Offers a deeply informed diagnosis of Ireland's current socio-economic and political malaise, suggesting a political earthquake may benefit the left.
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About the Author
Kieran Allen is a sociology lecturer at University College Dublin. His books include Marx and the Alternative to Capitalism (Pluto, 2011) and Max Weber: A Critical Introduction (Pluto, 2004) as well as a number of works on Irish society and politics. Brian O' Boyle is the Economic Programme Director at St Angela's College, National University of Ireland. He has published a number of articles in International Critical Thought, Cambridge Journal of Economics and Capital and Class.
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What happens when a government goes to a failed Wall Street mogul for advice in a crisis?
In September 2008, money was pouring out of Irish banks as news spread about a property bubble that was collapsing. The government panicked, thinking that the ATM machines might seize up and there would be riots on the streets. So they put through a call to Merrill Lynch for advice. The Wall Street giant seemed to be as solid a corporation as you could possibly get. Originally formed as a network of stockbrokers selling to middle class Americans, it had a host of Irish Catholics at its helm. With this connection to the 'old country', it seemed the right place to look for advice. In fact, it should have been the very last. Merrill Lynch was a dealer in toxic sub-prime securities – and it was sinking fast. Stung by the success of its rival, Goldman Sachs, it had been packaging up the mortgages of poor people as Triple-A-Rated Collateralised Debt Obligations. It made a fortune in fees from selling these on to finance houses around the world who thought they could collect a steady income flow. But Merrill Lynch's luck ran out in 2008 and it was stuck holding &8364;45 billion worth of its own dodgy financial products. By the time the Irish government came knocking on its door for advice, it was losing &8364;52 million dollars a day. Two weeks before it wrote up its advice to the Irish government, it was taken over by Bank of America.
If this sounds like a Father Ted-style comedy, it was to get even more farcical. Merrill Lynch had a lucrative relationship with Irish banks and had been covering up for them. It was the underwriter for Anglo-Irish bonds and a corporate broker for Allied Irish Bank, earning huge fees for its efforts. In March 2008, one of its younger banking analysts, Phil Ingram, examined the commercial loans of Irish banks and concluded that a major write-down was in the offing. Within hours, the report flew all around the London financial markets and the executives of the Irish banks were fuming. They rang Merrill Lynch and the Ingram report was censored, softened and re-edited before being released with a different story-line.
Merrill Lynch charged the Irish government &8364;7 million for its 14-page advisory document – a neat half a million a page. It made one claim that was to shape the destiny of Ireland for years and, maybe, decades afterwards. 'It is important to stress', Merrill Lynch noted, 'that at present, liquidity concerns aside, all of the Irish banks are profitable and well capitalised'. In other words they were fundamentally sound and were only suffering a cash flow problem. They reported that 97 per cent of Anglo-Irish loans were 'neither impaired nor past due' – although they qualified this with reference to possible property price falls. Written in typical business-speak, the Merrill Lynch memorandum provided a number of options, including a state guarantee for the six domestic banks. But once the problem was framed as a temporary cash flow problem, state aid became a logical 'solution'. Some caveats were expressed, but it did not seem to matter greatly that the sums involved were huge.
The Irish banks had been gambling on an enormous scale because friendly politicians had changed laws to facilitate them. Instead of just taking in deposits from Irish savers, they had been issuing bonds – or IOUs – to the global money markets to increase their loan book. In 2001, the Dail had passed an Assets Covered Securities Act to allow banks to issue 'covered' bonds. This meant that creditors were guaranteed that they would be first to have access to the underlying mortgage payments. The law was described as a 'benchmark' for European legislation and it gave the banks a huge flow of credit from British and German financial institutions. Incredibly, the legislation had been drafted with the help of the Irish Banking Federation and a partner in McCann Fitzgerald, a big legal firm.
Banks and drug dealers have one thing in common – the more they addict their clients, the more they gain. The addiction can be to loans or drugs – but the main thing is to dole it out and get the clients hooked. Just as the small time drug pusher expands by getting more gear from a bigger supplier, so too did the banks want more loanable cash. In 2007, at the height of the Celtic Tiger boom, Irish banks had lent out &8364;342 billion. Incredibly, this was more than twice the size of the Irish economy and was far higher than the &8364;166 billion they held in deposits. The shortfall was made up by a vast amount of money that came through bonds. When, in September 2008, the Irish state issued a blanket guarantee on these bonds, it made its own people liable for the vast private debts. It had gone to a failed Wall Street gambler for advice on how to help their friends in Dublin and, naturally, the option of a state hand-out was suggested. If the regulars who frequent the Paddy Power bookie shops had gone to state officials for help with their 'cash flow problems', they would have been laughed out of court. But when private banks, who gambled on an enormous scale, did the same thing, they were treated with deference and respect.
Another firm which was heavily involved in the state guarantee decision was Arthur Cox. This is one of the most lucrative legal firms in Europe, because it gets big contracts from the Irish state and the financial industry. It used to be the main legal agent for Anglo Irish Bank and was currently acting as the main lawyer for Bank of Ireland. But none of this was regarded as a conflict of interest. After all, the firm had also won the contract to be the lead legal provider for the Health Services Executive at the very time that its chairperson, Eugene McCague, served on its board. According to the firm, it was just a matter of preserving a Chinese Wall between the different wings of the same firm. Arthur Cox went on to become a major beneficiary of the Irish financial crisis. Between 2008 and 2011, it received &8364;13.5 million from the Department of Finance for banking advice, including helping to draw up a law guaranteeing bank debts. It got another &8364;7.4 million for helping to set up the National Asset Management Agency (NAMA), the state agency charged with hoovering up the bad debts of the Irish banks. Then it got &8364;3.07 million in legal fees from NAMA between 2010 and 2011. And when the future pension funds of Irish workers were stuffed into Allied Irish Bank and Bank of Ireland, Arthur Cox was again at hand, collecting another &8364;2.1 million to ease the flow. Who says that dark clouds do not have silver linings?
One other firm involved in the crisis decision making meetings was Goldman Sachs. It met with the government on 21 September 2008 to discuss the situation at Irish Nationwide Building Society. It noted that there was 'lots of reassurance' that the building society's loan book had 'real value' but claimed it was facing a 'liquidity problem' and suggested that 'help from the authorities will be required'. This was an extremely grave miscalculation, because the bailout of Irish Nationwide eventually cost the Irish state over &8364;5.4 billion. Yet Goldman Sachs, the doyen of the financial engineering industry rode off into the sunset, leaving the Irish people to pick up the tab.
The decision to guarantee private bank debts was the greatest calamity that ever befell the Irish people. It occurred because the state surrounded itself with advisors drawn from corporations and took their advice uncritically. Global capitalism was going down the tubes because of financial speculation – and whom did they turn to? The speculators. The fat cats of the world were panicking over losses and what did the Irish government worry about? Restoring the 'confidence of the financial markets'. Politicians often talk blandly about 'thinking outside the box' and being 'innovative' but when you get right down to it in a crisis, they thought there was only one natural thing to do – talk to the people with the money.
This attitude of deference to the corporate elite runs deep in official Ireland. The country marketed itself as a free enterprise paradise that offered light touch regulation and a host of tax breaks. It 'ticked the boxes' on adhering to formal rules but turned a blind eye to all sorts of ruthless business practices. That way, corporations could gain an aura of respectability while having the freedom to do as they pleased. The country was the very model of a neoliberal economy, hailed by market fundamentalists as a success story because it cut taxes and did not interfere with business. In 2007, at the height of the boom, Ireland was ranked number three in an Index of Economic Freedom, drawn up by two mouthpieces of the neoliberals, the Heritage Foundation and the Wall Street Journal. It scored nine out of ten for 'business freedom', 'financial freedom' and 'investment freedom'. That was nearly top of the class for gung ho, unrestrained capitalism. Writing in the New York Times, the economist Paul Krugman summed it up.
How did Ireland get into its current bind? By being just like us, (Americans) only more so. Like its near namesake, Iceland, Ireland jumped with both feet into the brave world of unsupervised global markets. Last year the Heritage Foundation declared Ireland the third freest economy in the world, behind only Hong Kong and Singapore.
During the Celtic Tiger era, the media drooled over the achievements of Irish entrepreneurs. Businesspeople were given their own slot every morning on RTE news – Business News – to crow about their achievements. Game shows like The Apprentice or Dragons' Den were designed as fantasy programmes to romanticise business 'leaders' and suck people into an aspiration to emulate them. Bill Cullen – a former Renault car dealer – was given endless opportunities to tell his rags to riches story so that he could be held up as a model for, what he termed, the 'mollycoddled youth'. Aside from the US, Singapore and Hong Kong, there was hardly another country that extolled commercial values more than Celtic Tiger Ireland.
This culture was the seedbed from which the decision to bail out banks had sprung and it was no accident because the political elite were intimately linked to the big corporations. They saw nothing unusual about surrounding themselves with big money people or 'financial engineers'. If anyone inside their charmed circles had the temerity to suggest that the banks should be nationalised and their debts repudiated, they would have been called a 'head-banger' and shown the door. That question never even arose, however, because the crisis was framed as a matter of 'restoring confidence' to the financial system. Banks were supposed to be the 'lifeblood' of an economy and had to be helped. End of story. After the event, a different story-line grew that it was all down to Brian Cowen and his incompetent advisors in the Department of Finance. Fianna Fail apparently caused the crisis because they were so used to looking after their insider friends among bankers and developers they did not see the bigger picture. No doubt, there were important ties between Fianna Fail and Anglo Irish Bank in particular, but blaming particular individuals is a way of absolving the entire system. You just throw out a few fall guys so things stay as they are. The reality, however, was that the two main parties Fianna Fail and Fine Gael voted for the bank guarantee scheme – alongside Sinn Fein. Richard Bruton of Fine Gael summed up the overwhelming consensus.
It is important that we copper fasten our financial system. We must all understand that a sound financial system is like the oil running through an engine. If that oil is drained away by a loss of confidence, then suddenly that engine seizes and the problems that beset people ... get much worse.
The Labour Party voted against the measure but they accepted that 'drastic action' was needed to keep credit flowing. Their main criticism was that the Minister had taken too many powers and not answered enough questions. Somewhat bizarrely, Ruairi Quinn suggested that there was 'blatant discrimination' against non-Irish banks because they would not be covered by the guarantee.
The decision to guarantee the &8364;440 billion debts of Irish banks was a hare-brained scheme. It was supposed to be a cute move to get ahead of other states and ensure that credit kept flowing into Irish banks. At the time, the financial world was stuck in a 'credit crunch' as banks would not lend to each other. The Irish government thought it could solve this difficulty with a guarantee of repayment and so hoover in credit to keep the Irish banks afloat. The scheme worked for a few weeks but then the worm turned. Why, some of the financiers asked, was this guarantee necessary if the banks were sound? And could a small economy really guarantee debts that were three times the size of its economy? Billions began to flow out again and the state was hoisted on its own petard. Its fate became intertwined with the banks and so a chain of calamitous events began to unfold.
The first sign of what was ahead came when a new word entered the vocabulary as the elite started to talk about 'recapitalisation'. This was a strange business term for pouring the people's money into banks. In other circumstances this money – which was raised from taxes and borrowing – might be used to build schools or hospitals but 'recapitalisation' meant the banks had first call on it. In December 2008, there was a recapitalisation of three banks to the tune of &8364;5.5 billion; another &8364;7 billion was needed three months later; then another &8364;4 billion for Anglo Irish Bank in May 2009; then in March 2010 another &8364;2.7 billion for Irish Nationwide and &8364;8 billion for Anglo; and back to Irish Nationwide again for another &8364;2.7 billion and so on. On 1 April 2011– appropriately April Fool's Day – the media reported an important pronouncement from the Central Bank. Yet another &8364;24 billion in total would be needed to bail out banks, bringing it all to a grand total of over &8364;64 billion. The endless talk of billions led to dazed eyes everywhere. Once upon a time people were told the country could not afford a million to save a few hospital beds or to replace a prefab classroom. Yet suddenly billions upon billions became available because very important people in banks were talking about their 'life blood' and 'confidence'. The cost of the bailouts was the equivalent to the people of Ireland working for nearly six months for free – as slaves, for no wages. Of course, the slave duty could be spread out over their lifetime and onto their children's – but pay for it they must with their time and labour.
Then there was nationalisation. This had been ruled out in 2009, with the government's special economics advisor, Alan Ahearne, arguing that it would scare off the international markets. 'It would be taken as a sign that the banking systems have completely failed', he boldly declared. Yet within two years, five of the six Irish banks had fallen under state control. The only one remaining in private hands was Bank of Ireland and this only occurred because the state handed over its 35 per cent share to a Canadian company, Fairfax Financial, for a mere &8364;1.1 billion – even though it had put &8364;4.2 billion of public funds into the bank since the crisis. Nationalisation is often thought of as a left-wing policy but that is only when it is a device to take assets of the wealthy into public ownership. The nationalisation of Irish banks was about taking control of debt – not assets. The Irish state took on debts of private gamblers and made them its own. During the Celtic Tiger, Bank of Ireland, Allied Irish Bank and Anglo Irish Bank made over a billion euros every year in profit, but the Irish state received very little because tax rates were so low. There was no talk of sharing the profits with society because there could be no interference in the market. Yet, when the crash happened the rhetoric changed and 'we' all had to share the burden of paying off bad debts.
The insane policy of bailing out banks has had four major, overlapping effects.
First, it pushed up government debt. In 2007, just before the crash, Irish sovereign debt stood at &8364;47 billion, which amounted to a quarter of its GDP. There was nothing unusual about this and in fact, it was a good deal better than many other countries. Germany, for example, which is held up as a model of financial discipline had a much higher debt ratio, the equivalent of two-thirds of its GDP. After the bailout, however, the Irish national debt shot up to &8364;192 billion, which was the equivalent of 118 per cent of GDP. This debt will hold Irish society in a vice grip for years to come. Second, this level of debt entails high interest payments every year. In 2012, interest on the national debt amounted to &8364;6.3 billion and it was set to rise to over &8364;9 billion a year by 2015. However, a deal on the 'promissory note' that the Irish government used to fund the Anglo Irish bailout subsequently reduced the interest payments – but only at the cost of lengthening the payment period to 2053. From 2022, interest payments will rise to &8364;10 billion for the next decade and &8364;14 billion in the decade after that.
Excerpted from "Austerity Ireland"
Copyright © 2013 Kieran Allen.
Excerpted by permission of Pluto Press.
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Table of Contents
2: The Partners
3: The Failure of Austerity
4: The Re-Configuration of Ireland
5: Where are the Jobs?
6: Will There Be a Roof Over Our Heads?
7: Tax Haven Capitalism
8: A Change in Political Management
9: Why Don’t the Irish Protest
10: Are Sinn Fein Ireland’s Radical Left?