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Government Strategy has failed and this Government is on its way out
19 October 2010
On the last day of September, almost two years to the day since Brian Lenihan announced the bank guarantee scheme, ‘Black Thursday’ signalled the breakdown of the Government’s strategy. This day was supposed to be when the Government announced just how much saving Anglo Irish Bank was going to cost, to signal the final bill for the bank bail out to the international investors who might finance the Irish State’s debt. This is not actually what it was all about but let’s leave that aside for one moment. What it did do was something else entirely. It signalled the failure of Government’s strategy and the countdown to the end of the Fianna Fail/Green Government.
The decision by the Irish State that it could no longer afford to continue its regular borrowing from the international markets because the interest rates being charged were too high demonstrated this failure while the decision to call the much delayed by-elections revealed that the Government has admitted its time is almost up. The Governing parties will get hammered at the polls and if they go ahead with the by-elections then a general election could not be far behind. In fact the question that arises is whether it would not be better for the Governing parties to take the hit all at once rather than reveal their unpopularity before a general election.
The Government has, over the last two years, adopted a series of measures to deal with the financial crisis, all with the primary aim, not of protecting taxpayers- its claims to this cannot be taken seriously; and not even to bail out its banker and developer friends – yes it wants to do this partly to save its own dirty secrets but the crisis is so acute this is no longer primary. The main reason, as we have argued before on this web site, is to preserve the Irish State as a safe and slavish destination for international capital in whatever form it comes – US multinational investment, foreign bankers’ investments or purely financial flows through ‘brass plate’ companies inside or outside the International Financial Services Centre.
These measures have included the blanket bank liabilities guarantee, the repeated efforts at recapitalisation, NAMA, splitting Anglo-Irish into a bad bank and less bad bank, and now nationalisation – first of Anglo-Irish and now of Allied Irish. The state now effectively owns four of six domestic financial institutions involved in the bank rescue scheme. This is the same nationalisation that Brian Lenihan stated repeatedly would be such an almighty disaster. Well, it looks like disaster has indeed arrived, but not due to nationalisation.
Bank of Ireland would also be effectively nationalised if the Government had not just announced that it and the other banks could keep loans below €20 million instead of transferring them to NAMA, replacing the previous lower limit of €5 million. This has effectively delayed acknowledging the additional losses that are involved in these loans which would, if revealed, require additional capital and therefore greater state ownership.
It has arrived because none of these measures have worked. The ‘final’ bail out figure announced by the Government is not, of course, the final figure and not just because it ignores completely the losses on non-developer loans. It also ignores the non-NAMA bound loans still sitting in the banks and the NAMA loans that will make even bigger losses than the discounts applied by NAMA.
The international financiers know this, which is why credit rating agency Standard and Poor’s came up with a figure on the total cost closer to what has now been announced before the Government did, only to be denounced wildly by the Government and its apologists for not understanding what was happening.
The announcement on Thursday was for the benefit of Irish workers – to prepare the ground for them to accept yet more horrendous cuts in their standard of living. This is why we suddenly heard of a new four year budget programme that will set out how the Irish people will be squeezed to bail out the banks and the international investors who took a punt on them, despite their profligacy, incompetence and sheer stupidity.
The arrogant, aggressive and brazen performance by Lenihan on RTE that Thursday was not for the benefit of international buyers of Irish bonds. Which one of them is going to be stupid enough to fall for Lenihan’s comments that the latest economic results, showing continuing contraction in the economy, demonstrate that there has been ‘a remarkable turnaround’. This is right up there with the ‘cheapest bail out’ nonsense, the ‘green shoots of recovery’ last year and the Irish banks, including Anglo-Irish, being ‘on the road to recovery.’
In fact far from a turnaround, the Government’s strategy has definitively failed -the raising of the interest rate at which international investors will lend is a sign they haven’t bought any of the Government’s various stupid statements or their various initiatives. Now the Irish State is massively in debt having relied on the property boom to finance its activities and taken on the debt of the banks which bust the banks and is now going a long way to busting the State.
The State has not immediately defaulted on its debt because it has borrowed enough to keep it going until next spring. Seen as a wise move it has in fact signalled that the Irish State was simply kicking the can further along the road before its lack of any coherent strategy was revealed. The State also has sizeable reserves in the pension reserve fund but using workers’ pension money to fund repayment of debt, plugging the budget deficit or simply burning it – the equivalent of recapitalising Anglo-Irish, would leave the State unable to fund pension commitments. Irish workers may draw the line at resigned acceptance to this.
Instead the Government has been told by the EU that it needs to do more. That is, it needs to put together a series of four austerity budgets that will definitively demonstrate that it can make Irish workers pay for the bank bailout, the State debt and the budget deficit. The EU is often portrayed as some sort of outside referee, applying the rules, or even as the saviour of the State. In fact the budget cuts are demanded because the EU, and the member states which comprise it, are demanding that their banks – the German and French etc. – get repaid the money that has been invested by them in the Irish State and its banks. These banks are just foreign versions of the same speculative vultures who lent to Irish developers and who now demand that, through the Irish state, Irish workers pay them back.
The EU and IMF plus assorted shysters like Goldman Sachs’ Peter Sutherland have all called for massive austerity as the only way to ensure they get their money and that owed to the people they represent. Only by screwing the living standards of the vast majority can the claims of the tiny minority be made good.
But there is a problem. In fact there are a series of problems. One has been much debated in the financial press, reflecting the concerns of the international capitalists that it informs. This is that such massive austerity will deepen the recession making the state less and less able to afford both the austerity measures and pay back of debt. This process of a shrinking economy exacerbating the problem of raising taxes and reducing public expenditure, while there is increasing pressure from unemployment benefit and other welfare payments, has already been in evidence.
Central Bank forecasts for the deficit in 2011 have been that it would be around €20 billion or 11.8 per cent of Gross Domestic Product (GDP). The latest calculations are that, by including the effects of reduced tax receipts and the cost of servicing the recapitalisation of the banks, this will lead to a deficit of €23 billion or 14.2 per cent of GDP. At this level the coming budget will do little more than achieve a stand-still even if the cuts are €5 billion. As the economist Karl Whelan notes, no one believes that this can be reduced to 3 per cent by 2014. Just like the policy of nationalising the banks the ‘alternative’ of the Labour Party and ICTU look as if it is almost being implemented by the current Government. We are thus in a position to judge very concretely that this is no alternative at all.
Concerns about ability to repay borrowings themselves increase the cost of borrowing contributing to a vicious circle leading inexorably to default. The Irish State is now well on this road, something that would have been blazingly obvious had the European Central Bank not stepped in during September.
During last month it was revealed that the amount of short term lending by the European Central Bank (ECB) to Irish banks had risen by €24 billion to €119 billion. This additional lending was necessary because Irish banks had to pay around this amount to its creditors and needed to refinance themselves. Just like the Irish State no one was willing to lend them money. So much for being ‘on the road to recovery.’
It is now clear that the price of this support is that the Irish Government introduces a programme of four austerity budgets which have to be approved by the EU. There has been much prattle about the Government having to make ‘tough’ decisions in order that the Irish State retain its sovereignty. Irrespective of what sovereignty a small state has which is without its own currency; is up to its neck in foreign debt; can’t borrow from abroad and is pinning its hope on even greater dependence on US multinationals; what has been demonstrated is that the concerns about sovereignty are a little beside the point now.
The whole idea of a Government that has months to live introducing a four year programme is so absurd that even Fianna Fail could not have imagined it. The EU has undoubtedly put pressure on the Irish political system to demonstrate that all the potential governing parties, including Fine Gael and Labour, will buy into such a programme. Hence the manoeuvres around a consensus approach, spearheaded by the Greens whose reason for existence was originally supposed to be to break the consensus.
Fine Gael and the Labour Party have now indicated even more clearly that they are in complete agreement with budget cuts but will maintain the lie that they are in opposition, and have an alternative, by refusing to simply sign up to the precise measures that Fianna Fail will propose. Such will be the depth of the cuts that there will be scarcely much difference. The Irish Congress of Trade Unions have meanwhile accepted all the previous cuts and there is no reason for any of the parties to believe that they will not simply continue to do so again in the future, while still proclaiming loudly that it is opposed and will ‘fight’ them.
On the other hand the European Central Bank has made increasingly threatening noises that it will end its policy of allowing banks that are effectively bust from borrowing money from it to keep themselves afloat, using useless collateral for its loans that everyone really knows are worthless. Loss of this lifeline would bring the Irish banks down. As we have seen however, it is not really the Irish banks which are the EU’s concern but the health and wellbeing of the banks of the big EU States.
The second problem is therefore the future of these big banks and hence the Euro and the EU as currently constituted. What is involved in the Irish crisis is not just the effects of damage to the reputation or confidence in the Euro as a possible world reserve currency. While on its own the Irish crisis is manageable, the Irish banking system and State is only one of a number in severe difficulty across the EU. Just as so-called ‘stress tests’ on the Irish banks recorded satisfactory results that were entirely bogus, and convinced no one, so is this also true of the stress tests on the 91 European banks in July this year.
These institutions lent heavily to the peripheral countries of the EU including the Irish State following creation of the Euro and removal of capital controls. This continued after the credit crunch in 2007 as they followed the policy guidance of the ECB and sought to profit by the higher interest rates and therefore profits available from these debtors. The Bank of International Settlements has estimated that Eurozone banks at December 2009 had exposure of $727 billion to Spain, $244 billion to Portugal, $206 billion to Greece and $402 billion to Ireland. The bulk of this was held by German and French banks. On top of some poor lending decisions by some German banks during the housing bubble in the US these banks are skirting with disaster.
In turn the efforts by the US to help save the Euro reflect the exposure of their banking system to the Eurozone, which has doubled in the last five years. This is why the US, in the form of the IMF, rushed to help the EU provide a mechanism to prevent default by Greece. They don’t care about Greece. They do care about their own banks.
This is why the ECB has torn up its rules in providing loans to distressed Irish banks and others. This is why it is buying Irish and other Government bonds off these banks in the secondary bond market. These banks were facing collapse after the credit crunch and are still in a much weakened state. Yet daily Irish workers are led to believe that these financial institutions are all powerful and on no account can they be disobeyed when they demand further austerity. The current crisis is therefore in many ways the continuation of the banking crisis of two years ago with States having taken on themselves the debts of the banks and placed them on the shoulders of the workers.
Once again nationalist slogans are the fig leaf behind which this policy is enforced with workers of every country called upon to make themselves competitive and export their way out of recession. But not every country can do this and it is simply a means of reducing wages across the EU. In Greece public sector wages have been cut by between 20 and 30 per cent; they have been frozen this year in Portugal and perhaps for the next two years while unemployment benefits have been cut. A freeze has also been introduced in Spain followed by a cut of 5 per cent in public sector wages. Meanwhile VAT, which hits those who spend their money rather than having the ability to save or invest it, has been increased by 4 per cent in Greece, by 1 per cent in Portugal and by 2 per cent in Spain. Huge privatisation programmes are planned in Greece and Ireland while attacks on pension rights have occurred everywhere leading to strikes and riots in France.
The crisis and the austerity is therefore international in scope, indicating that purely national solutions are not possible. The role of the EU has been to attempt to protect its biggest banks at the expense of workers across the EU, hitting those in the weakest countries hardest. From financing the Irish banks during the speculative boom it is now trying to make sure Irish workers pay for their banks’ reckless investments.
These plans of the EU which Fianna Fail
are drawing up and which the opposition parties are signing up to, with
their own selections from the menu, must be rejected. The strategy
of the Irish Government and State has failed. The strategy of the
EU risks the same fate. It is time workers put forward their own
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