The Irish Debacle: the Republic’s path to subordination to the ECB, EU Commission and IMF Troika

Future historians will surely see Ireland’s joining the Eurozone in 1999 and abolishing its national currency to adopt the euro as the worst policy mistake ever made by the Irish State. It was an act of gross irresponsibility on the part of a political class that had come to see themselves as “good Europeans” first and upholders of the national interests of its own people second. Explaining how this mindset came about will be a challenge to the country’s historians and social psychologists.

The Republic of Ireland joined the Eurozone on its establishment even though it did nearly two-thirds of its trade – exports and imports together – outside the area. It did some one-third of its trade with the Eurozone, one-third with the UK and one-third with America and the rest of the world. (The proportions for 2008 were : Total trade – Eurozone 34%, UK 24%, Rest of world 42%; Exports – Eurozone 39%, UK19%, Rest of world 42%; Imports – Eurozone 25%, UK 33%, Rest of world 42%, in the Statistical Yearbook of Ireland 2009). Its Europhile politicians assumed at the time that Britain would adopt the Euro before long, which would put the bulk of Irish trade inside rather than outside the Eurozone. But of course Britain did not and will not.

Moreover when Ireland joined the Eurozone it had been experiencing for over half a decade its “Celtic Tiger” economic boom. The period 1993 to 1999 was the only period in the history of the Irish State, which was established in 1921, that it followed an independent exchange rate policy and let the Irish pound float, thereby giving priority to its real economy of production and employment. This gave it a highly competitive exchange rate, which encouraged massive inward foreign investment, boosted exports and underpinned average annual growth rates in those years of 9% of GDP.

In the early 2000s, the first years of Eurozone membership, the euro itself fell against the dollar and pound sterling, which added to Ireland’s competitiveness in external trade. Unfortunately the growth rate then slowed, as output expansion shifted from exports to the domestic sector in response to the Eurozone’s unsuitably low interest regime and the housing and property boom of the early 2000s.

Eurozone interest rates were low in those years to suit Germany and France, whose economies were in recession. Ireland more than halved interest rates on joining EMU, even though it needed higher rates to cap its boom. This gave huge impetus to the borrowing binge that followed between 2001 and 2007. This was concentrated on the market and expanding domestic demand. It made the Republic of Ireland’s property bubble one of the biggest in the world.

Having surrendered control of monetary policy on joining EMU, the Irish Government let fiscal policy rip. It cut taxes and raised spending, buoyed by revenue from the booming property market. This began the process which landed the State with annual public sector deficits of over 10% of GDP and set the scene for the disastrous bank policy it adopted post-2008.

Ireland’s blank bank guarantee

When the property bubble burst some Irish banks were insolvent because of bad property loans and all had serious bad debts. In September 2008 Irish Taoiseach Brian Cowen and Finance Minister Brian Lenihan gave their infamous blanket guarantee to the Irish banks, from which the intolerable debt burden, the credit crunch, and the current crucifixion of the Irish economy all stem.

It would have been reasonable enough for the Irish Government to guarantee peoples’ deposits in the banks, the savings of citizens, and so head off a bankrun. Its folly was to give a simultaneous State guarantee to the creditors and bondholders of the Irish banks, and in particular the notorious Anglo-Irish Bank, a property developers’ bank which was in no way “systemic” to the country’s finances.

Unlike depositors, who can withdraw their money, creditors/bondholders cannot run anywhere. These were mostly foreign banks from which the Irish banks had borrowed vast sums over the years for on-lending to Ireland’s property market and which had made good profits on those loans.

At the time of the blanket bank guarantee Jean- Claude Trichet, Governor of the European Central Bank (ECB), phoned Finance Minister Lenihan from Frankfurt and told him that on no account should he let any Irish bank fail. If the insolvent Anglo-Irish Bank had been let go, the German, British and French banks which had lent that one bank alone some €30 billion for on-lending to the Irish property market, would have been badly hit. There could have been a chain reaction of bank failures across the Eurozone.

The European banks, and some American ones, had been happy to make money stoking the asset bubbles of the PIGS countries – Portugal, Ireland. Greece and Spain – under EMU and now feared these countries’ banks defaulting. Banks in Germany, France and Britain together had over €300 billion of exposure to the Irish banks and property market. In proportion to population size this was nearly ten times their exposure to Spain.

So with property prices plummeting and the investments of these foreign banks threatening to go belly-up, the Irish Government promised that the Irish State and Irish taxpayers would ensure that foreign creditors got their money back in full. There would be no default on senior bondholders of the country’s banks even if it meant years of pain for the Irish people, a credit crunch for local business, deflation, austerity, high unemployment and a return to mass emigration for the country’s youth.

The Irish Government gave this blanket bank guarantee on the assumption that its banks would have the backing henceforth of M.Trichet and the ECB. They got that for the next two years. During this time the ECB lent money at 1% interest to the Irish banks. Then in September 2010 the ECB grew alarmed at the size of the sums being demanded of it and the poor quality of the collateral the banks were offering against those loans.

Bailout/stitch-up by the EU

That month the two-year blanket bank guarantee was up, but the Irish Government, in line with ECB policy, renewed it. Although the Government had enough money to finance its own bills until mid-2011, it could not simultaneously guarantee the debts of Anglo-Irish and its other insolvent or near insolvent banks. With naïve trust in its Eurozone “partners”, the Government stood by its guarantee that no German, French or British bank would suffer. It would see to it that Ireland’s taxpayers would continue to pay off the debts of its insolvent local banks.

Two months later, in November, the EU pulled the ground from under the Irish Government. The European Central Bank told it that it would no longer lend Ireland money at 1% interest, but would organize a loan instead from its “shock-and-awe” fund which had been set up in May to lend to Greece, the European Financial Stabilisation Facility, at 5.8%. The Irish Government bowed to the harsh terms of the €67 billion loan being pushed on it by the ECB and the EU Commission, with the IMF in tow. US Treasury Secretary Geithner vetoed an IMF suggestion that senior bondholders in Ireland’s banks bear some of the costs. They would be paid in full. A troika of the ECB, the EU Commission and the IMF took over detailed management of Ireland’s finances and began supervising the release of the various tranches of the loan.

It was a humiliating culmination to the Irish political elite’s long love-affair with Brussels. As an editorial put it in the Irish Times, the paper which for decades had been the most uncritical advocate of each step of further EU integration by the Irish State: The EU/IMF loan and the conditions attached to it “represents nonetheless a defeat for this State which has turned us, in the blink of an eye, from European success story to a people at the mercy of the benevolence of others. It was notable that the announcement was made in Brussels and only after that was the Government able to hold its press conference in Dublin.” (29 Nov 2010)

In this way Ireland has been turned into a vast debt-service machine by the criminal incompetence of its own chief policy-makers and the demands of the European Central Bank. It has become a “bankocracy”, ruled by bankers. In December the Financial Times nominated Ireland’s Brian Lenihan, for the second year in succession, as the worst Finance Minister in Europe. In February this year the Fianna Fail Party, which had held office during the Republic’s boom and bust and which had dominated Irish politics since the 1930s, got its deserved come-uppance. It fell from 77 out of the 166 seats in the Irish Parliament to 20.

It was replaced by a Fine Gael-Labour coalition government, with 113 seats between them, which however has to date continued the same policy as its predecessor and is dutifully implementing the provisions of the Memorandum of Understanding with the ECB, the EU Commission and the IMF Troika.

This Irish debacle should make small countries that are outside the Eurozone thank heaven they are not in it.

Nobel Economics Prizewinner Paul Krugman on “The Euro Trap”

On Monday May 3rd, the Irish Times carried an article by Nobel Economics Prizewinner Paul Krugman on “The Euro Trap”. Its main contention was that the euro-realists and euro-sceptics who had warned against the dangers of abolishing national currencies to form an EU currency union were being proved right by current events.

The austerity being imposed on Greece so that it can repay what it owes to German, French and other banks could be alleviated if Greece had its own drachma to devalue, thus helping to restore its economic competitiveness and enabling its government to use its own money to encourage domestic demand. Exactly the same point is true of Ireland.

This article was first carried as an op-ed piece in the New York Times last week. Since then Krugman has written the following related pieces on his blog, which may be of interest.


http://krugman.blogs.nytimes.com/2010/05/04/default-devaluation-or-what/
The Conscience of a Liberal
Paul Krugman
Tuesday 4 May 2010
Default, Devaluation, Or What?

Is there anything more to say about Greece? Actually, I think so.

Observers like Charles Wyplosz, who point out that the adjustment being demanded of Greece is extraordinary and hard to see happening, are right. And yet .. one thing I haven’t seen pointed out sufficiently is that a debt restructuring, or even a complete cessation of debt service, wouldn’t do all that much to ease the burden.

Consider what Greece would get if it simply stopped paying any interest or principal on its debt. All it would have to do then is run a zero primary deficit – taking in as much in taxes as it spends on things other than interest on its debt. But here’s the thing: Greece is currently running a huge primary deficit – 8.5 percent of GDP in 2009. So even a complete debt default wouldn’t save Greece from the necessity of savage fiscal austerity.

It follows, then, that a debt restructuring wouldn’t help all that much – not unless you believe that getting forgiveness on much of Greece’s existing debt would make it possible to take on substantial new debt, which doesn’t seem very likely.

The point is that the only way to seriously reduce Greek pain would be to find a way to limit the costs of fiscal austerity to the Greek economy. And debt restructuring wouldn’t do that.

Devaluation would, if you could pull it off. I see that Vox has reposted the classic Eichengreen paper on why you can’t. I’ve already written that this argument, which I found extremely persuasive when first made, now seems to me less than watertight. But let me be a little more specific.

The way things are going, it looks quite possible that Greece will spiral into domestic as well as debt crisis, and be forced to take emergency measures. And that makes me think of Argentina in 2001. At the time, Argentina had the convertibility law, supposedly permanently pegging the peso to the dollar – and that was supposed to be irreversible for the same reasons the euro is supposed to be irreversible now. Namely, to repeal the law would require extensive legislative discussion, and any such discussion would set off destructive bank runs, hence there was no way to undo the fixed exchange rate.

But by late 2001 Argentina was a mess, with many emergency measures in place in an effort to contain the situation. These included the corralito, severe restrictions on bank withdrawals to contain bank runs – and one unintended consequence of all this was that the bank runs argument against suspending convertibility became moot.

Is it really impossible to see something similar happening in Greece? And if it does, might not other countries’ membership in the eurozone be called into question?


http://krugman.blogs.nytimes.com/2010/05/01/why-devalue/
The Conscience of a Liberal
Paul Krugman
Saturday 1 May 2010
Why Devalue?

As the debate over possible departures from the euro heats up, there seems to a lot of confusion over the possible uses of devaluation. The main argument I’m hearing goes like this: since Greece’s debt is in euros, devaluing won’t relieve the debt burden – so it won’t help.

But that’s missing the point. True, devaluation wouldn’t reduce the debt burden. But it would reduce the macroeconomic costs of fiscal austerity.

Think for a moment about Greece’s predicament now, even if it were to default on its debt. It’s running a huge primary deficit, so even if it were to stop paying any debt service it would be forced to slash spending and/or raise taxes, to the tune of 8 or 9 percent of GDP.

This would have a massively contractionary effect on the Greek economy, leading to a surge in unemployment (and a further fall in revenues, making even more belt-tightening necessary).

Now, if Greece had its own currency, it could try to offset this contraction with an expansionary monetary policy – including a devaluation to gain export competitiveness. As long as it’s in the euro, however, Greece can do nothing to limit the macroeconomic costs of fiscal contraction.

And that’s why a devaluation would help – it wouldn’t reduce the need for fiscal adjustment, but it would reduce the costs associated with fiscal adjustment. As I argued yesterday, this difference is an important reason why Britain, with a primary deficit as large as Greece’s, isn’t in anything like the same amount of trouble.

Or to put it another way, exchange rate flexibility doesn’t solve fiscal problems by itself – but it makes solving such problems much easier.


“The Euro Trap”
Paul Krugman
New York Times, Thursday 29 April; reproduced in the Irish Times, Monday 3 May

Right now everyone is focused on public debt, which can make it seem as if this is a simple story of governments that couldn’t control their spending. But that’s only part of the story for Greece, much less for Portugal, and not at all the story for Spain.

The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. […] And all of the countries were attracting large inflows of foreign capital, largely because markets believed that membership in the euro zone made Greek, Portuguese and Spanish bonds safe investments.

Then came the global financial crisis. Those inflows of capital dried up; revenues plunged and deficits soared; and membership in the euro, which had encouraged markets to love the crisis countries not wisely but too well, turned into a trap.

What’s the nature of the trap? During the years of easy money, wages and prices in the crisis countries rose much faster than in the rest of Europe. Now that the money is no longer rolling in, those countries need to get costs back in line.

But that’s a much harder thing to do now than it was when each European nation had its own currency.

Back then, costs could be brought in line by adjusting exchange rates … Now that Greece and Germany share the same currency … the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation. And since Germany won’t accept inflation, deflation it is.

The problem is that deflation – falling wages and prices – is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment. And it also aggravates debt problems, both public and private, because incomes fall while the debt burden doesn’t.

[…]

All this is exactly what the euro-sceptics feared. Giving up the ability to adjust exchange rates, they warned, would invite future crises. And it has.

So what will happen to the euro? Until recently, most analysts, myself included, considered a euro breakup basically impossible … But if the crisis countries are forced into default, they’ll probably face severe bank runs anyway, forcing them into emergency measures like temporary restrictions on bank withdrawals. This would open the door to euro exit.

So is the euro itself in danger? In a word, yes. If European leaders don’t start acting much more forcefully, providing Greece with enough help … a chain reaction that starts with a Greek default and ends up wreaking much wider havoc looks all too possible.

[…] What the crisis really demonstrates, however, is the dangers of putting yourself in a policy straitjacket. When they joined the euro, the governments of Greece, Portugal and Spain denied themselves the ability to do some bad things, like printing too much money; but they also denied themselves the ability to respond flexibly to events.

And when crisis strikes, governments need to be able to act. That’s what the architects of the euro forgot […]

For Your Information: Ireland, EU, Eurozone, Banks & Economy – News & Analysis

Ghosts of debt and jobs will haunt economy
The Irish Times – Tuesday, December 29, 2009
http://www.irishtimes.com/newspaper/opinion/2009/1229/1224261354227.html
Morgan Kelly
OPINION : By 2015, Iceland will almost certainly be a lot better off than Ireland because it dealt decisively with its banks.

For grand corruption, though, we will have to look to Nama. By allowing the banks to dictate the terms of their bailout, the bank rescue was turned into the most lucrative and audacious Tiger Kidnapping in the history of the State, with the difference that, like the sheriff in Blazing Saddles, the bankers held themselves hostage.

Bad banks like Nama were tried on a large scale in the early 1930s in the US, Austria and Germany; and proved to be profoundly corrupt and corrupting institutions, whose primary purpose was to funnel money to politically connected businesses. The German bank is best remembered for setting up what we would now call a special purpose vehicle to fund the presidential election campaign of the odious Paul Hindenberg.

Bad banks do not just happen to be corrupt and anti-democratic institutions, it is what they are designed to be. Effectively, bad banks give governments the power to choose which of a country’s most powerful oligarchs will be forced into bankruptcy, and which will be resuscitated to emerge even more powerful than before.

Nama will get to pick which of the fattest hogs of Irish development will be sliced up and fed, at taxpayer expense, to better connected hogs (remember that Nama has been allocated at least €6.5 billion, considerably more than the Government saved by draconian budget cuts, to “lend” to favoured clients).

While Nama may have momentous political consequences, it has already failed economically: the Irish banks are still zombies, reliant on transfusions of European Central Bank funding to survive until losses on mortgages and business loans finally wipe them out. In the next few months we will discover if the State bankrupts itself by nationalising the banks; or if it has the intelligence to free itself from bank losses by turning the foreign creditors of banks into their owners, as Iceland has just done with Kaupthing bank.

It is ironic that by 2015, having devalued its currency and dealt decisively with its banks, Iceland will almost certainly be a lot better off than Ireland.


Why the eurozone has a tough decade to come
Financial Times – January 6 2010
http://www.ft.com/cms/s/0/54cc3b20-fa62-11de-beed-00144feab49a.html
Martin Wolf

What would have happened during the financial crisis if the euro had not existed? The short answer is that there would have been currency crises among its members. The currencies of Greece, Ireland, Italy, Portugal and Spain would surely have fallen sharply against the old D-Mark. That is the outcome the creators of the eurozone wished to avoid. They have been successful. But, if the exchange rate cannot adjust, something else must instead. That “something else” is the economies of peripheral eurozone member countries. They are locked into competitive disinflation against Germany, the world’s foremost exporter of very high-quality manufactures. I wish them luck.
[...]
Where does that leave peripheral countries today? In structural recession, is the answer. At some point, they have to slash fiscal deficits. Without monetary or exchange rate offsets, that seems sure to worsen the recession already caused by the collapse in their bubble-fuelled private spending. Worse, in the boom years, these countries lost competitiveness within the eurozone. That was also inherent in the system. The interest rates set by the European Central Bank, aimed at balancing supply and demand in the zone, were too low for bubble-fuelled countries. With inflation in sectors producing non-tradeables relatively high, real interest rates were also relatively low in these countries. A loss of external competitiveness and strong domestic demand expanded external deficits. These generated the demand needed by core countries with excess capacity. To add insult to injury, since the core country is highly competitive globally and the eurozone has a robust external position and a sound currency, the euro itself has soared in value.

This leaves peripheral countries in a trap: they cannot readily generate an external surplus; they cannot easily restart private sector borrowing; and they cannot easily sustain present fiscal deficits. Mass emigration would be a possibility, but surely not a recommendation. Mass immigration of wealthy foreigners, to live in now-cheap properties, would be far better. Yet, at worst, a lengthy slump might be needed to grind out a reduction in nominal prices and wages. Ireland seems to have accepted such a future. Spain and Greece have not. Moreover, the affected country would also suffer debt deflation: with falling nominal prices and wages, the real burden of debt denominated in euros will rise. A wave of defaults – private and even public – threaten.

The crisis in the eurozone’s periphery is not an accident: it is inherent in the system. The weaker members have to find an escape from the trap they are in. They will receive little help: the zone has no willing spender of last resort; and the euro itself is also very strong. But they must succeed. When the eurozone was created, a huge literature emerged on whether it was an optimal currency union. We know now it was not. We are about to find out whether this matters.


Are we about to see the end of the much-vaunted eurozone?
The Observer – Sunday 3 January 2010
http://www.guardian.co.uk/commentisfree/2010/jan/03/peter-oborne-end-of-eurozone
Peter Oborne
In putting financial considerations before social ones, the governments of Europe have ensured that things can only get worse

It is nearly 20 years since the Conservative chancellor of the exchequer Norman Lamont made his notorious remark that unemployment was a “price worth paying” for the restoration of economic stability. Lamont was at once condemned for his comments, made at the height of Britain’s ill-fated membership of the Exchange Rate Mechanism. The progressive left universally denounced him as arrogant, brutal and out of touch. And yet, only two decades later, the European left has made the identical calculation. The imposition of the euro, and the rigid economic policy a single currency implies, is having socially catastrophic effects across much of Europe on a scale that dwarfs Britain’s suffering in the 1990s.

Consider the facts. In Spain, unemployment has already reached a gut-wrenching 19.3%. But unemployment for those between 16-24 is a catastrophic 42%. In Greece, youth unemployment is 25%, in Ireland 28.4% and Italy 26.9%. Marginal eurozone countries such as Greece, Spain and Ireland are not just in recession. They are in depression – and so long as they remain inside the euro there is no exit.

Before their decision to abandon economic sovereignty and sign up to the euro, policymakers had a tried and tested response to the kind of global setback of the last two years – depreciate the currency and loosen fiscal and monetary policy[…] But inside the euro, individual countries are stripped of the ability to manage their own economies. That is why the global recession has been far, far more devastating for some eurozone members than would otherwise have been the case – in just the same way that membership of the ERM inflicted wholly unnecessary damage on the British economy in the early 1990s.

The European single currency amounts to an experiment in social and economic engineering on a scale only very rarely before encountered in world history. The great question is whether it will work. There is a universal belief among the European political and economic elite that the euro will continue, no matter how much damage it inflicts or how many jobs it costs.
[…]
I believe that this heartless analysis is mistaken, and that the eurozone will in due course collapse (as Karl Marx might well have remarked) under the weight of its own contradictions. Economically, the euro can be spotted a mile off: it is a classic bankers’ ramp. It is designed to do all the things that bankers have historically wanted: create efficient markets, drive down the cost of labour, impose price stability, eliminate trade barriers, confound national boundaries and maximise corporate profits. Bankers don’t care much about youth unemployment in Madrid or home repossessions in Lisbon or riots on the streets of Athens. They worry about the bottom line and the euro has been very good for the bottom line, with stock markets up by an obscene 50% over the last eight months.


Should we divorce the euro?
The Sunday Business Post – 10 January 2010
http://www.sbpost.ie/commentandanalysis/should-we-divorce-the-euro-46642.html
David McWilliams

Joining a currency union is the economic equivalent of a marriage. If a country decides to give up its currency and get into bed with another currency, it would seem ludicrous to entertain this move without being sure that the union was suitable. As we all know, there is a difference between fancying someone and making the thing last.

To avoid single currency arrangements going sour, there is also a ‘matchmaker’ in economic theory. The economic matchmaker goes by the typically incomprehensible name of the ‘optimal currency area theory’. This theory is a checklist of economic attributes which need to line up in order for a monetary union to work.

For a currency union to work for a country, the most important thing is that the country trades overwhelmingly with the other members of the monetary union.

This ensures that all the countries in the union move roughly in the same economic cycle. It is also important that the structures of the respective economies are broadly similar, so that one country doesn’t experience a huge boom, while the rest are just motoring along nicely.

Having similar structures in banking and housing, for example, will imply that a country should not suffer a monumental bust, while the others are merely experiencing a normal recession. Equally, it is important that there is significant movement of people within the currency union – like there is in the US between its states – so that, if a country does slump, its citizens can move to find work in another member country.

In general, for a currency union to work, there should also be a single fiscal policy so that, when one area of the currency slumps, the rest of the union’s taxes go some way to ease the problems in the region in difficulty. This is how the currency unions in the US, Canada and Australia work.

Guess what? None of these attributes was in place when Ireland joined the EU economic and monetary union (EMU) and the euro. So it is clear that we didn’t join for economic reasons. So why did we join? It seems that we were too insecure to behave logically and this national insecurity – particularly among our senior mandarins – prevented us from having a debate.
[…]
The reason we should ask these questions is that it is clear the euro has been a disaster for Ireland, and will ensure our slump lasts considerably longer than it has to. When we look at other countries, we see that, of the three entrants into the then EEC in 1973,we are the only ones using the euro. However, we trade less with other eurozone countries than either Denmark or Britain.


The Irish Credit Bubble
University College Dublin Centre for Economic Research Working Papers Series – WP09/32 – December 2009
http://www.ucd.ie/t4cms/wp09.32.pdf
Google Cache (Web Page)
Morgan Kelly

While NAMA is intended to repair, for now, the damage to the asset side of Irish bank balance sheets from developer loans, their liability side appears unsustainable. The aggressive expansion of Irish bank lending was funded mostly in international wholesale markets, where Irish banks were able to borrow at low rates. From being almost entirely funded by domestic deposits in 1997, by 2008 over half of Irish bank lending was funded by wholesale borrowers through bonds and inter-bank borrowing. This well of easy credit has now run dry. In the words of Bank of England Governor Mervyn King: “But the age of innocence—when banks lent to each other unsecured for three months or longer at only a slight premium to expected policy rates—will not quickly, or ever, return.” As foreign lenders have become nervous of Irish banks, their place has increasingly been taken by borrowing from the European Central Bank and short-term borrowing in the inter-bank market. Payments from NAMA will allow Irish banks to reduce their borrowing by a trivial amount.

Without continued government guarantees of their borrowing and, more problematically, continued ECB forbearance, the operations of the Irish banks do not appear viable.
[...]
By pushing itself close to, and quite possibly beyond, the limits of its fiscal capacity, the Irish state has succeeded in rescuing Irish banks from their losses on developer loans. Despite this, these banks remain as zombies entirely reliant on continued Irish government guarantees and ECB forbearance, and committed solely to reducing their own debts.

While bank capital levels are, probably, adequate for the markedly smaller scale of their future lending, we will see below that even fairly modest losses on their mortgage portfolios will be sufficient to wipe out most or all of that capital. Having exhausted its resources in rescuing the Irish banks from the first wave of developer losses, the Irish state can do nothing but watch as the second wave of mortgage defaults sweeps in and drowns them. In other words, it is starting to appear that the Irish banking system is too big to save. As mortgage losses crystallise, the Irish government’s ill conceived project of insulating bank bond-holders from any losses on their investments is sliding beyond the means of its taxpayers.

The mounting losses of its banking system are facing the Irish state with a stark choice. It can attempt a NAMA II for mortgage losses that will end in a bond market strike or a sovereign default. Or it can, probably with the assistance of the IMF and EU, organise a resolution that shares property losses with bank creditors through a partial debt for equity swap. It is easy for governments everywhere to forget that their states are not wholly controlled subsidiaries of their banks but separate entities; and a resolution that transfers bank losses from the Irish taxpayer to bank bond holders will leave Ireland with a low level of debt that, even after several years of deficits, it can easily afford.

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