After the neoliberal summer, Ireland has plunged into debt winter – every Irishman is half a million dollars in foreign debt
Ireland bows to massive prere from the EU and is now toying with the idea of slipping under the euro bailout umbrella against its own will. Without the irresponsible talkativeness of the chancellor it would never have come so far.
Image: O’Dea, CC License
To call Ireland’s financial situation precarious is a gross understatement. The Irish economy is in debt abroad to the tune of US$2.3 trillion – more than over-indebted Japan with its 123 million inhabitants.
Every Irishman, from suckling to geriatric, is thus saddled with more than 513.000 US$ in foreign debt every year. Thus, each year the Irish have to borrow an average of more than 25.000 per capita only for the interest service, whereby the debt mountain did not even become smaller with this sum.
The more credible are, among others, the German banks, which hold Irish bonds worth 138 billion US$. The nationalized Hypo Real Estate, which has Irish government bonds worth 10.3 billion euros on its books, is at the forefront of this development. The fabulous rise of the "Celtic tigers" was a boom on credit – now the bill is coming and Ireland is literally up against the wall.
From Celtic tiger to bedside rug
Besides Iceland, Ireland was hit by the financial crisis like no other country. Shortly before the outbreak of the crisis, Irish banks had loans worth four times the national GDP on their books. In addition to international junk bonds, it was mainly Irish mortgage bonds, which were used to finance a gigantic real estate bubble on the Emerald Isle, that broke the banks’ backs. In the face of this malaise, the Irish government was forced to set up a national bank bailout fund worth a staggering 350 billion euros – translated into German terms, this amounted to 7 trillion euros.
The liquidation of Ireland’s largest bank alone, the now nationalized "Anglo Irish Bank", presents little Ireland with almost insurmountable problems. In the second quarter of this year, for example, the Irish government had to absorb the accumulated losses of 12.3 billion euros – almost 8% of Ireland’s GDP.
The tragic combination of the costs of the bank bailout and the fiscal consequences of the crisis in the real economy have put the public finances in a serious mess. If last year’s budget recorded a 14% deficit as a percentage of GDP, this year’s deficit will rise to a staggering 32% – more than ten times what the Maastricht criteria permit. Thus, in just two years, the restructuring efforts of the last decade, in which Ireland successively reduced its public debt to below 40% of GDP, have been wiped out. Next year, the Irish state will be indebted at around 100% of GDP. The Irish road to success, however, already planted the seeds of today’s crisis "Tiger times" but there have been successes in three sectors in particular:
- in the real estate sector – due to a speculative bubble
- in the financial sector – due to lax regulation and tax advantages
- in the production sector – due to tax dumping. Companies were lured to the country with a corporate tax of 12.5 percent
The neoliberal summer
The Celtic tiger was a giant on clay feet, its growth was unsustainable. Lax banking regulation, which once contributed to the country’s terrific growth figures, has now left it with liabilities of biblical proportions. The tax dumping that brought manufacturing companies – and jobs – into the country is now ensuring that the state does not have enough revenue to finance the consequences of the crisis.
Ireland was the prodigy of neoliberal dreams. The country deregulated and lowered taxes. For one summer, this policy worked well – Ireland was in the black, the state was getting out of debt, while the private sector was getting deeply into debt. The neoliberal house of cards collapsed during the first autumn storm and now winter is moving in.
For the Irish it will be a hard winter. The state has to save money, but on the other hand it will have problems to raise revenue. On the one hand, the country is not only in a deep recession but also in deflation, on the other hand, the government knows that the – mostly American – manufacturing bases are not in Ireland because the island is so grun and the women are so already. If the state now raises the corporate tax, employers will move to the next dumping paradise.
Risk surcharges for uncertainty
Although the medium- to long-term forecasts for the Irish budget are ominous, the state says it will be able to manage with its liquid assets until July 2011. Only then will Ireland have to place new government bonds on the market.
The current prices on the bond market are not yet a problem for the Irish. High risk premiums for Irish bonds, however, are also dragging up the bonds of other ailing euro countries. Thus, the current rates of between 8% and 9% pose problems for Greece, Portugal and Spain in particular, as these countries can only ie their bonds with a "Ireland markup" be able to place.
The risk premium measures the probability that a state will not be able to service its bonds. If investors currently have doubts that the PIIGS countries will be able to service their bonds, this is not just a matter of speculation, but is well founded. When the EU opened its 750-billion-euro bailout fund in May, it said that the markets had calmed down. Since the bailout fund is large enough and the ECB’s legitimacy to buy government bonds in the future convinced the markets, the likelihood of a sovereign default in the eurozone dropped significantly. As a result, investor mistrust has decreased and risk premiums have fallen significantly.
However, political incompetence and the German fixation on austerity programs softened the actually good concept of the bailout fund and ensured that not a single euro from this program has been drawn down to date.
Angela Merkel’s dream of broad burden sharing
The bailout fund will expire in 2013, and a successor model is already being worked on behind the scenes. In the future, the German government would like private investors to share the costs of debt restructuring. At first glance, this sounds excellent and will certainly sell well with the electorate. In practice, however, Merkel’s proposal amounts to a catastrophe that will inevitably drive euro states with poor financial cover into loss of sovereignty.
How was the mechanism of the wider distribution of burdens to work?? bonds were in the future no longer of equal rank in servicing. IMF loans already enjoy a higher quality of claims. When a state declares its inability to pay, with 50 billion. US$ at the IMF and with 50 billion. US$ bei privaten Investoren verschuldet ist und bei den Glaubigerverhandlungen einen "Haircut" If the IMF (super senior) gets all its money back, while the private investors (pari pa) get only 50% of their claims back. According to Angela Merkel’s ideas, in the future EU bailout funds should also enjoy senior status and be given preferential treatment in the event of insolvency.
The problem with this model, however, is that it also increases the risk for private investors. Investors have the "stupid" Habit of getting its risk paid for. The implementation of such a mechanism will probably have an impact on the required risk premiums on the market. For the PIIGS countries, this means nothing other than that their financing costs on the regular market will become significantly more expensive. For ailing states, however, this can mean that they can no longer finance themselves on the market at a reasonable cost and are driven by this model into an EU rescue mechanism in the first place.
For the German taxpayer, this is of course no advantage, since the alternative to a halfway secured loan in this case was no loan at all, since the state in question was able to refinance itself on the market without help. Merkel wants to save taxpayers’ money, which without her plan would probably not have been lent at all.
It was to be expected that the markets would react to Merkel’s reckless exaggerations. Shortly after the Chancellor gave free rein to her volubility, the risk premiums for PIIGS bonds rose dramatically.
The Irish and the Greeks are therefore quite rightly blaming the Chancellor for the renewed dramatization of the situation. As early as April of this year, Angela Merkel had frivolously talked up the Greek crisis, which explains the anger of the Greeks. Of course, the chancellor can do nothing about Ireland’s precarious financial situation, but she is partly responsible for the concrete market reactions.
It is all too understandable that Ireland does not actually want to slip under the EU bailout umbrella. The EU does not give away the money, but charges a respectable 5% for the aid. States that use these funds also have to let Brussels and Berlin interfere with their budgetary rights and thus lose their sovereignty.
Irish fear of being ruled by Brussels already expressed itself in memorable Lisbon referendum. Now, the financial crisis combined with Angela Merkel’s smart talk has done what the Lisbon Treaty failed to do – Ireland is about to hand over significant powers to Brussels and Berlin. Of course, Ireland could wait until July 2011 to take this step, but the massive prere from Madrid, Lisbon and Athens, reinforced by Brussels and Berlin, makes it difficult for the Irish to refuse the poisoned gift from Brussels.
It is difficult to understand why the EU allows the markets to dictate its financial policy at all. The crisis summit in May had actually already cleared the way for quantitative easing by the ECB. Why does the EU not allow countries that have had to pay too high a premium on the market to finance themselves with conditions via the ECB?? How this can work was recently demonstrated by the FED, which announced that it would buy up US$600 billion worth of government bonds. For Angela Merkel, however, this would be unattractive, since she can now directly influence the policies of the PIIGS countries.