Wednesday, November 17, 2010

Today's "All Ireland" Links

1--Ireland: How much punishment for British and international banks?, Robert Peston, BBC

Excerpt: There might be sound practical reasons for protecting the senior debt providers. Certainly it is very difficult to see - under the current law - how the senior debt holders could be punished in the absence of some dramatic events. First the two weakest of the big banks, Anglo Irish Bank and Allied Irish Banks, would probably have to be declared insolvent. And second, almost all the many billions of euros that Irish taxpayers have already pumped into these banks would have to be written off, which would be extremely painful.

What would then be triggered would be enormous payments by underwriters of credit default swaps (CDSs), the debt insurance contracts taken out by lenders and speculators. These payments would generate enormous losses for the financial institutions, including banks, which provided the CDS cover.

Sources close to the Irish government tell me that the US authorities are deeply concerned at the idea that CDS payments would be triggered in this way. The implication (yet again) is that insurance contracts designed to reduce risk are in fact a source of systemic instability. Which, of course, has been the hideous norm in the Frankenstein markets that have been engineered over the past decade or so.

Even without the CDS loss multiplier, the impact of debt haircuts would be painful for British and international banks. According to the Bank for International Settlements, total lending of non-Irish banks to Irish banks is around $170bn, of which British banks provided $42bn, German banks provided $46bn, US banks $25bn and French banks $21bn.....If you add all that together, it comes to $435bn of exposure for international banks to the banking and public sectors of the eurozone’s three weakest economies.

2--The EU versus Irish freedom, Bruno Waterfield, EUobserver

Excerpt: Ireland is fighting for its political and economic independence in a world dominated by the globalist, or fatalist, outlook that says markets and bureaucracies, in this case the EU’s, cannot be bucked.

Irish ministers, whatever their own gombeen surrender monkey instincts, know that Ireland’s voters value their independence, a freedom earned through bloody battles with British imperialism, and resent the idea of others coming into to “help”, even “for their own good”.....

Ireland must get on its knees and confess its helplessness, powerlessness and “interdependency” to come back into the club of the civilised-Van Rompuy-style EU. Ireland, like all of us, must learn its place. We are all subject peoples now – or so the EU or managerial outlook would have it....

Popular sovereignty, increasingly painted as a dark and dangerous force, will be decoupled from national interests which will merely become bureaucratically expressed differences between civil servants of different nationalities....

When popular sovereignty is expelled by the managerial administrators, the people become a threat or a problem to be managed and ignored.

3--The Irish verdict George Osborne would like to forget, The New Statesman

Excerpt: RIP Ireland's economic miracle. A combination of tax cuts and increased public spending -- coupled with the credit crunch -- has left Ireland with a budget deficit of 32 per cent of its GDP this year. The credit-inflated bubble has now well and truly popped, the draconian austerity measures have failed -- as many predicted they would -- and the Irish government appears close to being bailed out by the EU....

Ireland did not surge ahead because of its highly regarded education system or increased research and development at universities.

Ireland boomed instead on a toxic mix of cheap credit, lax banking regulation and by becoming a borderline tax haven.

Slashing corporation tax -- a move continually hailed by Osborne as the way forward -- simply weakened Ireland's tax base even further, making the recovery that bit more difficult.

We should learn from Ireland's mistakes. Unfortunately, however, Osborne wants to copy them -- at least judging by Osborne's cuts to universities, the 3.4 per cent reduction in the education budget and his continued obsession with reducing corporation tax -- to the point where companies could end up paying less tax than their cleaners.

The case of Ireland is a cautionary tale, not an instruction manual.

4--Ireland's smug, Euro-loving elite has led their country to ruins – 'Little Englanders' saved ours, Ed West, Telegraph

Excerpt: Ireland has a historical attachment to continental Europe, as liberator from British rule, but it perhaps goes even deeper than that, back to its monks’ preservation of Western civilization during the Dark Ages. Ireland, more than most countries, feels itself profoundly European and its Catholicism was always a part of that. It is not entirely a coincidence that as Christianity faded Ireland adopted a replacement ideology – the dream of Brussels. Or the world’s biggest suicide pact, as I think of it.

The Irish political elite, progressive in social and cultural issues, naturally loves Brussels’ social agenda, which is hostile to the Church, religion or any moral opposition (warning sign No. 1). That explains why seriously devout Catholics in Ireland joined with the far-Left and the ultra-nationalists in opposing the Lisbon Treaty.

A motley collection, but at least Sinn Fein’s logic is consistent. Why spend 800 years trying to overthrow the Brits just to come under the sway of the EU? Having said that, almost no one in Ireland goes anywhere as far as UKIP or many Tories in opposing the EU altogether....

The European Project was and is a utopian idea, based not on practical logic but on an idealistic vision, and it has only one aim in mind – total political union. Along the way its architects have consistently lied to the public about its aims, especially so in the creation of a single currency, which logic suggests requires political unification.

5--Ireland has lost its sovereignty and is now the creature of Brussels – thanks to the euro, Peter Oborne, Telegraph

Excerpt: When the euro was being invented 20 years ago, one of the central criticisms by Eurosceptics was that a single currency was possible only if individual nations surrendered their sovereignty. The people who issued these warnings were dismissed as cranks, madmen and embittered losers. The tragic – there is no other word – fate of Ireland this week shows how prophetic they were.

It cannot be denied that Ireland has lost its status as a sovereign nation. Thanks to its disastrous entanglement with the euro, it has lost any independence in domestic, foreign and above all economic policy. The Irish nation is the creature of Brussels and the European Central Bank. The Irish prime minister has effectively been turned into a pro-consul despatched to Dublin from Brussels. Brian Lenihan, the finance minister, is like an overseas manager of a Brussels subsidiary. For those of us who love Ireland, this is miserable and demeaning – but it needs to be borne in mind that a similar fate awaits a number of other European countries. Greece already does what it is told by the IMF and the ECB; the same will shortly apply to Portugal and in due course Spain.

6--Crisis of Democracy Faces Euro Zone, Iain Martin, The Wall Street Journal

Excerpt: Any country leaving would find that its new currency dropped like a stone (which would increase the relative size of its debts, still denominated in euros). It might default but it could not raise a penny on the markets to fund itself. Unless there is gold at the end of the rainbow, or 870 million barrels of oil off the west coast of Ireland, as was claimed yesterday, Ireland's only option appears to be the euro. It long ago passed the point of no return...

...listen to European leaders speak in public, one would imagine there really are no implications. It is as it ever was, only a little bit more so. Ireland's Finance Minister Brian Lenihan was interviewed recently and suggested it was the same old story: "Ireland has always been linked to a fixed currency arrangement. We are currently linked to the euro, we were linked with sterling for more than 150 years. Small countries don't have the luxury of having a separate currency, they link themselves to another currency, there's nothing unusual about that."

In reality, the political end of the European project is now being completed, having been parked because it was too difficult a subject when the single currency was founded. So Ireland is not just "linked" to another currency—its independence is no more than notional. In return for its bailout it will lose control over its corporate tax rates, if not this time then a little further down the line. There will be extraordinary oversight not just of budgets but all manner of other aspects of euro-zone countries' economies. That goes well beyond a pooling of sovereignty. If it walks like a government, and it talks like a government, then it probably is a government.

But what happens when enough voters, in what might be called a nation state, inside the euro zone, one day soon decide that they want to change their government? I don't mean reshuffle their political elite, drilled by the bond markets and common currency orthodoxy, but vote to really head off in a new direction right or left, a direction that requires an independent economic policy. Perhaps such voters in countries including Ireland will always be relaxed when they discover the option has been permanently removed by the ECB and EU. But what happens if they are not so relaxed?

7--Yes, You Can Buy Ireland (If You’re Brave), Forbes

Excerpt: But Bob McKee of Independent Strategy says investors need not worry about haircuts. The Irish government’s (initially disastrous) commitment to honor senior bank debt and other bank liabilities still stands, he points out, along with an E.U. extension of that guarantee through to mid-2011. “Any package with the European Union or IMF from here will ensure that is maintained,” McKee says.

The EU also stated at last week’s G20 meeting that a German plan for haircuts on private holders of sovereign debt would not apply under the existing European Financial Stability Facility, which expires in 2013, but only to a new permanent bailout structure after that. “So banks would not take a haircut on any sovereign debt holdings through 2013,” says McKee.

8--There is a way out for Ireland, and Britain should stand ready to offer it, Daniel Hannan, The Telegraph

Excerpt: Almost everyone now sees that, for Ireland, the euro has been a disaster. As early as 2001, Irish economists were warning that the boom was getting out of control, and that interest rates needed to go up. But, of course, there were no Irish interest rates any more: there was only the European Central Bank. Its policy of cheap money was arguably excessive even for the core European economies; for Ireland, it amounted to catastrophically pro-cyclical monetary policy. A credit bubble was inflated; the bust, when it came, was commensurately painful.

Denied the ability to devalue, undercut by sterling and obliged to borrow even more money in order to participate in the Greek bail-out, Ireland’s position has become calamitous: debt and unemployment are rising, prices and incomes are falling. GDP is down by an almost unbelievable 20 per cent from peak. And here’s the really bad news: these problems will carry on for as long as Ireland is in the euro. Bailout or no bailout, Eire’s economy diverges cyclically and structurally from Continental Europe: save by occasional and fleeting coincidence, its interest rates and exchange rates will always be wrong.

Alright, so the euro was a disaster. How, though, does Ireland get out of it? If it were simply to reissue its own currency, that currency would devalue, pushing up its debt level even further. This might be a lesser evil than continued euro membership, of course, but it is an evil none the less. Is there any solution?

Yes. Ireland could adopt the pound and treat its loans as having been issued in sterling. Immediately, Eire would be able to start exporting its way back to growth.

9--Ireland will win this game of bluff, Simon Nixon, Wall Street journal

Excerpt: Dublin still has the strongest hand. The first thing in its favor is that no one can force it to accept a bailout; Ireland has to ask the European Union for help. And given the Irish government is fully funded until the middle of next year, it can in theory drag this situation out for months. If it did that, of course, contagion would likely spread quickly across the euro zone, as Tuesday's stock and bond selloffs showed, threatening the survival of the common currency. In that sense, Ireland is armed with a nuclear weapon.

In response, the EU is armed only with bows and arrows. There is very little it can do to force Dublin to seek an early bailout. The one pressure point is Ireland's banks, now only able to survive thanks to European Central Bank funding. But so long as the banks are still able to post eligible collateral, the ECB has little option but to continue accepting it, even though its lending to Ireland now totals €130 billion, equivalent to 80% of Irish GDP, much of it in the form of Irish domestic mortgage-backed securities specifically created to meet the criteria for the ECB's lending facilities. If the ECB were to impose an arbitrary limit on Irish borrowing, it could spark panic across the euro zone.

This game is due to be played out over the rest of this week with European Union and International Monetary Fund officials descending on Dublin to thrash out a deal. Ireland has signaled it is willing to consider a deal to recapitalize its banks, allowing them to borrow again in private markets. Optically, that suits the Irish because it enables them to claim the sovereign itself remains solvent and so shouldn't be subject to any external fiscal oversight that might put its tax arrangements at risk. Legally and practically, this argument is nonsense since any bailout needs to be channeled via the sovereign, giving the lenders the right to impose any conditions they wish.

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