July 25, 2011
This dressed-up deal is no victory for Europe or IrelandPosted in Irish Economy · 152 comments ·
Ireland asked for nothing from the EU last week – and, make no mistake, that’s just what we got
Let’s be clear. The European deal announced last Thursday night is designed to do one thing and one thing only. It is designed to persuade investors to buy Italian and Spanish government bonds. And as an exercise in how the EU works, it was quite a piece of coalition building, buying off here and there, holding hands when necessary and hoping for the best always.
But, just before you get any notions, Thursday had nothing to do with Ireland and while Greece was the proximate reason for the summit, the real action was in Italy and Spain, whose difficulties were heightened by the global background of a debt crisis simmering in the US.
If the ‘troika’ — the EU, ECB and IMF – at the core of euro policy making could persuade investors to buy Italian bonds, they could avert – for now anyway – a continued European debt crisis.
So there were a lot of balls in the air. Obviously, the first crucial aspect of the deal was to quarantine Greece under the tagline that ‘‘Greece is different’’. They needed to ring-fence Greece and declare that any U-turn on previous policy was specific to Greece and Greece alone.
The U-turn on Greece has been spectacular. Having spent the past two years beating the ‘‘default in the euro would be unthinkable’’ drum (and creating much of the crisis), the troika on Thursday sanctioned a massive â‚¬37 billion default on Greek bonds.
But this is only a haircut of about 20 per cent on all Greek debt, and Greece probably needs a haircut of 80 per cent on debt to be able to pay back the money sustainably. It is another fudge.
But for now, if you had bought Greek short-term bonds based on the troika’s promises at the time of the original Greek bailout in April 2010, you have now been shafted. All Greek short-term debt will be converted into long-term IOUs. Those who bought last year’s guff were sold this year’s pup.
Why should Thursday’s promises have any more credibility in a year or two? Fancy a wager?
In essence, what we saw on Thursday was a Brady Bond plan for one country. This column has been arguing that the Latin American debt crisis resolution in the 1980s, known as the Brady Bond plan might be the blueprint for all of Europe. I still believe that this will happen, and that Thursday’s effort to limit default to Greece is ‘finger in the dyke’ stuff.
The original Brady Plan was based on allowing countries to buy their old debts back at deep discounts with new money.
That ‘new’ money was lent to the defaulting governments but guaranteed by the US Treasury so that the countries could reduce their debt/GDP ratios buying back all their debts at a fraction of face value. Once they serviced these ‘new’ old debts, they could borrow again.
To a cynic, this constitutes just a new Ponzi scheme under a new name, but the Latin countries accepted it rather than have to run their countries with zero budget deficits indefinitely, or at least run their countries without borrowing from foreigners.
This is what the Greeks have agreed to, in return for more promises of austerity. But why should such a deal be limited to Greece and not extended to Ireland? After all, the EU sanctioned ‘‘burning the bondholders’’ – is this not the very pledge this new Irish government fought the election on?
Obviously, there is no moral reason why the Irish shouldn’t look for the same treatment as Greece, particularly if the treatment makes Greece’s debt profile more sustainable. If I were an investor, I’d be thinking to myself – ‘‘hold on, the Irish and Portuguese need this type of deal too, so why shouldn’t they get it in the future’’?
But how did the troika fob off a potential ‘me too’ bid from Ireland, given that Ireland’s debt dynamics are so diabolical? Well they banked on playing on the old Irish insecurity of always trying to be one of the goody-goodies in the EU class – the teacher’s pet of negotiators, never causing a scene.
To the extent that when the continentals thought about Ireland, they had to gamble on the assumption that the Irish authorities are so cravenly unable to stand up for their citizens’ interests that they would never cause an embarrassing scene at the summit by forcing bank bondholders to take a bath. The troika wagered that the Irish would sit there and say nothing because by saying something, it might draw attention to us, and we couldn’t have that. We’d deploy the Seamus Heaney line – ‘‘whatever you say, say nothing’’.
We’d side with the big boys, the respectable ones. The troika could buy off Ireland cheaply by conferring on Ireland the best of the worst accolade. That they did, by praising the Irish, patting us on the head.
But egregiously when you look at the detail, it seems that we committed to talks about corporate tax harmonisation. In return for what? In return for the troika stopping their present policy of loan sharking – charging us extortionate interest on the loan and dressing it up as a friendly ‘bailout’. Friends don’t involve themselves in loan sharking.
So now we have no deal on the banks, no debt forgiveness, ‘normal’ official interest rates for an official loan and a threat to our corporate tax rate. This is now being dressed up as a victory for Ireland.
Having bought the Irish off cheaply as an afterthought, the troika had to deal with another more pressing constituency – the investment banks that held Greek bonds.
If they were to prevent a complete collapse of Greek asset prices, the leaders had to come up with more money from somewhere else to make sure that the share prices of the bank that owned the Greek crud, didn’t tank further. So they turned to who? How do I put this nicely. . .you.
The summit decided to expand the slush fund known as the ESFS with taxpayers’ money that can be used to prop up the assets of countries like Greece to make sure the private banks don’t take a bath. Is it any wonder bank shares rallied on the news?
All this is hoped to encourage investors to buy Italian bonds. Let’s see what happens – but I wouldn’t be too confident.
It is easy to see why the Triumvirate behaved as they did. They have so many conflicting constituencies to hold together. They need to keep the Germans on-side and also the Finns, who want no part of taxpayer bailouts.
The French need to protect their overexposed banks that are up to their necks in Greek debt and thus need a taxpayer bailout. The Italians and Spanish need to stop a run on their bond markets, so they need a deal that quarantines Greece. The ECB need a deal which makes its previous promises credible and prevents everyone jumping on the emerging European Brady Bond bandwagon. So they drew a line at Ireland.
And we did what? We opened up negotiations on our corporate tax rate in return for a commitment from our so-called friends to desist from loan sharking.
In the end, we have just experienced a shift in language that would make Orwell’s Big Brother blush. Think about it, we have ended up with an explicit selective default in the euro.
This is now being signalled as a triumph. Yet up until last Thursday the official line was that such a default in the euro would constitute a calamitous defeat. Crisis over? I wouldn’t bank on it because the stated universal agreement for everyone to cut spending now and go for zero or close to zero deficits will cause growth to falter, generating the expectations for the next bailout.