In what passes for debate on economic matters, you are expected to favour the Irish loan, rescuing Irish banks, assuring Ireland’s trade and prosperity for the future and so looking after the UK’s interest in our nearest neighbour. If you refuse, you are said to be crassly in favour of letting Ireland “go down”. Now we are told that the loan will be a good business proposition for the UK, as we can borrow the money more cheaply than we will charge the Irish.
Let me again try to explain some of the downside in the current EU approach to these matters. Prior to October the Republic of Ireland could borrow ten year money for less than 6% in the market in the normal way. It was when the EU claimed Ireland needed a special loan, and when Frau Merkel said bondholders with Irish or Greek bonds might have to take a loss or hair cut, that the normal debt markets virtually closed to Ireland. The interest rate Ireland would have to pay soared to over 9%. The first mistake was to do all this in public and to undermine the Irish ability to borrow.
The second mistake was to insist Ireland needed to borrow when the government said they did not. It appears to have been the European Central Bank’s decision to threaten withdrawal of liquidity from the stressed Irish banks that forced the Irish government to the table to negotiate. The ECB could have held its negotiations with Irish banks and the Irish state in private, and agreed a plan for longer term withdrawal of ECB support, without triggering such a public crisis.
The third mistake is to think that providing large extra amounts of lending at 5.82% is the answer to Ireland’s problems. It is unlikely to be so. The interest rate is high, so Ireland will still struggle to pay the interest and in due course repay it, just as it was finding it difficult with market debt before the created crisis. The loan solves none of the underlying problems.
What the IMF and the EU do is to create preferential creditors – themselves – over the normal bondholders for countries at risk. There is then an additional task in recovery, to get a country out of special finance and back into more normal finance. The Republic of Ireland needs a work out, not a bail out.
If the Regulators are not happy with Irish banks’ solvency then they need to agree a plan of asset sales, capital raising, salary cuts, business wind down, merger or whatever to sort out the underlying problem. If the Irish state needs to borrow too much itself, there needs to be a budget and economic growth plan which makes sense and which the markets believe.
There was no need for an international loan when they forced one. The ECB could have carried on financing the Irish banks, as it has a duty to do, or could have done a private deal on sorting them out if it did not agree with the Regulator’s view that they are all fit to trade.
If the Uk had declined to join as, as a non member of the Eurozone, the Euro zone would have provided the money. After all, it was just a refinancing of Eurozone loans anyway. As the UK is now involved it needs to stress three things:
1. It will not help bail out another Euro zone member, if the EU decides on a similar foolish course with another member.
2. The UK recommends that the Eurozone concentrates on stabilising and improving its banks quickly, before more damage is done with another banking slide.
3. The UK recommends that the EU as a whole adopts more business friendly policies so that the Eurozone has more chance of growing out of deficits and difficulties.
Creating or waiting for another member state crisis would be a bad idea. Demanding early refinancing of more ECB money would be unwise. They need in secret to sort out banks and country deficits in a more workmanlike way. If stronger states lend to weaker states, it weakens them and puts up their cost of borrowing. The UK’s cost of borrowing has risen since we announced the Irish loan.