April 20, 2011
We should go to back of class for economic sinsPosted in International Economy · 96 comments ·
When I was in school, the class was fairly split between swots and messers. But the messers broke into two groups. The first were the hard-core messers — these were the lads who the teachers told us “would come to no good”. If they were caught smoking in the jacks and you had just managed to evade capture, these were the lads who would never rat on you.
On the other hand, the second type of messers were the most dangerous — they were the blokes who wanted to curry favour with the teacher and would squeal on you at the first hint of trouble. They wanted to be treated as swots but weren’t quite good enough, so when they stepped over the line and were snared, they always sided with the teacher and capitulated at the most modest disciplinary threats.
The Irish establishment reminds me of these guys who want to be with the ‘goody goodies’ at the top of the class but don’t have the wherewithal. Worse still, these were the lads who capitulated at the smallest threat from the top, so they are the easiest to control because they don’t have the natural self-confidence and ability of the clever lads, nor do they have the natural self-confidence and defiance of the real messers.
Europe is split between the swots — the countries that owe nothing to anyone — and the messers, the countries who owe their shirts to everyone. Most of the swots are well behaved, looking down their noses in private at the messers, while saying nothing incriminatory in public, preferring to condemn in a conspiracy of supercilious silence. Except of course for Finland, which broke ranks this weekend.
When faced with the distinct division between debtor nations and creditor nations, the cleverest thing for the debtors — the messers — to do is form a coalition of delinquency to strengthen their hand in future negotiations. This is, after all, what the creditors are doing.
If it was in doubt before, it is clear now that the endgame for Europe will involve a massive structured default, so we should decide what side we are on.
Today is the first anniversary of the Greek bailout. Greek two- year interest rates are more than 20pc. Greek government bonds are 11pc above those of Germany. Remember last year’s bailout was supposed to solve Europe’s debt crisis.
Back then, even though Ireland was a financial delinquent, we tried to behave like one of the swots. Our Finance Minister puffed his chest out and told anyone who might listen that “we are not Greece”. But no one believed him. What they saw was a snitch, trying to belittle a nation whose total debt — public and private — is much less than ours. The minister then earmarked â‚¬2bn he didn’t have to help these poor Greeks. This cavalier exercise in fiscal delusion combined with belittling our partners who found themselves in trouble did us no favours. We were trying to suck up to the good guys when everyone knew we were no better than the Greeks. Ultimately, the Greek finance minister got his own back during the week the IMF came in here, when he looked at our banking mess and claimed loudly that “Greece is no Ireland”.
Having been so quick to condemn the Greeks and sneer at the Portuguese, we found that we had few enough friends when we needed them last November. Instead of seeking a debtors’ alliance, having the self-confidence to admit that we were weak, and the defiance to point out that it was a mutual creditor and debtor problem, we sought to curry favour.
We displayed the age-old Irish weakness of preferring to be loved rather than feared, to be pliant rather than defiant, to be malleable rather than awkward.
Well, this game has not worked. In the past two days the rating agencies — after billion- euro bailouts and capitalisations — still downgraded our banks to junk status. We know that Greece is on the verge of default. We also know that in capitalism the key concept in a bankruptcy is the idea of co-responsibility, where the creditors and the debtors are equally responsible.
According to the Bank of International Settlements, the debtors of European periphery owe the creditors â‚¬1.1 trillion, or â‚¬1,100bn. So it is clear this money will not be paid and will have to be restructured.
There are two ways for creditor nations to deal with this. The first is to realise that the game is up and do a deal before the likes of the Greeks default and drag us with them after the IMF money runs out. This would seem silly. The longer they wait, the more likely the anti-euro result of Finland’s election will be repeated in the other creditor countries. The Finns voted that they had enough of paying for Germany’s banks and close to 20pc voted for a party that is against any more money going to the periphery and, by extension, to the German creditors.
Finland’s conversion to fiscal and monetary prudence is at odds with the Finland I first visited in the winter of 1994, when the Finnish municipalities were raising money from foreigners. Finland in 1993, having told the world it would not devalue, devalued overnight by more than 40pc. They consequently “burned all the foreign bondholders” who had originally invested their “hard currency” in Finland on the basis that the Finnish currency — the Markka — would be held stable. And who was in the Finnish cabinet when Finland burned all the foreign investors and put the future of the Finnish citizen before the foreign financier? Why Olli Rehn, of course. The same Olli who says to do such a thing would be dreadful.
When I was there, I was representing the people who were about to commit new money to Finland. And do you know what happened after Finland burned its bondholders via a shock devaluation? Was it cast out of the markets and turned into a pariah?
No: the international banks — such as the one I worked for — were back in, just a year later, lending again. I know this for a fact; I was there doing the lending! Not only were we lending to the Finnish government, we were lending to Finnish county councils and municipalities.
So it is hard to take this new-found Finnish probity seriously. The consequence of Finland breaking its international promises was actually inconsequential. Why was this? It was because everyone understood that Finland with a more competitive currency was a better bet. Similarly now, everyone understands that the periphery of Europe with less debt will be a better bet. A balance sheet with less debt is a better balance sheet and less at risk of future default. Simple.
Now that Greece is on the brink and we have been downgraded to junk-bond status, Spain looks next to go and Portugal is settling into an IMF bailout, 1,000 people a week are leaving our country and the rating agencies doubt even the US’s ability to pay its debts — isn’t it time to realise that the world has changed?
So what do we want, chaos or an organised solution? Maybe it’s time the messers realised that the swots’ solution has not worked. It is time to rethink employing the common sense of the back of the class rather than the elegant theories of the teacher’s pet.