Ireland – An extraordinary shift in power

Morgan Kelly, in excellent form, produced a tour-de-force in the Irish Times, covering the banking crisis that is sinking us. He reprises the figures from his earlier article on Vox (covered on Slugger here) – Ireland is on course for a debt-to-GNP ratio of 140%.

The issue of national sovereignty has for so long been the monopoly of republican headbangers that it is hard to know whether ordinary, sane Irish people still care about it. Either way, we will not be having it around much longer.

We have long since left the realm of easy alternatives, and will soon face a choice between national bankruptcy and admitting the bank guarantee was a mistake. Either we cut the banks loose, or we sink ourselves.

He points to the Uruguay (rather the Argentina) as pointing the way forward

While most countries facing bankruptcy sit passively in denial until they sink – just as we are doing – there is one shining exception: Uruguay. When markets panicked after Argentina defaulted in 2002, Uruguay knew it could no longer service its large external debt. Instead of waiting for a borrowing crisis, the Uruguayans approached their creditors and pointed out they faced a choice.

But Ireland is in a stronger position than Uruguay

In one way, our position is a lot easier than Uruguay’s, because our problem is bank debt rather than government debt. Our crisis stems entirely from the Government’s gratuitous decision on September 29th, 2008, to transform the IOUs of Seán FitzPatrick, Dermot Gleeson and their peers into quasi-sovereign instruments of the Irish state.

Our borrowing crisis could be solved before it even happens by passing the same sort of Special Resolution legislation that the Bank of England enacted after the Northern Rock crisis. The more than €65 billion in bonds that will be outstanding by the end of September when the guarantee expires could then be turned into shares in the banks: a debt for equity swap.

But what of the objections?

There are two common objections to sharing the banks’ losses with their bondholders, both of them specious. The first is that nobody would lend to Irish banks afterwards. However, given that soon nobody will be lending to Irish banks anyway, this is not an issue. Either way, the Irish State and banks are facing a period of relying on emergency funding. After a debt-for-equity swap, Irish banks, which were highly profitable before they fell into the clutches of their current “management”, will be carrying little debt, making them attractive credit risks.

The second objection is that Ireland would be sued in every court in Europe. Again wrong. Under the EU’s winding-up directive, the government that issues a bank’s licence has full power to resolve the bank under its own laws.

But Irish politicians, heavily invested as they are in the myth that what’s good for Anglo is good Ireland, are unlikely to take this option themselves. In Uruguay the decision to negogiate was made by a technocrat rather than a politician. Here Morgan identifies the Irish technocrats who could save us, and the extraordinary power shift that would facilitate that.

This transfer did not take place without a struggle – one that was entirely missed by the media. When Anglo announced they wanted to take over Quinn Insurance despite the objections of the Financial Regulator, journalists seemed to view this as just another case of Anglo being Anglo. They should have remembered that Anglo cannot now turn on a radiator unless the Department of Finance says so, and what was going on instead was a direct power struggle between the Financial Regulator and the Minister for Finance.

Having been forced to appoint a credible Financial Regulator and Central Bank governor – first-rate ones, in fact – the Government must do what they say. Were either Elderfield or Honohan to resign, Irish bonds would straight away turn to junk.

Now you understand the extraordinary shift in power that lay behind the seeming non-headline in this newspaper last month: “Lenihan expresses confidence in regulator”.

With four months left on the bank guarantee, let’s hope they are listening!

No bio, some books worth reading – The Rational Optimist: How Prosperity Evolves – Matt Ridley .

Crisis Economics: A Crash Course in the Future of Finance -Nouriel Roubini, Stephen Mihm