Finnegan's Take

The role of the European Central Bank (ECB) in Ireland’s financial meltdown demands more scrutiny.

The IMF, EU and ECB are calling the shots in Dublin now. That much is clear.

What hasn’t been quite so obvious is how directly the ECB has been influencing Irish government policy for several years now.

The biggest mystery for Irish people this week – tens of thousands of whom marched in Dublin on Saturday – is how they came to be liable for billions of euro worth of bank debt.

The simple answer is that the Irish government took the disasterous decision to guarantee its wreckless banks in September 2008. But why? Why would a government extend such a broad guarantee, forcing a small population to shoulder huge debts and making itself politically unpopular (to put it mildly).

Here, the influence of the ECB President Jean-Claude Trichet comes into play. According to Ireland’s finance minister Brian Lenihan, Trichet called him at the peak of Ireland’s banking crisis in September 2008 urging him to “save your banks at all costs“. See here

At all costs.

Ireland has two very serious problems. One is budgetary. After tax revenues collapsed in the wake of a burst property bubble, Ireland’s inflated public spending has been exposed. Dublin is spending far more than it is taking in.

This has to be fixed and will require a long and painful correction. There will be protests and hardship as health and education services decline and taxes rise. But, alas, this problem is effectively of Ireland’s making – exacerbated by electing, re-electing and electing again a political class that was too cosy by far with its property developers and banking ‘elite’.

This adjustment is, however, necessary. And the Irish taxpayer will just have to live with it.

The second problem is Ireland’s ‘wild west’ banking system. Don’t get me wrong, Dublin failed to regulate its banks and turned a blind eye to dodgy dealings in the Irish Financial Services Centre (IFSC).

The ECB was not blind to what was happening there either. And German, French, British and other major financial forces were content enough to have deals done on Irish soil which could not be done in Frankfurt. (More here on that complex web, but suffice to say that banks from DE/FR/UK/BE/IT are all up to their necks in this).

This is without getting into the well-rehearsed complaint that cheap money from the ECB (at interest rates which suited its larger members but were inappropriate for its smaller members) helped fuel the boom. There were plenty of things Irish politicians and regulators could have done to cool things down but they preferred the look of graphs which showed they were presiding over an economic miracle. Those graphs are not so pretty now.

But back to the fact that the ECB is calling the shots.

Here is an EUX.TV video of Brian Lenihan yesterday in Brussels. He makes it clear that Ireland raised the issue of letting senior bondholders take a hit as part of the effort to rescue Ireland – and was told to forget it. If those bondholders take a hit, it means banks and pension funds across Europe losing money they unwisely lent to reckless Irish banks.

So, the ECB effectively says ‘No, share the debt amongst your 4 million population’. It is plain that this is impossible. It’s not that it’ll be too hard, it’s just not possible. Ireland’s banking sector served as a special economic zone for half of Europe to fly in, spin the roulette wheel, and fly out with their profits. Now some of those gambles have not paid off, they will be allowed to leave their debts behind.

The real plan seems to be to keep this on Ireland’s shoulders for as long as possible in the hope that by 2013 Europe has a cleaner, stronger banking system and a robust economy which can stomach the losses that will result from Ireland’s inability to service (let alone repay) massive debts run up in its banking system.

In the meantime, Brussels and Frankfurt are saying that the Irish should live with this debt – but shouldn’t have an election in case it upsets the markets. The Irish should, they say, let a deeply unpopular government (under instructions from Europe) pass a budget, do a deal with the IMF and set out a four-year plan which the next government will have to implement.

Democracy is a funny thing.

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  1. “There were plenty of things Irish politicians and regulators could have done to cool things down but they preferred the look of graphs which showed they were presiding over an economic miracle. Those graphs are not so pretty now.”

    Makes me think of a certain Mr Brown. For 10 years in the UK we heard about “prudence”, “restraint”, “sound fiscal policy” and “an end to boom and bust”.

    Of course, instead of “tax and spend”, he was of the “spend, spend, borrow and spend” theory.

    Whether the Irish should live with this debt, I think not, but I fear they shall.

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