September 27, 2010
Iceland’s main interest rate was lowered on Friday to 6.25 per cent, while its ten-year debt is also trading around this level. Ireland’s cost of long-term, borrowing rose on Friday to 6.5 per cent.
So Irish interest rates are now higher than Icelandic interest rates.
Icelandic interest rates are now lower than Irish rates: just take that in for a second.
The country that defaulted on debts, shut down its delinquent banks, burned the bondholders, allowed its currency to fall and did everything ‘wrong’, according to the Irish establishment now, is regarded by the financial markets as a safer bet than Ireland.
Think about it. Iceland is a country where the residents refused to allow international bankers bleed the country dry and put the policy of making the people stump up for the banks to a referendum.
Obviously, the people rejected the idea of paying foreign banks what the banks demanded.
More sensibly, they said Iceland would restructure the debts so that Iceland can survive.
Last week, the Icelandic Supreme Court ruled that Icelanders who took out foreign currency mortgages and loans did not have to pay them back because the loans were illegal.
If you were to believe the propaganda from the Irish government, such a move should have caused interest rates to spike upwards – as investors panicked.
But the opposite happened.
Investors looked at Iceland, which has seen its unemployment peak at just above 7 per cent and growth has returned, and concluded that it was going the right way.
The reason for the markets’ reaction is that financial markets are forward looking.
You win some, you lose some, but the key is to stay in the game.
The more it looks like Iceland is on the right track to growth, the more the markets will forget what happened and will look to a profitable future in Iceland. But you can only be profitable if the country is growing; what really scares investors is a country with a death wish.
So, two years after the crisis, Iceland’s interest rates – the key barometer of market confidence – are falling. In contrast, two years after our crisis, Irish interest rates are rising.
Our international reputation is in doubt. Last Friday, our Minister for Finance suggested that this might be because economic commentators had been too negative.
RAF pilots in the war had an expression:’ ‘You only take the flak when you are over the target.” It is hard not to conclude that, the closer a commentator is to the truth, the more flak he takes from the establishment which has told so many stories and sold so much spin that it doesn’t know what the truth is any more.
The truth is that – as this column has been arguing for over a year and half now- our banking policy is verging on the financially suicidal.
We in Ireland were told that, if we knuckled under and slashed our budget deficit and kept our banks afloat by giving the innocent the bill for the guilty, we would be rewarded by the financial markets with lower interest rates.
This was never right. It was always wrong because that is not how the world works.
The markets want growth and anything that strangles growth scares them.
Those of us who argued that the government’s policy would fail were ridiculed.
Yet again, official Ireland has been proved to be wrong, criminally wrong. But these spats really don’t matter; what matters is how we are going to get out of this.
The recovery here in Ireland is in our own hands. It will be local and it will happen when local people decide they have had enough and it is time to start the fight back.
Last year, I travelled to Iceland to see how they were dealing with the crisis and I was amazed at the feeling of local solidarity.
In little bars and cafes in remote areas, they constantly said tome that they would get out of this on their own, by promoting their own local industries and produce and selling it to other Icelanders.
In a tiny village outside Reykjavik, a few local shopkeepers said they would figure out how to get people into their village to boost business.
Undoubtedly, the government’s defiant stance towards the foreign banks instilled a sense of national solidarity, and it was impressive to see.
In the last week, I have seen the same spirit in Ireland in two very different communities.
Last Saturday night, I was in a bar called Murrays in Graiguenamanagh, listening to a brilliant ceili band, the Darty Ceili Band from Sligo.
I was at the Graiguenamanagh Town of Books fair, which is an annual event with the aim of turning Graig’ into Ireland’s book town, not unlike Hay-on-Wye. This is the dream of a local businessman and he is drawing on all the town’s resources to make this happen.
The next day, as I strolled on the most beautiful walk up the canal on the river Barrow from Graig to St Mullins, it seemed so obvious: our recovery will be local.
This was reinforced on Friday night in Clifden, where the arts festival was in full swing. I found myself listening to a combination of Breton and Armenian music out on the western seaboard, and the place was full of locals and tourists.
The point is that the Clifden Arts Week and the Graiguenamanagh book fair are just examples of what is going on all over the country, despite – rather than because of – the government.
These are local initiatives, which wouldn’t happen without the indomitable human spirit to do something for ourselves.
The organisers of both events put in huge amounts of work behind the scenes to make sure that, for a few days, extra people come and visit the town and spend a few extra euro in the shops and bars.
These few extra euro all add up and, if the initiatives are successful, more and more people come back.
Here are two small examples of the locals using culture to liberate the economy.
This is what we are good at in Ireland: locals coming together to create an atmosphere, normally using literature, music and the arts, in order to help ourselves to help ourselves.
This is the communal energy which exists in all small towns and villages, all over the country. It is there. It is ready to be harnessed organically and this is the sort of local spending which creates local jobs.
All we are asking of our government is not to make any more elementary mistakes.
Don’t lumber us with debts we can’t pay.
We don’t need a huge banking system.
We don’t need to be world-beaters. We can explain to Germany and France that we are weak and want to start small again.
This is how economic recoveries happen.
They don’t start on the bond trading floors of London.
They start inside the minds of all of us.
The recovery will be more GAA than IDA, less bond market, more farmer’s market.
All we are asking the government to do is to not make the problem they caused in the past ten years any worse.
This is what the Icelandic government did. Is it too much to ask?