Economist Morgan Kelly reveals in the Irish Times today that a deal last November to haircut approximately 30B Euro of Irish bank debt was sabotaged by financial terrorist Tim Geithner. The 20B Euro or so reduction in Irish bank debt entailed by the haircut would not, of course, have saved Ireland from sovereign default, but it would have been a symbolic victory and would have set a good precedent.
But Geithner and the ECB would have none of it. Kelly recounts a G-7 conference call in which Geithner struck down the deal to haircut bondholders. Remarkably, it was the IMF who originally proposed the (very modest) haircut in the first place, and argued against bailing out unguaranteed bondholders. The ongoing economic and political upheaval we are witnessing in Ireland is just one more example of what Hugh Hendry has called "The Economic Consequences of the Bailout."
Kelly's Irish Times op-ed is worth reading in its entirety. He makes a strong case for Ireland getting out of the bailout altogether. In fact, he argues what we have been saying all along: Ireland has no choice about whether to default -- it can default now on the bank guarantee, or it can default on its sovereign debt later on. The choice is clear. The only question is whether Ireland will be able to force her politicians to make the right one. (hat tip Yves Smith)
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Ireland's Future Depends On Breaking Free From Bailout
by Morgan Kelly
WITH the Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable. By the time the dust settles, Ireland’s last remaining asset, its reputation as a safe place from which to conduct business, will have been destroyed.
Ireland is facing economic ruin.
While most people would trace our ruin to to the bank guarantee of September 2008, the real error was in sticking with the guarantee long after it had become clear that the bank losses were insupportable. Brian Lenihan’s original decision to guarantee most of the bonds of Irish banks was a mistake, but a mistake so obvious and so ridiculous that it could easily have been reversed. The ideal time to have reversed the bank guarantee was a few months later when Patrick Honohan was appointed governor of the Central Bank and assumed de facto control of Irish economic policy.
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Ireland’s Last Stand began less shambolically than you might expect. The IMF, which believes that lenders should pay for their stupidity before it has to reach into its pocket, presented the Irish with a plan to haircut €30 billion of unguaranteed bonds by two-thirds on average. Lenihan was overjoyed, according to a source who was there, telling the IMF team: “You are Ireland’s salvation.”
The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.
The negotiations went downhill from there. On one side was the European Central Bank, unabashedly representing Ireland’s creditors and insisting on full repayment of bank bonds. On the other was the IMF, arguing that Irish taxpayers would be doing well to balance their government’s books, let alone repay the losses of private banks. And the Irish? On the side of the ECB, naturally.
In the circumstances, the ECB walked away with everything it wanted. The IMF were scathing of the Irish performance, with one staffer describing the eagerness of some Irish negotiators to side with the ECB as displaying strong elements of Stockholm Syndrome.
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