What’s Wrong with the World

The men signed of the cross of Christ go gaily in the dark.

About

What’s Wrong with the World is dedicated to the defense of what remains of Christendom, the civilization made by the men of the Cross of Christ. Athwart two hostile Powers we stand: the Jihad and Liberalism...read more

Irish subjugation

Here’s a long essay that incisively examines the ruinous financial crisis in Ireland, which is above all a banking crisis. Unlike Greece, this is not a public sector problem. In Ireland, free enterprise excesses, extreme excesses rightly compared to the most reckless of gambling, were crowned by craven policymaking to issue in national penury. The author’s excellent summary of the Irish agony concludes by exhorting Irishmen to realize that their most pressing antagonists are bankers, foreign creditors, and their hirelings; which hirelings apparently include the US Treasury Secretary, according to this account. Mr. Geithner, we read, vetoed a deal brokered by the IMF that would have forced Irish bank creditors to take a major haircut. Ireland, instead, would be put in subjection to those creditors by means of a bailout designed above all to put the fear of God in Spanish bankers and financiers. Very complicated stuff, but if you can wade through it all (and the author’s supple and engaging prose will help you do this), you will come away enlightened.

Comments (16)

The essay at the Irish Times provides an excellent guide to the Irish road to ruin.

However, Ireland is facing insolvency not simply because of 'objective' problems - i.e. economic misjudgments and financial chicanery. There's also the (subjective) deleterious effects of what might be called the Irish 'national psychology' to take into account.

Historically it's been a very poor country with few natural resources on the Western fringe of a prosperous Europe. A sense of inferiority provoked a desperate gambler's desire to 'catch up'. Joining the EU provided a golden opportunity to sail into a safe economic haven; or so it seemed. Money, as the Irish say, appeared to grow on trees; and they had a spend, spend, spend carnival for a while.

The delusions and ineptitude of politicians should also be blamed for the ruin of the Irish economy. They devised unaffordable but populist measures to promote an entirely toothless 'Celtic tiger'. After creating absurd and unappeasable expectations of continuous economic growth, the egregious gambler-politicians tried to satisfy them by ruthless borrowing - until the credit ran out.

Good points, Alex.

The tale seemed to me to be one in which there were multiple places at which Ireland could have averted the disaster (several of them coming before the United States' officious interference) but lacked the prudence and political will to do so. That, indeed, seemed to be a major point the author was making.

I appreciated the author's call for the Irish government to make an eleventh-hour rescue of which an essential ingredient was balancing the budget.

Along with stiffing their creditors with an outright bankruptcy or devaluation.

My impression was that he was trying to avoid bankruptcy, but maybe there are different meanings of the term. Not sure how the devaluation would work. The other part of his plan was "walking away from the banks." This seemed to have something to do with putting their money into foreign banks--which of course they have perfect right to do. But I admit to not having understood that aspect of the plan clearly and distinctly, which is doubtless simply a function of my own ignorance.

This appears to be what you're calling "stiffing its creditors":

This allows Ireland to walk away from the banking system by returning the Nama assets to the banks, and withdrawing its promissory notes in the banks.

I'm sure you know what that means a lot better than I do, Paul. (Really, I'm sure you do.) But it looks to me like he's saying it's a perfectly legal way out and is something like redeeming promissory notes with assets that one is allowed to use to redeem those notes. Perhaps a little bit like telling a bank to go ahead and take your house instead when you can no longer pay your mortgage.

Myself, I wouldn't call that "stiffing" anybody. It's the kind of scenario that seems to be an implicit possibility in the transaction from the outset.

Oops! Yeah, sorry about that. It should have been "Along with stiffing their creditors without an outright bankruptcy or devaluation."

This allows Ireland to walk away from the banking system by returning the Nama assets to the banks, and withdrawing its promissory notes in the banks. The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner. At some stage the ECB can take out an eraser and, where “Emergency Loan” is written in the accounts of Irish banks, write “Capital” instead. When it chooses to do so is its problem, not ours.

First, NAMA can sort of be thought of as an Irish TARP. It was formed as what's called a "bad bank" to take the toxic loan assets off the books of banks and hold them until a suitable market permits resale at less depressed prices.

Secondly, the ECB represents European creditors to Irish banks (mostly, I gather, German and British); and ever since the fateful decision by the Irish government in 2008 to treat bank debt as sovereign debt (the "bank guarantee" that the author refers to early on in the article), that means that the ECB represents Ireland's creditors. But more importantly, the ECB represents creditors to other European banking systems -- Spain, Portugal, the UK -- whose own funding troubles might put them next in line for the debt crisis.

So the author here is saying that if the ECB's policy is to set up a firewall in Ireland to protect the wider Eurozone banking system, let it effect this policy with its own capital and resources, rather than on the backs of the Irish taxpayers, who will be in hock to bank creditors for years under the current plan. To that end, he endorses an IMF haircut plan which he characterized as emanating from the belief "that lenders should pay for their stupidity."

The haircut of bank bonds, he reports, would have averaged a two-thirds reduction in value. Pretty severe. That's the "stiffing" I was talking about.

But it's too late for that haircut plan, right? That's what the U.S. vetoed. Now he seems to be saying that the Irish, all on their own, have the legal power simply to "turn in" those NAMA assets and reclaim their promissory notes, thus "walking away from the banks." I suppose one can say that that has a similar effect to the haircut plan that was vetoed, but it doesn't sound like it's legally the same thing; for one thing, that plan had to be worked out in negotiations. This seems to be something the Irish can do on their own: "Here, you have our promissory notes for which we can trade these assets. Have the assets instead. Have fun. Sayonara." And then the ECB can figure out what to do with all these (possibly worthless) assets that it owns.

That seems to me reasonable, if I'm understanding it correctly. It seems like a risk the creditors were taking from the outset.

Right. I read him as arguing for the substitution for the Irish taxpayers of the ECB as the capital base for Irish banks. How this promissory note business works in Irish and EU law is not something I can comment on. The bank guarantee was a rather novel instrument, one which the author calls a panic-driven mistake "so obvious and so ridiculous that it could easily have been reversed." Its status at law is pretty indeterminate.

Lydia, also note the purpose of the balanced-budget policy:

By bringing our budget immediately into balance, we focus attention on the fact that Ireland’s problems stem almost entirely from the activities of six privately owned banks, while freeing ourselves to walk away from these poisonous institutions.

That sort of puts us back to square-one, doesn't it? Irish and American circumstances are not the same, but a similar pulverizing question arises in both:

When a cartel of avaricious banks is killing your country, but the structure of your economy prevents you from letting them die the death they so richly deserves, what do you do?

I don't know about "avaricious," but if you know it can get your country killed, you don't put yourself in their power in the first place, and if you find that you are, you get out as cleanly as possible. Everything in the article implies that there have been multiple opportunities for Ireland to do so and that they still could to some extent cut their losses but that what is lacking is self-control and political willpower, particularly willpower to balance the budget and go it on their own, without the dependency on foreign lending. Evidently the politicians prefer "lying on the ground with a begging bowl" (which seems to me to be a great line).

It gets something of a shrug from me that I'm supposed to treat this as some huge ethical power struggle between poor, poor Ireland and the Powerful Evil Banks. The Irish government appears to have been stupid to get themselves into the situation (like we are being stupid, I gather), and the banks appear, from what he's saying, to be betting that the Irish government won't leave them holding the baby in the form of worthless assets. Looks to me like the Irish government should call their bluff, which I would _not_ call "stiffing" and which does not look unethical, in which case the creditors will be the ones to look stupid. In other words--hate debt, get out of it, keep your books balanced, and retain or regain your independence, respectability, and dignity. What's for a debt-hating free-marketer like myself not to love about this approach?

Paul, great article, thank you for posting it.

re stiffing: It seems to me the Irish Government has currently guaranteed the obligations of the Irish Banks to the ECB; that obligation is ruinous. I take the author to be suggesting that the Irish government ought to say: "Here are the taxic assets back, and we are formally repudiating our guaranty." That raises lots of interesting problems, but with no real central government, I'm not sure the EU could do anything about it.

The immediate balancing of the budget is a critical piece of this because it is necessary. The only real way the international markets have of punishing a wayward country is to deny it access to international debt markets. Which means Ireland would not be able to fund deficits. The implication of the balanced budget being recommended may be more draconian than it first appears because Ireland might expect to be locked out of those markets for some time and thus not be able to roll over its own legitimate debt (i.e. that debt not related to the banking mess). Putting itself in a position to honor its "true" obligations and doing so would probably speed willingness of debt markets to lend to Ireland again.

Seems to me that this could touch off a liquidity crisis as well, unless the ECB backs down, almost forcing Ireland out of the Euro. That probably depends on how much of the Irish banking system is served by Irish banks and how much by offshore banks.

re stiffing: It seems to me the Irish Government has currently guaranteed the obligations of the Irish Banks to the ECB; that obligation is ruinous. I take the author to be suggesting that the Irish government ought to say: "Here are the taxic assets back, and we are formally repudiating our guaranty." That raises lots of interesting problems, but with no real central government, I'm not sure the EU could do anything about it.

Thanks, that's helpful. To what extent does the analogy here hold of giving up your house to a bank that holds the mortgage? Then if it turns out that the house is unsaleable, that's the bank's problem. To the extent that the Irish _can_ "give back the toxic assets" and cancel the promissory notes, I can't see that there is anything morally wrong with doing so. The assets sound to me something like collateral in the same way that a home is collateral for the mortgage--it's the "stuff" that you took the loan in order to purchase, and the most that your creditor can do is possess himself of the "stuff" if you cannot pay back the loan in money. I have never committed myself (that I know of) to a principle that all loans must be paid back *in money*. If assets can be simply given back instead to cancel a debt, that sounds like in some situations it could be a very good idea and a risk the creditors should have taken into account. As the author says, at a certain point it makes sense for the creditor to become the owner of the asset.

The author did make clear the relationship of this idea to balancing the budget. All sounds like a pretty responsible set of ideas.

I'm genuinely heartened by your warm embrace of this sort of analysis, Lydia.

John S., well said.

I don't know _what_ to say about the original "haircut" plan--the one the U.S. scotched. It's not on the table anymore, so I'm not sure to what extent an opinion is called for. It was "negotiated," which isn't the same thing as "imposed," which is good. I'm not sure what to think about the IMF anyway. And it seems to me unwarranted for the U.S. to have interfered at all. What business of ours was it? That's probably a rather shallow reason for me to resent our intervention, though.

The assets sound to me something like collateral in the same way that a home is collateral for the mortgage--it's the "stuff" that you took the loan in order to purchase, and the most that your creditor can do is possess himself of the "stuff" if you cannot pay back the loan in money. I have never committed myself (that I know of) to a principle that all loans must be paid back *in money*.

Unless you've never had a mortgage, a car loan or purchased something (furniture?) from a store where they get a security interest in the assets, that's probably not right (speaking solely of the commitment, not your knowledge of same). In the ordinary course you borrow money and secure that loan with a security interest in favor of your lender in some asset (if the asset is real property, its called a mortgage). The security is provided in almost all cases to secure a promissory note of some sort. If you don't pay the note as agreed, the lender can grab the security (different states have different rules on the level of judicial process that must be observed, and it varies depending on the property in question). If the collateral isn't sufficient to pay off the debt, you still owe the balance. With your home, many states do have anti-deficiency statutes, and in those that don't, most lenders are happy to get what they can and move on - after all, most people who have their home foreclosed from under them aren't really likely to have a pile of assets to go after. And litigation is really expensive; so functionally, most residential mortgages are effectively non-recourse. But that's not what the loan papers say.

Post a comment


Bold Italic Underline Quote

Note: In order to limit duplicate comments, please submit a comment only once. A comment may take a few minutes to appear beneath the article.

Although this site does not actively hold comments for moderation, some comments are automatically held by the blog system. For best results, limit the number of links (including links in your signature line to your own website) to under 3 per comment as all comments with a large number of links will be automatically held. If your comment is held for any reason, please be patient and an author or administrator will approve it. Do not resubmit the same comment as subsequent submissions of the same comment will be held as well.