November 15, 2010
Less than 20 years ago, the Irish currency was devalued amid apocalyptic warnings. Here we are again, heeding the same warnings, while the Irish people face years of austerity
Many years ago, while working in the Central Bank during the 1993 currency crisis, I witnessed a particular drama playing out. Back then, the Irish authorities tried to fight the inevitable – and lost. They tried to prevent the punt from devaluing within the old EU Exchange Rate Mechanism, and they used the same language as they are using today in the sovereign bond market crisis.
Words like ‘credibility’ and ‘reputation’ were bandied about. The story line was that, if Ireland devalued the punt and did what everyone expected, the credibility of the nation would be tarnished forever.
The consensus view was that the credibility of Ireland’s entire economic policy was tied up with the currency – as Germany’s was with the mighty mark. The problem was that sterling had devalued, famously dropping out of the Exchange Rate Mechanism on Black Wednesday in September 1992 and now Ireland was too expensive as regards Britain, our biggest trading partner.
The official line was that, if we devalued, we would be cast out into the wilderness of second rate nations. However, the Irish people did not believe the government and displayed their own views by driving over the border to Tescos in their thousands, taking advantage of cheap sterling.
In the end, we devalued and guess what? The sky didn’t cave in, the world did not end; on the contrary, the opposite happened. Money flowed into Ireland, interest rates fell and the economy took off.
In fact, everything that official Ireland said would happen after a devaluation turned out to be wrong. The economy thrived once the crisis was over.
In the final days of the crisis, having said that they would support us come what may, the German and French leaders supported the franc, which was much bigger and also coming under speculative pressure, but they let the punt go. This move was referred to as a ‘sweetheart’ deal by the then minister for finance, Bertie Ahern.
The same will happen again now. A solution will be imposed on us which ‘suits’ the wider European interest. There were already signs this weekend of pressure on us to sign up for the stabilisation fund. While it will not be conceded at this stage, in the long term, Ireland will not pay back all the borrowings of our banks. We simply can’t afford to. We will not pay the people who lent recklessly to the Irish banks, and the European leaders are opening up this avenue.
German chancellor Angela Merkel said last week that bondholders to troubled countries would need to share the pain – albeit under a new mechanism which will not come into force until 2013 for sovereign debt. In so doing, she is opening up an exit strategy for our leaders.
Surely now, in terms of our bank debts, it is clear that this principle of the private investor ‘sharing the pain’ must apply and we must do a deal. Merkel is saying, in effect, that, when things go wrong, private investors should share the pain and that it is ok to burn – or at least singe – the bondholders.
As she put it, there may be a clash of politics and the markets here, but sometimes the wider political interest has to win out. Yet our government has run so far up its own cul-de-sac that, rather than reach out for Merkel’s olive branch, it responded – and I am quoting Taoiseach Brian Cowen here -Merkel’s comments were not ‘‘helpful’’. Merkel’s comments were a ‘get out of jail’ card. This is one we can’t refuse. But what happened?
We will instead impose austerity on the Irish people to pay the creditors of our banks, when even the creditors’ boss is hinting that private investors must share the pain when things go wrong. We will take the route that favours the ‘markets’ and ignore the wider political interest of looking after the people.
Let’s look at Merkel’s instincts here. She realises, like former chancellor Helmut Kohl did in 1992, that Ireland is not the issue. We are too small to be the issue; the issue is Europe, not Ireland. Back then, the fault line was the franc and if, in order to ease pressure on the franc, the punt had to devalue, well so be it. Now the big issue is the euro. If, in a chaotic period, we slip into the European Stability Fund, so too might Portugal and then, ultimately, Spain.
This frightens the Europeans because Spain is simply too big for the fund to handle. If they can get a structured solution to the Irish situation, the EU leaders might stop the debt crisis on the periphery. In the same way, allowing the punt to devalue stopped the currency crisis in Europe in 1992.
This solution must involve some renegotiation of what we owe – though it may be awhile before this is accepted, because the current intention of the stabilisation fund is merely to tide countries over by giving them cash. Debts will still be repaid in full, we are told. The trouble is that the markets don’t believe it. This is what they are telling us by bond yields of over 8 per cent: sorry, Ireland, we simply don’t believe you are able to pay us back all our money back and also take on all the debts of your banks. Something has to give.
This is not to suggest that there is an easy way out. Any deal to restructure our debts – or those of our banks – will involve haggling and risks. Our EU partners will not give us an easy ride in any deal. They see a country which is still wealthy and ask why they should have to pay our bills. We still have a big hole in our exchequer finances which has to be closed. There is no painless route out of this mess.
Yet we can start on the road back if, as happened in early 1993 before the pound devalued, we finally accept reality. Just as was the case during the currency crisis, the financial markets are sending us a clear message: it won’t work.
They were right then. And they are right again now.