ECB must pay a share of our banking mess

 

One year ago, on the day following the announcement of the €85 billion assistance programme, I wrote that “The European Union and the European Central Bank have stitched us up.” The last year has been turbulent and full of change but the stitch up of Ireland remains firmly intact. Just last month, $1 billion was repaid to bondholders of Anglo Irish Bank even though these bondholders were not even covered by the Government guarantee. Such grand larceny is due to be repeated over and over again until the European financial institutions have recouped every cent of their foolish investments in Irish banks.

 

Last year, an extortionate interest rate was initially charged on Ireland’s bailout loans. The majority of the interest rate was pure profit for our EU partners. The Government was told that the interest rate had to be at a higher rate to discourage other countries from viewing a bailout as a soft option. The Government was told that if it wanted a reduction in the interest rate, it had to bring something new to the table €“ a clear indication that our corporate tax rate was in the sights of France and Germany. These arguments were bogus. Once the crisis affected Spain and Italy, the profit margin on the interest rate was not just reduced, it was abolished.

 

In my view, the arguments put forward against the write-down of debts to the remaining bondholders are equally bogus. There will be no contagion effect if the remaining bondholders in Irish banks face the consequences of their poor choice of investment. That horse has already bolted from the stable. In the past year, the financial crisis has swept aside Portugal, Spain and Italy and it is now being felt in France and even Germany. Europe has agreed that Greece’s national debt should be written-down but insists that Ireland’s banking debt must be repaid. There is no logic or consistency to this whatsoever. Investors in an insolvent Greek state must face the consequences of their poor choice of investment while investors in insolvent Irish banks must be returned all their money with interest. The arguments put forward last year have evaporated. They are now entirely redundant.

 

To my mind, the European Central Bank must pay its share of the bill also. If it had not advanced loans to the Irish banks, the bondholders could not have been repaid. The bank guarantee was a bluff. When the payment of bondholders was due, neither the banks nor the State had the resources to pay them. This is where the ECB stepped in. The ECB lent approximately €75 billion to the Irish banks to enable them to repay the bondholders. That’s how the ECB became fully complicit in diverting billions from this country into the hands of reckless investors. The ECB must be held responsible for its own actions. This money should not be repaid to the ECB in full. It should be written down substantially and the write-down passed on by the banks to Irish households and businesses to provide a badly need stimulus to the economy. The economy is in urgent need of such a write-down. Ireland’s total debt burden €“ the sum of government debt, household debt and business debt €“ is the highest in the developed world. For every €1 billion of debt in the Greek economy, there is €1.8 billion of debt in the Irish economy. If Greek debt levels are unsustainable, how can Irish debt levels be sustainable?

 

The EU and ECB have effectively escaped any accountability for their role in paying the bondholders at the expense of the Irish public. There is no European solidarity here. When our European partners dismiss calls for write-downs on the indebtedness of our banks to the ECB, we must react with the same open resistance as we do when they insist that we raise our corporate tax rate. We have been damned with faint praise from the EU about the “successful” implementation of our austerity programme. But the current EU policy of kicking the can down the road is just prolonging the crisis.

 

In December, this Irish government will show courage and determination in taking tough, necessary and, perhaps, wildly unpopular decisions in order to sort out the mess the previous government left us in and correct the fiscal imbalances. What I believe is needed now is for the EU and ECB to recognise the imperative of reducing the unsustainable overall debt burden on the Irish economy.

 

If the European political establishment really believes we’re doing such a good job, then the obvious, correct and moral course for the ECB is to lighten the debt load that has wrongly been dumped on the Irish public. €75 billion in write-downs would do this €“ and clearly demonstrate to international markets that Europe is willing to make radical changes to solve this crisis.