| A third country which is central to the european debt crisis is Ireland. Once again the history of the problem is different.
In 2005 Ireland had the second lowest debt to GDP ratio in the European Union. Only Luxembourg had a better record in those terms. The government was not spending more than it took in: it had a surplus of 2.5%, in fact. That surplus was used to establish a Pension Reserve Fund: which seems quite a sensible thing to do. ( it is interesting to note that after the event the IMF has rewritten history, and its own assessment at the time:They now say that there was an underlying deficit: but then they would, wouldn't they? ) Economic growth had been strong from about 1980, outstripping most other european countries quite significantly, too.
One thing which was obvious to the casual visitor to Ireland was that the housing market had gone crazy. I noticed this and many of my friends, who also visit the country as tourists, remarked on it too. Everywhere you looked there were new houses and most of them were big houses. From Donegal to Kerry and all across the Irish midlands huge houses marred an otherwise beautiful landscape. And the house prices were insane. Between 1992 and 2006 property prices increased by 300% in real terms.
This madness was fuelled by the banks in much the same way as we have seen elsewhere: loans were not funded by deposits. In this case the Irish banks raised money by taking loans from outside the country, and they secured them against the hugely inflated housing assets. When the crash came the Irish banks could not repay the debts and they were bankrupt. By that stage about 13% of the Irish working population were employed in construction. The collapse of the housing market thus had a profound direct influence on wages and on economic activity in general.
There were aspects of government policy which contributed to the disaster: in particular there were tax cuts and a climate of deregulation, in line with the prescriptions of the neo-liberal mindset. Indeed in 2007, despite some warnings from analysts and mild concerns expressed by the OECD about the fragility of tax revenues highly dependent on the property market and on consumer spending, on the whole both the EU and the IMF were content with what was happening. For example the IMF reported on financial stabilty in the country in 2006: and it did not point to causes for concern. Ireland was following the mainstream wisdom, and weak regulation was tolerated because the climate was one of reliance on market risk assessment. In short the banks and the market were seen as better at managing the economy than was the state. Few raised serious concerns and those who did were ignored or, in some cases, suppressed.
The Irish banks were incredibly irresponsible and the best parallel I have been able to find is Chile in 1982. A report prepared for the Irish government talks of "mistakes" and "errors of judgement", but it seems quite clear to me that they were no such thing. The Irish banks were not particularly involved with the "new instruments" like derivatives; they were engaging in an old fashioned "bubble". There is little excuse for this and any doubt must be removed by the fact that the true situation was neither properly recorded nor properly disclosed, even after the problems were clear. The Irish banks borrowed more and more money to lend greater and greater sums to a very small number of interconnected borrowers in the property market: particularly the commerical sector. That combination of high borrowing and high concentration could not have been an error: rather it was a policy decision of the major banks
When the crash came the Irish government decided to assume responsibility for the banks' debts. In the first place, in 2008, the government guaranteed the debts of six of the main banks and financial institutions for a year:and that was renewed for a further 12 months in 2009. That same year government established the National Asset Management Agency which was designed to consolidate the bad debts: this too was similar to what chile did after 1982, and I assume that was the model they were following. However that strategy was not a good idea because the government had no idea what they were taking on
It is very clear that the problems with the Irish banks went far beyond reckless borrowing and lending. At least some of the banks were engaged in activities which were criminal, even within the wide limits allowed in a deregulated financial regime. And the underlying liabilities were far far higher than those disclosed when the government made the decision to assume the debts. This particularly involved the Allied Irish Bank which was the centre of a "hidden loans" scam: that scandal ultimately led to the nationalisation of that bank and two others. There are murky dealings attached to that episode, and the extent of the corruption is not clear to me: but it led to a wave of resignations at the highest levels in banking circles in Ireland, and the decision to "recapitalise" those banks directly (in this case, as in so many others, the auditors (Ernst and Young this time) are quite clearly complicit or they are idiots: it is unfortunate the the major auditing firms are so few, and that their role in all of these horrors is largely passed over. Especially here, because Ernst and Young then advised on the "recapitalisation" after the banks were nationalised).
The banks were nationalised in 2009 despite the opposition of other parties in the Dail, who proposed they should be shut down instead.
The Irish debt crisis is a direct result of criminality in the banking sector. While it is clear that the government could have taken a different decision (c/f Iceland) the decision to nationalise the banks was not made on principle: it was a response to that criminality and the consquent impossibility of dealing with the situation through government guarantees or recapitalisation by issuing bonds and assuming the debt in a repurchase scheme a la Chile. There was nobody left within the banks who could be trusted to manage any such scheme, even with close scrutiny. But the level of the liabilities was not known, and have proved to be far greater than first suspected.
In this case it seems clear that Ireland was neither reckless in its spending nor pursuing policies which a neoliberal would see as hampering business or growth: it was doing just what the EU and the IMF and free marketeers in general recommend. Yet like Italy and Greece the people are expected to pay an enormous price for the failings of the banks, and in this case those failings are clearly not due to errors nor exuberance. Yet they are not qualitatively different from other banking behaviour which stays within the law: the effects are identical.
From a consideration of these three very different economies it is really hard to understand the characterisation of them which is common in the mainstream press.
In the case of Greece one can say that the government was complicit in hiding emerging financial problems through the use of complex financial instruments, sold by Goldman Sachs and others, for very big fees: but it not possible to be sure that government understood what it was doing: because the banks bleat that they did not understand them, when the trade in those same instruments led to their own disastrous failings.
In the case of Italy one can say that the government was responsible for low growth etc: but since we are told as a matter of faith that governments are no good at that kind of thing and it is better left to the market , that is an argument that requires watertight boxes in your head so that you can put the blame where you want it to be
In the case of Ireland one can blame lax regulation: but again you need those boxes to do it. And you can also blame the people to some extent, for taking on too much debt in order to find somewhere to live. That is partially legitimate: but as discussed elsewhere it is difficult to avoid when the debt is the only means of putting a roof over your head
What is abundantly clear is that the feckless peripheral nations do not exist in the form normally described, at least so far as I have been able to trace the development of these problems in three different nations. The only things they have in common are viciously self interested banks and financial institutions
In none of these cases is fiscal irresponsibility evident: in none of them have the people been in possession of the facts: in none of them are the proper people suffering much in the way of consequences: and in all of them the population is suffering really severe austerity so as to maintain thoe same banks which have caused the problems.
The cry is they have spent beyond their means and must now pay the price.It does not seem to be true.
Edited by FionaK - 6/11/2011, 18:23
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