Wednesday, November 17, 2010

The Irish Crisis

How it must hurt to be Irish right now.

Bond markets have been sending clear signals that lending to Ireland is a risky endeavour, that the risk of default is rising. Dublin must offer 665 basis points more for 10-year bonds than Berlin does, an astronomical 6.65 percent. The Republic of Ireland took on debt in 2008/2009 to assist its massive banking sector and prevent it from collapsing. Debts were transferred from the private sector to the public sector, with the consequence that swingeing cuts in public spending have been necessary, and the capacity to borrow when needed has shrunk.

Ireland is on the brink of being a developing country once again. And its government is looking for a way to avert catastrophe without resorting to a public bailout from Europe and the IMF under the auspices of the European Financial Stability Facility (EFSF).

As a result, Irish Finance Minister Brian Lenihan is seeking a bailout that would go directly to banks and not the government, saving the government the shame and humiliation of publicly receiving what amounts to institutionalised development assistance. If Lenihan is successful, he will secure an enormous state aid programme for the Irish financial sector. This would be ground-breaking (an EU facility to bail out private companies in addition to national governments),  expensive (no programme like this is restricted to a single recipient in EU politics), precedent-setting (other countries would line up for handouts if the Irish package were approved), and a massive violation of EU rules against public subsidy of private companies. All of which are reasons why it shouldn't happen. The EU has already broken rules on providing subsidies to banks in the financial crisis,. but until now it has been national governments who have been providing the cash injections.

It appears that Ireland's rescue may come from the country that sees itself as next to be torpedoed if the Irish ship sinks: the United Kingdom. This offer is for bilateral aid from London to Dublin, bypassing the EU and the EFSF, and possibly subsidising the banks directly in a way that would not set European precedents. In doing so, London is also keen to discredit the EFSF, which it has allowed to be set up but refuses to actively support. London stated today that whatever bailout plans Europe might offer would be too little and too late, and that national action was imperative and right.

UK Chancellor George Osborne today underlined the UK national interest in underwriting Ireland's survival and ensuring that Dublin can hold to its present course of budget cutbacks and structural reforms to the economy. That interest is not only based on the similar economic profiles of Ireland and the UK, including a distinctive reliance on low taxes, light regulation and a strong financial services sector. He sees the UK and Ireland as ideological comrades on the fringe of Europe, and he is right. The Conservative/Liberal Democratic government in the UK is also intent on preserving national sovereignty and inflicting massive budget cuts on the UK economy. Universities will have their funding cut by 80%, and welfare cuts are pending.

In Dublin Castle, there are portraits of James Connolly and other martyrs of the Easter Rising of 1916. It is there, looking into the faces of these men long gone, and listening to a tour guide explain how the British rounded them up and executed them, strapping Connolly to a chair to shoot him because he was too ill to stand, that you begin to understand just what it means for Ireland to have Britain as its only hope. Lenihan hasn't rejected this offer as he has rejected EU and IMF aid. He and the Irish government will take it if it will avoid the shame of institutionalised aid to the Irish government. Because the Irish Crisis isn't simply economic. The whole country is on the line.

That's how much is at stake.

1 comment:

  1. I've never understood why the Irish got so angry over those Clontarf Prison executions. The Easter Rising was about as popular as an epidemic of venereal disease (the Guiness Brewery even supplied the Brits with improvised armoured cars to get those guys out of the GPO), and executing the ring leaders seems like the entirely appropriate thing to do for the leaders of a rebellion in the middle of a World War. (If you go to St. Patrick's Cathedral in Dublin, you can still see the Book of the Irish dead, as well as all the WWI army banners.)