Ireland Drowning in Private Debt (1 of 4)

Paul Sweeney: There is little or no recovery after five years of austerity in Ireland, especially when judged by the key factor of unemployment. Ireland does appear to be on target to reduce its budget deficit to 3 per cent. But at great cost to the rest of the economy and to society.

Last week’s deal by the Irish Government on the private bank Promissory Notes will give a boost to confidence in Ireland. However, it was a deal which should never have had to be done and it should not have totally protected the private bank creditors of the two dead banks, Anglo Irish and Irish Nationwide. There should have been burden-sharing by the private creditors who were stupid enough to lend to these banks.

Ireland has institutionalised the “Geithner Doctrine” which is that top banks must not fail and that no bondholder will be left behind. The Geithner Doctrine is deep-rooted in EU governments, as Ireland has shown.

Leading economist Morgan Kelly said that in December 2010, “at a conference call with the G7 finance ministers, the haircut (of Irish bank bondholders) was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are” Irish Times, 11 May, 2011. Geithner was worried that if Ireland refused to repay bank bondholders then, according the UK Daily Telegraph (10 June 2011), “that could have spread contagion to the entire European system, to which American-backed “credit default swaps” were exposed to the tune of €120bn.”

The Minister for Finance used an elegant metaphor in explaining his deal on the Promissory Notes. He talked of the mortgage on his own home and said he had turned a harsh term loan into a long term mortgage and by the time it will be fully repaid, it will not be so costly. What is missing is that he at least has a home. The Irish citizens get little or nothing for their payments.

Ireland will now get up to 40 years to repay the debts of the private banks and at lower interest rates. But our 1.8 million at work will repay over €35bn, which is more than the total tax paid last year (€33.7bn) in Ireland. For this we will get absolutely nothing in return – not one school building, not one teacher nor even a hospital bed. Such deal may satisfy the ECB and the EU, but it undermines respect for democracy.

Ireland‘s economic collapse in 2008 was not due to poor competitiveness, nor to public sector profligacy, but to gross irresponsibility by a small elite in the private sector, operating within what had become an ultra-liberal economic system. It was the private banking collapse, which the government foolishly under-wrote which brought Ireland down. Commissioner Rehn demanded, in Latin, “pacta sunt servanda” and in English that the Irish taxpayers “respect your commitments and obligations.”

But these debts are not ours, but those of the private defunct banks, which our sacked previous government guaranteed, in our name, without our consent. Prior to this, European banks queued up to lend to our reckless banks, while the ECB looked on benignly. Tax policy – cutting direct taxes on incomes and profits, tax breaks especially for property investment and tax-shifting – also contributed substantially to Ireland’s current economic crisis. The third factor was de-regulation.

This series of four blog posts results from Paul Sweeney's presentation to the IMF in Washington, February 2013. Three case studies were discussed (Portugal, Romania and Ireland). This was part of a wider meeting between the International Trade Union Confederation, the IMF and the World Bank

Paul Sweeney     @paulsweeneyman

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.