Emerald Guile:
What Ireland's Bailout Means For Us
By Carl
Horowitz
12/25/2010
Townhall.com
The scenario has
a familiar ring. A country goes on a credit binge.
Borrowers in large numbers receive approval for home
mortgages and other loans that they can’t afford to repay.
A sharp upswing in defaults and foreclosures of these
now-securitized loans helps trigger a world financial
crisis. And a frantic government bails out investors to
prevent a depression and defuse political chaos. That’s
Ireland we’re talking about.
By now almost
everyone glued to financial news outlets knows that the
Republic of Ireland, population 4.5 million, is set to
receive a whopping emergency loan bailout worth 67.5 billion
euros (US$89.4 billion). Irish lawmakers, by a close
margin, voted on December 15 to accept the terms of the
package. Two-thirds of that sum will come from the European
Union (EU), fresh from staving off collapse in Greece a
half-year earlier; the other third will come from the
Washington, D.C.-based International Monetary Fund (IMF).
The average interest rate is 5.8 percent. Lurking
somewhere in all this are lessons for America, no stranger
lately to bailouts either.
The rescue of the
weakest links in the 16-nation euro zone, led by an
increasingly recalcitrant Germany, likely will “work” – for
now. But in bringing short-term stability, they also raise
the risk of a more intractable crisis down the road. For if
recipient nations of this largesse cannot pay back their
loans – not inconceivable – they either must raise taxes to
intolerable levels (triggering a capital flight and,
paradoxically, foregone tax revenues), cut basic public
services to the bone or ask other nations for help once
more. Ireland’s crisis mirrors that of Europe.
This is a far cry
from a half-decade ago. Ireland, if one recalls, was a
veritable “Celtic tiger,” showing the world how to run an
economy. U.S. information technology companies, including
Cisco, IBM, Intel and Microsoft, lured by the country’s low
12.5 percent corporate tax rate, literate English-speaking
labor force and membership in the World Trade Organization,
located plants and back offices there. Domestic enterprises
also grew, and not just export-oriented mainstays like
Waterford, Guinness and Barry’s Tea, but also RTE, Magnet
Entertainment and IONA Technologies. Many Irish who had
migrated abroad during the Eighties in search of work – New
York City was an especially common destination – came home.
If people didn’t come to Ireland to work, they came to
play. Offering lush countryside, quaint urbanity, and
cultural creativity (e.g., “Riverdance,” Enya), Ireland
became a magnet for tourists and their dollars. Annual GDP
growth during 1994-2007 averaged around 6.5 percent. And by
the end of that period, Ireland had about 30,000 euro
millionaires.
A by-product of
this growth and accompanying optimism was a desire to buy a
home – and not just any home, but single-family dwellings
that rivaled those in some of America’s best neighborhoods.
The banking and real estate industries were happy to
accommodate the rush, and then some. And anticipating
indefinitely rising prices, homebuyers were happy to pay a
premium. During 1994-2007 house prices in Ireland rose by
more than 500 percent, setting in motion a debt bomb that
finally detonated in 2008.
Exacerbating the
collapse was rapid public sector growth. Flush with
potential tax revenues, many Irish officials believed they
could afford the expenditures. When recession hit with full
force, government couldn’t adjust. By the close of 2009,
public debt represented 57.7 percent of GDP, a figure only
half that of Greece, but alarming all the same.
The Irish debt
crisis, in short, has morphed into a general crisis. The
country is looking at a cumulative debt of $2.25 trillion,
more than a dozen times its 2009 Gross Domestic Product of
$172.5 billion. That comes to more than $530,000 per
capita. GDP is down by around 10 percent from 2008. House
prices have tumbled by as much as 70 percent in some
communities – talk about “underwater” real estate! The
national unemployment rate, only 4.6 percent in 2007, rose
rapidly during 2008-09 and has hovered around 13.5 percent
these past several months. Unemployment claims rose from
267,200 in November 2008 to 466,900 in August 2010. Direct
foreign investment dried up. Ireland became the first
European Union nation to enter a recession, as defined by
the EU Central Statistics Office. And banks, increasingly
unable to collect from strapped borrowers, have fast
approached insolvency. To add to the indignity, the
nation’s suicide rate has increased 25 percent in the past
year.
The Conference
Board, a Manhattan-based global nonprofit business research
organization, aptly summarized the situation: “The luck of
the Irish has run out.”
Indeed, it has.
And Ireland turned to foreign sources for a reversal of
fortune. A month ago, following tense meetings, the
European Union and the IMF agreed to save the day. The
rescue protects mainly foreign investors, assuring timely
payments of around $60 billion in Irish senior bank bonds.
But if bondholders won’t be forced to take a loss (at least
for the next few years), Ireland is learning the meaning of
the word “austerity.” To repay its $89.4 billion loan
package, the Irish government must set aside: $43.1 billion
to cover budget deficits over the next four years; hold
$33.1 billion in reserve for commercial banks; and hold
another $13.2 billion in reserve for state banks. In
addition, the government will have to contribute $23.2
billion in cash reserves and pension funds to cover current
expenditures, thus pushing the true cost of the bailout to
beyond $110 billion. Moreover, it must reduce its budget
deficit from the current 32 percent of GDP (the highest in
postwar European history) to 3 percent by 2015.
The
detritus of bad lending decisions is being felt
politically. On November 27 more than 100,000 Irish took to
the streets of downtown Dublin to protest the international
bailout and mandated austerity. “We should be more like the
French and get onto the streets more often,” said contractor
Mick Wallace, who has had to lay off about 100 construction
workers. A beleaguered Prime Minister Brian Cowen already
has announced that he will step down early next year.
The pain is
especially acute for those who have lost their homes, put
buying plans on hold, or build homes for a living. Ireland
is now home to at least 600 vacant, often unfinished
residential developments known as “ghost estates.” The
homes aren’t being sold because they can’t be sold.
As the real estate boom was a product of an
artificially-generated credit boom, the pool of creditworthy
buyers in the recession has diminished sharply. And in a
manner not unlike our own Troubled Asset Relief Program
(TARP), Ireland earlier this year set up its National Asset
Management Agency to remove about 80 million euros (US$104.2
billion) worth of bad assets from the country’s banks. As
it is, fearful depositors have pulled out billions of
dollars in recent months. And only days ago, Moody’s
dropped Ireland’s credit rating to just three steps above
junk-bond status.
Germany, the
richest EU nation, understandably is a reluctant business
partner. On one hand, led by Chancellor Angela Merkel, the
Germans have made known their distaste for bailing out
member nations. On the other hand, their assets are heavily
tied up in weaker countries. German banks currently hold a
combined $515 billion in debt owed by the so-called “PIGS” –
Portugal, Ireland, Greece and Spain (the U.S. share is $133
billion). If heavily-indebted Spain, with more than 45
million people, needs a bailout, a full-scale panic may
ensue. The Germans are going along with the bailout if only
to preserve the illusion of EU stability.
It’s not as if
the Irish are happy with their predicament. An editorial in
the Irish Times (November 18) inveighed, “Having obtained
our political independence from Britain to be the masters of
our own affairs, we have now surrendered our sovereignty to
the European Commission, the European Central Bank, and the
International Monetary Fund.” And Gerry Mullin, a car
dealer in Monaghan, laments: “Jesus Christ, we’re the
laughingstock of the world. We’re back into a fine mess, we
are. Look. You got the IMF coming now.”
If the bailout is
eroding Irish self-reliance and pride, not everyone is
planning on sticking around for the conclusion. Tara
Keegan, 26, a Dubliner with a master’s degree, puts it this
way: “For me, England is the next step, but people are
going to Canada, Australia, everywhere you can get work.”
She’s apparently in good company. Some 13,400 Irish
nationals moved overseas in fiscal 2008, a figure that
jumped to 27,700 this past year. The Union of Students of
Ireland estimates that more than 75,000 recent college
graduates will emigrate over the next five years. “People
aren’t leaving because they want to; there isn’t much
choice,” notes the London-bound Daniel Philbin-Bowman, a
student at Dublin’s Trinity College. “The country needs to
be rebuilt.” Responds his professor, Elaine Byrne: “But
who will rebuild it if all of you are leaving?”
It’s a paradox,
all right. And we Americans, luckily, aren’t remotely at
the point where we have to resolve it. Yet our fate, like
it or not, is tied to that of Ireland. There are a number
of reasons why the U.S. can’t escape.
First, some $30 billion of the Irish
bailout is coming from the International Monetary Fund. And
since our own government currently covers 17 percent of IMF
expenses, U.S. taxpayers are on the hook for about $5
billion. The IMF isn’t hesitant about calling for
additional bailouts worldwide either. Its October 2010
Global Financial Stability Report (“Sovereigns, Funding, and
Systemic Liquidity”) recommended that governments inject
fresh equity into banks and prop up funding structures
through further emergency support. “Nearly $4 trillion of
bank debt will need to be rolled over in the next 24
months,” noted the report. By implication, America will
have to do its part.
Second, U.S. institutional investors hold
about $25 billion in Irish assets, according to the Basel,
Switzerland-based Bank for International Settlements, which
serves as a clearinghouse for central banks around the
world. That comes to around 15 percent of the $170 billion
invested in Irish banks by foreign lenders overall. Should
Ireland default, our banks either will have to write off the
losses or receive a bailout, whether foreign or domestic.
Third, and most ominously, bailouts in all
countries are self-perpetuating. That is, by providing
large-scale relief for short-sighted or reckless financial
behavior, donors enable the very behavior that led to the
rescue in the first place. Here in America, the $700
billion TARP loan program and $787 billion in “stimulus”
spending have not closed a widening national deficit. Why
should Ireland be immune to this logic? A bailout by its
nature rescues the beneficiary, but also raises expectations
of another bailout. In Europe, this is especially ominous,
since bailouts occur between countries as well as
within them. Just as Greece’s international $144.6 billion
bailout paved the way for the rescue of Ireland, the Irish
bailout in turn has heightened the widely-rumored
possibility that Portugal and Spain will get their own
EU-IMF aid package. The more Ireland needs money, the
more America will be asked to provide it.
Lawmakers in the
U.S., to their credit, grasp what is at stake. Back in May,
in the immediate wake of the Greek fiasco, the Senate, led
by John Cornyn, R-Tex., unanimously approved a measure
requiring that the U.S. representative to the IMF certify
the financial capability of recipient nations whose
government debt exceeds GDP. The provision, now part of the
Dodd-Frank banking reform law, thus far has been symbolic
because the Obama administration believes it impedes its
jurisdiction over foreign policy.
As for Ireland,
its best course of action is to reject outside aid. This
can be done without inviting economic collapse. The example
of Iceland is instructive. This far less populous island
nation in the Atlantic recently experienced a
mortgage-driven banking meltdown every bit as traumatic as
Ireland’s. Yet it rejected outside aid. The result: The
Icelandic economy did not crash. In fact, GDP grew by 1.2
percent in Third Quarter 2010.
Ireland is a
highly resilient nation. It knows all about war, political
chaos and famine. It can survive a banking and fiscal
crisis. Tourists will continue to come. Some even may
settle. The pubs will remain open. “Rescuing” the Irish by
undermining its self-discipline and sovereignty raises
rather than diminishes the likelihood of Round Two.
Bailouts are
seductive. It’s hard to say “no” to one when offered. But
Ireland should turn down the money to assure its people that
it is serious about getting its house in order. We in
America should apply the same lesson to ourselves. ###
In 1916, the
Proclamation of the Irish Republic stated:
We declare the right of the people of
Ireland to the ownership of Ireland, and to the unfettered
control of Irish destinies, to be sovereign and
indefeasible.
The rulers of
the 26-county state, have demonstrated an inability, or, as
the evidence (in most cases) suggests, an unwillingness, to
pursue the restoration of the sovereignty of the people of
Ireland over “The national territory” which “consists of the
whole island of Ireland, its islands and the territorial
seas,” as claimed by Article 2 of deValera’s 1937 “Éire”
constitution, not only in complete disregard of the
Declaration of Independence by the First Dáil Éireann, 21st
January 1919, but also of the “Republic of Ireland”
constitution, which they inherited from Costello and
MacBride. The “Free State” rulers, in conjunction with the
so-called “Good Friday Agreement,” caused the repeal of the
provision claiming such sovereignty. Now they, in greedy
complicity with irresponsible bankers, have compounded the
felony by making such a hash of the Irish economy that, as
stated in the above article, “… we have now surrendered our
sovereignty to the European Commission, the European Central
Bank, and the International Monetary Fund.” By their fruits
you shall know them.
Mise Éire (I Am Ireland), by Pádraic Pearse
1912
I am Ireland:
I am older
than the Old Woman of Beare.
Great my
glory:
I that bore
Cuchulainn the valiant.
Great my shame:
My own
children that sold their mother.
I am Ireland:
I am
lonelier than the Old Woman of Beare.
