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Apr 24, 2014
The Bank Guarantee That Bankrupted Ireland
Posted on Nov 2, 2013
By Ellen Brown, Web of Debt
This piece first appeared at Web of Debt.
The Irish have a long history of being tyrannized, exploited, and oppressed—from the forced conversion to Christianity in the Dark Ages, to slave trading of the natives in the 15th and 16th centuries, to the mid-nineteenth century “potato famine” that was really a holocaust. The British got Ireland’s food exports, while at least one million Irish died from starvation and related diseases, and another million or more emigrated.
Today, Ireland is under a different sort of tyranny, one imposed by the banks and the troika—the EU, ECB and IMF. The oppressors have demanded austerity and more austerity, forcing the public to pick up the tab for bills incurred by profligate private bankers.
The official unemployment rate is 13.5%—up from 5% in 2006—and this figure does not take into account the mass emigration of Ireland’s young people in search of better opportunities abroad. Job loss and a flood of foreclosures are leading to suicides. A raft of new taxes and charges has been sold as necessary to reduce the deficit, but they are simply a backdoor bailout of the banks.
At first, the Irish accepted the media explanation: these draconian measures were necessary to “balance the budget” and were in their best interests. But after five years of belt-tightening in which unemployment and living conditions have not improved, the people are slowly waking up. They are realizing that their assets are being grabbed simply to pay for the mistakes of the financial sector.
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The field is ripe for some publicly-owned banks. Banks that have a mandate to serve the people, return the profits to the people, and refrain from speculating. Banks guaranteed by the state because they are the state, without resort to bailouts or bail-ins. Banks that aren’t going anywhere, because they are locally owned by the people themselves.
The Bank Guarantee That Bankrupted Ireland
Ireland was the first European country to watch its entire banking system fail. Unlike the Icelanders, who refused to bail out their bankrupt banks, in September 2008 the Irish government gave a blanket guarantee to all Irish banks, covering all their loans, deposits, bonds and other liabilities.
At the time, no one was aware of the huge scale of the banks’ liabilities, or just how far the Irish property market would fall.
Within two years, the state bank guarantee had bankrupted Ireland. The international money markets would no longer lend to the Irish government.
Before the bailout, the Irish budget was in surplus. By 2011, its deficit was 32% of the country’s GDP, the highest by far in the Eurozone. At that rate, bank losses would take every penny of Irish taxes for at least the next three years.
“This debt would probably be manageable,” wrote Morgan Kelly, Professor of Economics at University College Dublin, “had the Irish government not casually committed itself to absorb all the gambling losses of its banking system.”
To avoid collapse, the government had to sign up for an €85 billion bailout from the EU-IMF and enter a four year program of economic austerity, monitored every three months by an EU/IMF team sent to Dublin.
Public assets have also been put on the auction block. Assets currently under consideration include parts of Ireland’s power and gas companies and its 25% stake in the airline Aer Lingus.
At one time, Ireland could have followed the lead of Iceland and refused to bail out its bondholders or to bow to the demands for austerity. But that was before the Irish government used ECB money to pay off the foreign bondholders of Irish banks. Now its debt is to the troika, and the troika are tightening the screws. In September 2013, they demanded another 3.1 billion euro reduction in spending.
Some ministers, however, are resisting such cuts, which they say are politically undeliverable.
In The Irish Times on October 31, 2013, a former IMF official warned that the austerity imposed on Ireland is self-defeating. Ashoka Mody, former IMF chief of mission to Ireland, said it had become “orthodoxy that the only way to establish market credibility” was to pursue austerity policies. But five years of crisis and two recent years of no growth needed “deep thinking” on whether this was the right course of action. He said there was “not one single historical instance” where austerity policies have led to an exit from a heavy debt burden.
Austerity has not fixed Ireland’s debt problems. Belying the rosy picture painted by the media, in September 2013 Antonio Garcia Pascual, chief euro-zone economist at Barclays Investment Bank, warned that Ireland may soon need a second bailout.
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