Tony Phillips is an Irish researcher at the University of Buenos Aires, Faculty of Economics. He specializes in the alternative development, sovereign debt issues, and ecological economics.
Ireland in December 2010 shows many parallels with Argentina in December 2001. This phase of the negotiations cost Argentina dear; riots, deaths, banking collapse and frozen accounts (the notorious “Corralito”). The peso was all but destroyed (a 75% depreciation) prompting the largest sovereign default in the history of modern finance. Three presidents were forced to resign between December 2001 and January 2002 because they could not offer solutions acceptable to the public. Riots in the streets lead to shootings by police. Mass marches politicized the middle class, they marched with their pots and pans demanding an end to corruption. IMF representatives, holed up in the Sheraton, continued to press the Argentine congress for changes in national corruption laws and worked feverishly to plug holes in flawed economic theories in their offices in the Argentine Economics Ministry. They were dark days indeed. Former Minister for Economics and Argentine statesman Aldo Ferrer wrote of this period citing Dante Alighieri, “Abandon hope, all ye who enter here.”
In Dublin this week large sums of money are in play. Irish negotiators will be under extreme pressure. Their performance now, and the actions of the Dáil in revising, renegotiating and passing an acceptable budget, will mark a defining hour in the history of the Irish state. This is not about a three euro airport tax, it is about Irish sovereign national debt.
Current indications are far from positive. Nama, a band-aid measure with limited transparency designed to cushion just one industrial sector, was both ineffective and expensive. The toxic combination of Nama with infinite deposit guarantees brings the Irish state dangerously close to risking sovereign default. Instead of shelving Nama, negotiators argue for its extension.
Interviews with Taoiseach Cowen reveal a dangerous confusion between the running costs of government and the woes of the private banking sector. Surely he understands the difference. Budget gaps can and will be fixed by Ireland alone. Unfortunately, Ireland’s banking woes may be beyond a national solution. The financial markets are crystal clear; they are worried about Ireland’s banking problems and their knock-on effects abroad, not mundane budgetary issues like the minimum wage.
Good Bank, Bad Bank, a global response
Banks worldwide are endangered by contagious collapses in derivatives. These derivatives are known as asset-backed debt – or “Collateralized Debt Obligations” to their friends. The risk of collapse prompts national financial rescues, typically splitting loans into good banks and bad banks. Schemes vary but you would be hard-pressed to find a bad bank scheme as generous as Ireland’s Nama. Resembling a giant cushion shoved under defaulting speculative loans from Irish banks, Nama was a critical mistake. It was a panicky reaction which gave a soft landing too many undeserving and wealthy institutions, more akin to what one might expect in the 1970’s Latin American banana republics than a modern OECD state.
As the IMF and the ECB negotiators try to convince Ireland that borrowing bailout funds to transfer private banking to the Irish taxpayer transfer is a national priority, Ireland’s negotiators have only one task: avoid financial suicide! The IMF and the ECB will fight tooth and nail to load as much debt onto the Irish people as they are willing to bear.
Bank rescue is a political issue. Unlike Argentina where pushing private debt on the public was a national sport by 1980’s dictators, Ireland is a democracy. The Irish people can refuse to elect any representative unwilling to fight hard on this issue. National financial stability is paramount. If this means forcing the losses of the banking defaults onto the shoulders of the speculators who borrowed from these banks, then so be it. Failing that, they fall to the shoulders of the foreign bondholders who speculated on speculator debt; these same foreign bondholders that politely asked their governments to send the IMF and the ECB to Dublin. Instead of shelving Nama, IMF and ECB negotiators argue for its extension.
Leaving the Euro
In 2001 the Argentine currency was pegged to the dollar. This is not analogous to Ireland’s marriage to the Euro. Membership of the Eurozone is a somewhat more reciprocal relationship. Though divorce is possible, counseling should be sought before the relationship is terminated. A new Irish punt will be prone to speculative attacks. It will be hard to convince markets of the stability of a defaulted currency. Devaluation would be severe, pushing up the cost of euro-denominated debt obligations. The state would have to maintain high foreign currency reserves. None of this is optimal, but it may be the least-worst scenario when compared to unsustainable debt.
Not the end of the World
The critical issue in December 2010 is less public money to rescue the banks, not more! The crisis will be over by Spring, the banks nationalized and the Euro will survive preferably in a new form. Most important from an Irish perspective, this return to stability can happen without loading decades of misery onto the Irish people.
So first things first! Have your voices heard in those snowy streets and prevent a bad budget! If the current government or future governments show any signs of corruption, change them. Their mismanagement to date should make such political changes not just necessary but popular. Refuse to elect any representative not trusted to represent national interests against global financial power.
Remember the remit of the IMF and the ECB includes the protection of private financial interests abroad. They will make the Irish taxpayer pay till they scream. Learn a lesson from Argentina, scream early and scream loud. It will mean less pain in the long run. Ireland needs to play hardball with foreign financial interests now. Argentina is watching you. Sovereign debt is a sovereignty issue; time to prove your mettle.