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!

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  • Cynic

    The other Euro issue – and it may ultimately be to Ireland’s benefit in that others might bail it out – is that Ireland is docked in the Euro-zone which is starting to sink almost as fast.

    If the Euro survives it might just be enough to provide a life-raft for Ireland but at a lover Euro / $ / pound value. That way we can all delude ourselves that things are with the same (in €) but the Euro itself might be down again to say 66p -70p sterling

    The real challenge for Ireland will be what to do if the Euro fails. I still don’t think that’s likely but, if for example the PIGS were set adrift to save the main Euro block, what would Ireland do? Go it alone again with Punt2 or put old animosities aside and adopt Sterling or the $?

  • and if the Euro succeeds Ireland loses economic sovereignty to Brussels or, more accurately perhaps, becomes a German Lander.

  • Itwas SammyMcNally whatdoneit

    Mack,

    Letting the banks take the hit – could it reallybe that easy?

    that is why as I metioned on your other thread that there needs to be a proper debate free of party politics – a government of National unity that considers all the arguements without concern for their arses at an election would surely be the best climate for that.

  • Ste

    No shift in Power, EU Property the Irish Region was, EU Property the Irish Region is.

  • DC

    Cynic

    Liam Byrne wrote in his article about Labour’s defeat that in terms of British trade:

    we are probably in the foothills of the change that is to come.
    Today we trade more with the Republic of Ireland, than we do with
    Brazil, Russia, India and China combined.

    Sterling? Hmm, an ever closer union and all that?

  • Cynic

    For everyone it may boil down to an issue of financial survival. The past is almost 100 years behind us. Where is the future?

  • Eire32

    A lot of wishful thinking going on in these comments.

  • DC

    Now is the time for it !

  • Drumlin Rock

    try the “united Ulster” thread for real OTT comments lol

  • Cynic

    Think of it this way. Ireland could look on it as ‘absorbing’ the UK. Would that make it easier?

  • Munsterview

    The situation is as it always was, there had been no great power shifts apparent to all who can see past the cosmetics and spin.

    The Department of Finance always ruled the roost, not alone in financial matters but in all matters also. That situation has not changed. It was no for nothing that the Late John Healy one of the most insightful and keyed journalists that this country ever produced, referred to the Department Of Finance Chief Secretary and the other Dep. Chief Secs. as ‘The Permanent Government’.

    One incident of comparatively recent times well illustrate this; Michael McDowell was a practiced Senior Counsel when he was elected a T.D. I had seen him in action from student days to Superior Courts performances; he is a quick witted, combative and effective, if somewhat bombastic, debater who took no prisoners and expected no quarter.

    In the Superior Courts he usually had a thorough command of his briefs and when in form could convincingly argue his points with humor and seeming conviction. Mick the Mouth did not suffer fools gladly….. of those who did!

    Michael when appointed The Minister For Justice one of the biggest problems on his plate was the Donegall Police Corruption Scandal where among other things some detectives had their own little cottage industry going for mixing viable explosives which they then planted to be found in the South and in the North also.

    Minister McDowell tried to find out the facts and took on his department, he first relied on their briefs but he was wrong footed time and again in Dail questions and debate. His Senior Department officials were selective feeding him information as part of the case management process.

    Michael had to finally go under the cover of darkness literally like ‘a thief of the night’ out to Private Detective Billy Flynn’s house, the man who broke the scandal to read copies of all the letters that he had send to the Department of Justice over the years.

    How pathetic and undignified was that for a Minister of a modern Government.?

    If a powerful and combative ‘ take no prisoners’ person like McDowell could be shown to be ‘all mouth and no trousers’ what chance has a pussy cat like Dermot Ahern of imposing his will. How many more in the present Government are any different ?

    The Department Of Finance all during the Celtic Era had the same incestuous and inappropriate relationship with the Golden Circles of Builder, Banker and Wan**r’s as Fianna Failure had, and would still have if they were still winning.

    There is no extraordinary shift of power; there is only what has always been Corrupt Ireland’s worst nightmare, an honest English Man who is doing his job properly. The ‘ Yes Minister’ types may be presently co operating with this temporary little arrangement out of instincts of self preservation but we can rest assured, his downfall is already well planned.

    Just like Jack Carlton or any other straight talking and acting outsider that tried to confront power structures here, it will all end in tears! Corruption works for the top elites, it has always worked for them and why on earth should they change it?

  • Alias

    Prof Kelly is one of the few economic pundit who is looking at the underlining dynamics with any sense of reality – and his sense of reality is blurred by optimism.

    He, however, consistently fails to understand that national governments have been constitutionally engineered by the EU via a plethora of treaties into a position whereby they disregard the national interest of their particular state in favour of promoting the EU’s interests – or, more accurately, the national interest of the (non-existent) European demos as set out in the Treaty of Rome.

    These europhiles take this obligation to promote the european national interest ahead of the Irish nation interest deeply seriously. They do no believe that Ireland has the right to determine its own affairs in isolation of the veto of other EU states.

    Hence Kelly cannot understand why Anglo could have been guaranteed by the state, thinking that the government must have done this to protect and promote the Irish national interest despite this bank being of no systemic risk to Ireland.

    Anglo was, however, of systemic risk to those eurosystem banks who lent their money to it and to those foreign depositors whose funds formed 80% of such its deposits.

    There is no consideration of Irish national interest in making the Irish nation 100% responsible for the debts owed to these foreign lenders and liable for circa 100 billion of its total debt simply to provide a 100% retrospective underwriting service to the 20% of its depositors who were actually members of the Irish nation.

    Indeed, there was no consideration of Irish national interest in making the Irish nation liable for all monies lost by wealthy people as a result of their private investments. The existing arrangement whereby the state guaranteed 100k of a private citizens’ deposit in a bank was ample to provide a form of uninsured insurance to typical citizens.

    Contrary to Europhile propaganda, the Irish government did not believe that it was protecting Irish national interests when it acted to protect foreign eurosystem banks and foreign depositors at the direct expense of Irish national interests: it knew full well that it was extending the concept of systemic risk from the Irish banking system to the eurosystem wherein the Irish banking system is an integral part. It was simply honouring its obligations to exercise the functions of the state in the promotion of EU interests.

    So while it is falsely presented that the Irish government acted against the wishes of the EC in guaranteeing all debts of Anglo, the rapidly Europhile Irish government would not fart without discussing first the direction of the prevailing wind with their pimps in the EU, and the extension of systemic risk from Eurozone member states to all states is now EU policy as to how the “contagion” is to be contained in the borrowing state rather than be allowed to default to the lending state. To believe that the Irish government created this policy in isolation on the night of September 28th and to believe that the EU – which duly tut-tutted it – should then adopt it as its policy is to believe in pure fantasy. The Irish government did what their masters told them to do (protect eurosystem from contagion) and to do it in such a way that the EU would then adopt the policy under the pretext that all states must share the same policy.

    They sold out the Irish national interest to the EU and they did it knowing exactly what they were doing. Indeed, for very slow learners, the policy of discarding the national interest in favour of federal interests is 53 years old and printed in the Treaty of Rome. They have no intention of undoing the damage they deliberely did to Irish national interests because their first and foremost loyalty is to the EU, and these patriots are loyal to their true state – the EU.

  • Mrazik

    You make it sound almost like the Wickerman. No guessing for who gets brunt in the end then!

  • Alias

    “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 is utter gibberish from you, Mack. It is wrong on every level that it operates:

    (a) That the Irish government guaranteed Anglo because it was operating in the Irish national interest. (The government guaranteed Anglo because it was acting, not in the Irish national interest, but in the interests of the eurosystem. It was acting to contain the debts of lending states within the borrowing states, thereby extending systemic risk to prevent “contagion” occuring in other EU states.)

    (b) That power should be devolved to from elected government to unelected quangoes because quangoes operate in the national interest and governments don’t. (Quangoes operate in the interests of their members, being unaccountable to the public.)

    (c) That a quango in Uruguay is comparable to a quango in the EU. (The “technocrat” in Uruguay was promoting Uruguayan national interests and not the interests of a supranational agency.)

    (d) That Prof Kelly supports the removal of power from government. (He doesn’t.)

    You really don’t get the concept of sovereignty at all. In fact I think you only liked that article from Kelly because he has a pop at those who do understand the purpose of sovereignty and the value of it.

    Sovereignty is simply the power of nations to determine their own affairs in their national interest. If they transfer that sovereignty to a supranational agency it doesn’t follow that the supranational agency then determines the affairs in the interests of the nation that has transferred the sovereignty. In fact it is impossible for this to occur under one-size-fits-all other than by accident. What actually happens when a nation transfers its sovereignty to a supranational agency is that the supranational agency then operates the sovereignty to promote its own interests. The nation agrees that it has no national interest in the matter over which it has transferred its sovereignty to the supranational agency.

    In the case of the Regulator: he is operating in an area where the bulk of the sovereignty has been transferred to the supranational agency. Therefore, he is promoting the EU’s interests and is not ptomoting the defunct national interest. To claim that he will suddenly begin to promote the defunct national interest if he not accountable to the state is nonsense. The EU interest is incompatible with the national interest, so the more sovereign powers of the state that are transferred to the supranational agency the more dysfunctional the state becomes. It becomes in effect a non-state.

    “The State’s organs cannot contract to exercise in a particular procedure their policy-making roles or in any way to fetter powers bestowed unfettered by the Constitution. They are the guardians of these powers – not the disposers of them.” – Justice Hederman J, Raymond Crotty v An Taoiseach and Others. As Justice Hederman pointed out, the state cannot dispose of the sovereign powers of the state without seeking the consent of the nation to do so. But once they have given their consent then the sovereign powers of the state are duly disposed of by the state. The nation gives up its right to determine its own affairs in these matters, declaring that they no longer have a national interest in them. Where it retains some discretion it only retains the discretion to act in a manner that is consistent with the treaty that it has entered into – much like Directives can set the policy but leave the implementation of it to the regional government.

  • Munsterview

    Loved that film. That ‘pounding on the door’ scene when she was trying to attract the cop was something else. They could certainly make a film back then!

  • Mack

    In fairness Dave I’ve blogged all Kelly’s articles.

  • Brian Walker

    I see the Dept of Finance replied quickly in the SundayTribune, with no doubt more to come in Monday’s papers:

    http://www.tribune.ie/news/home-news/article/2010/may/23/top-economist-inaccurate-and-pessimistic/
    Who are we to believe?

    “The governor of the Central Bank and the financial regulator are the two leading independent banking experts in the state and both of them have stated that they believed the bank guarantee was a necessary step to protect the Irish economy,” the department spokesman said.

    (“He added ) that Kelly’s calculation of losses in the financial sector – the professor said the banks are on track to lose nearly €50bn and more likely closer to €70bn – was “completely undermined” by comments made by Honohan two weeks ago. Honohan has said most of the banks started the boom “with such a comfortable cushion of shareholders’ funds that they would be able to repay their debts on the basis of their own resources. This includes the two big banks”. He added: “The government’s capital injections of last year into these two institutions look like being well remunerated”. Honohan has also said the state’s exposure to the banking crisis was entirely manageable.

    Kelly’s proposal for a default on financial institution bonds – “as the institutions that bought them did so in full knowledge that they could default and charged an appropriate rate of interest to compensate themselves for this risk – was “incorrect”, the spokesman said. The vast majority of bonds were so-called senior bonds – equivalent to deposits and on which no risk premium was paid.”

  • Mack

    Brian – the official figures, and estimates from most other economists (probably based at least partially on the official figures) make the fiscal deficit the larger (by some margin) of the two problems. But Kelly has credibility. I just hope he’s wrong this time!

  • Suilven

    This was a very poor article by Kelly. Not a mention of the fact that the IMF plan envisaged Uruguay running budgetary surpluses for several years after the restructuring (which it did), rather than Ireland’s anticipated 10%+ structural deficit for the next few years.

    Holding out the begging bowl while simultaneously ripping up the existing IOUs is unlikely to elicit much sympathy in today’s febrile markets.