwhile, could test the thesis - popular among some economists - that markets have short memories, and that having failed to reward us for being virtuous, they might equally fail to punish us for defaulting.
This is a radical proposal: untried at national level anywhere. So in breaking new ground, there would be many big questions to answer.
Speaking of ground, for example, would Bad Ireland need a territory? Arguably not. It could be just an accounting exercise, run from a back-office in Dublin, like those tax-avoiding multinational subsidiaries that have no employees but control billions of their mother company's profits. In this sense, bad Ireland could be a logical progression of an idea beloved of business leaders: "Ireland Inc".
But maybe some geographical identity would be advisable, if only to distinguish it from Good Ireland. There are several possibilities. One is that, while moving debts off-balance-sheet, we could also move them off-shore: to one of our abandoned islands, which - in a swift referendum on Article 2 - would be declared independent for the purpose. If the mainland was deemed preferable, however, a greenfield site near Malin Head might suit. Not only would it be safely distant from good Ireland's HQ, benefits might also accrue from that part of Donegal's mythical location. As Ireland's most northerly point, while also being firmly in the "South", it could encourage the creative ambiguity that my two-state solution requires.
Speaking of two-state solutions, another possible model would be along the lines of the Palestinian territories. The borders of Bad Ireland need not be contiguous. On the contrary, there's an argument that, as well as nominally owning all the country's ghost estates, abandoned building sites and empty office blocks, the administration of Bad Ireland should be physically based there too.
Hence there might be a "Gaza strip" in every Irish town, self-governing and connected to each other by "corridors" through Good Ireland. Yes, it would be a nightmare to run such a state. But in my ideal scenario, the territory would be administered by those people who love saying - vis-a-vis the causes of our economic disaster - that "we are where we are". Maybe after a year or two of getting lost on backroads, they might finally drop that phrase.
On the other hand, the Palestinian model could make Bad Ireland bigger than Andorra, San Marino, and several other European states that have their own football team. I'm not sure we want that. So getting back to more concentrated territories, my last suggested location is the site earmarked for Thornton Hall prison. This would be apt for many reasons: including the possibility that, eventually, certain people would be deported there to help run the new country, as part of their community-service sentences.
Bad Ireland would need an official name: perhaps "Namaland" or the "Anglo-Irish Republic". It would also need a flag. I suggest the existing Tricolour with skull-and-crossbones, or a harp with all the strings broken. Ideally, the statelet should not be too political. It would, after all, be a business arrangement. So whatever its name (this is important), it should have the letters "PLC" after it. And rather than a president, it would have a chief executive.
Perhaps the serious point here is that countries are not corporations; citizens are not shareholders. The financial engineering and "creative" accounting solutions currently possible for private corporations are not appropriate for sovereign states. Different rules do and should apply. To make a Sovereign State liable for the failings of its banking sector is not just economically nonsensical; it is politically suicidal and morally wrong. Otherwise, what is the point of having private enterprise and a mixed economy in the first place: to enable the rich to get richer and the poor to bear the loses when things go wrong?
This isn't just a time when a part of Ireland's soul dies, but when the European dream also becomes besmirched. The "European Community" used to mean that greater common interests and human rights should triumph over the economic and political interests of national elites. The only institution that should be "too big to fail" in this instance should be the state and the EU itself.
Ireland's failure here also betrays a moral vacuum at the heart of Europe. We have betrayed the Ireland and the EU bequeathed to us by the post war generations.