Why I have doubts about the Irish loan


               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.


  1. Duyfken
    December 12, 2010

    With these mistakes so clearly indicated, it is a wonder that others who should be as well versed in finance as you, failed to understand what their actions would do; so much so the suspicion hardens that it is all a tactic being deployed in the overall strategy of achieving a federal Europe.

    Now Reuters reports: European Union leaders will agree next week to insert two sentences into the EU treaty to pave the way for the creation of the European Stability Mechanism from 2013, draft conclusions of the summit showed. I presume it is in vain to hope for Mr Cameron to apply any leverage out of this situation.

    1. Denis Cooper
      December 12, 2010

      As made clear later in the Reuters article:


      that would require a treaty change which could only come into effect after being agreed between all the member state governments, and then ratified by all the member states in accordance with their respective constitutional requirements.

      Therefore the leverage available to Cameron would be immense – the threat of a veto on the change, plus the threat of putting any agreed treaty to a referendum – and he could have absolutely no excuse if he failed to secure a very substantial quid pro quo in our national interests.

      1. Andrew Shakespeare
        December 13, 2010

        Yes, but he won’t do anything to take advantage of it, any more than he’s doing anything to take advantage of the current treaty negotiations. Instead, what Cameron’s done is to craft a huge row over a tiny detail on the budget increase, safely distracting media attention from the fact that he’s cruising ahead with breaking a fundamental manifesto promise.

        His referendum lock, which is carefully designed not to be worth the paper it’s written on, will not prevent the treaty from taking place, any more than it would have prevented the transfer any of the major powers that Cameron has already surrendered to Brussels. Cameron’s task is made all the easier if the Eurocrats all agree to find ways and means of avoiding referendums, have they have in the present negotiations.

        Even before the gneral election, Cameron was quietly declaring that “Europe is not a prority for us” — in other words, that he had no intention of fulfilling his word, whatever he might have priomised us at the time he was asking for our votes. Regrettably, Cameron’s “Euroscepticism”, and all his posturing at the time of the Lsbon treaty’s travesty, appears to have been nothing more than a bit of flim flam designed to fob off the Eurosceptics that comprise tha overwhelming majority of his party’s members and MP’s. Sadly, despite telling us at the time of the of the Lisbon treaty’s ratification that “we will not let matters rest”, that is precisely what Cameron is doing.

  2. Pat
    December 12, 2010

    If the Irish could repay a loan they could get one on the open market. Therefor this “loan” is either a gift or a poisoned chalice- however unintentional the poison.
    In the end it will be written off because it cannot be repaid.
    Those wishing to maintain the Euro must either accept that regular such gifts from richer areas to poorer areas are part and parcel of the deal, or raise and pay for an army to prevent the secession of the poorer areas. Either way it makes the rich poorer, as well as making the poor poorer.
    I wonder how much existing Irish and Greek debt is held by German banks, and speculate that this has more to do with attempting to improve their balance sheets than anything else.

  3. lifelogic
    December 12, 2010

    The idea that the EU or the UK will adopt “more business friendly policies” sounds rather unlikely. The hugely damaging “Disability and the Equality Act 2010” has after all just become law and there seem to be no new area of business, or indeed life in general, that the EU and government does not wish to licence, tax, regulate or push out of the EU.

    When will the government learn that the best people to decide whom to employ to do a job are the employers. They have no interest other than finding the best man, woman, machine or robot to do the job.

    If as they suggest there is this pool of under paid women etc. who so discriminated against then then anyone employing just woman would clearly be at a huge advantage and grow rapidly.

    In fact women without children already earn more than the average man showing clearly that some women choose less demanding jobs because it suits them better.

    Due to longevity women also get more benefit than men from state sector and defined benefit pensions schemes.

    The Irish bail out was always likely to push up UK borrowing rates.

    JR how much is this extra interest and the bail out likely to cost each UK tax payer?

    Reply: The UK has to pay around £2 billion interest on the total it needs to lend to Ireland, but of course will receive more interest than that by way of payment. The bigger problem is the extra cost as UK interest rates rise, and whether any of that is down to the Irish loan.

  4. Mick Anderson
    December 12, 2010

    The EU/ECB “negotiated” in public because it gave them a massive advantage. Once they had condemned Ireland, they had complete control over the situation – they were playing with heavily loaded dice. It’s not about being practical or helpful, it’s about making people dance to the EU tune.

    Many of us on this blog don’t believe that the Coalition leaders have any intention of declining help to any EU state. I wouldn’t like to say whether it’s because Mr Cameron and Mr Clegg are so pro-EU, or whether it’s because the EU has shown itself to be so ruthless with Ireland that they fear it could be our turn soon. Either way, the amount of borrowed money that the UK will hand over is not going to help our own recovery. We need to borrow less, not more.

  5. Robert K
    December 12, 2010

    Your explanation is crystal clear. The rationale put forward by the government is not. Conclusion: you should be in the Cabinet.

    1. Ken
      December 12, 2010

      I agree, JR (or Bill Cash) should be in the cabinet. At least one person who stands up for reason and stands up for mainstream UK voters should be in the cabinet.

  6. NickW
    December 12, 2010

    The action taken by the European financial leaders against Ireland was (in my opinion) a cold and deliberate action to destroy Ireland’s sovereignty and force it into a position in which Europe totally controlled its finances.

    This is Europe’s professed end-game; an over-arching financial governance of all European states. Beginning with the weakest and smallest Nation makes perfect sense.

    Exactly why Europe should agree to financial governance by an institution incapable of auditing or controlling its own finances is another matter.

    Debt markets have replaced tanks and soldiers in wars between countries. All countries with huge debts to finance are in the same vulnerable position as Ireland, and that includes the USA and UK.

  7. Andrew Gately
    December 12, 2010

    The Irish situation is virtually identical to the Northern Rock debacle.

    Ireland was doing fine until Angela Merkel suggested that bondholders should take a hair cut. Just as NR was doing fine before (media coverage-ed) started a run on the bank.

    The loans provided to NR and Ireland are now both classed as bailouts and are politicaly vulnerable to misrepresentation due the wider publics ignorance of financial matters. e.g. Vince Cable’s comment of a 100 billion black hole with NR which was the amount of the liabilities but ommitteed the 102 billion of assets of NR. The difference of 2 billion was pocketed by the government on nationalisation.

  8. A.Sedgwick
    December 12, 2010

    Quite so, unfortunately countries think that they can and should behave differently to business and people in financial difficulty. Too many cooks, always present with the super bureaucratic EU, have certainly not done the Irish any favours.

  9. ferdinand
    December 12, 2010

    Your analysis is excellent. The EU takes whatever steps it can on any occasion it can to tighten its control of member states. Markets are driven by returns so that anything the EU does has to respect that, but when legal ties are introduced the markets are distorted. This distortion is always one-way. Evil.

  10. Martin Cole
    December 12, 2010

    Good points on which we must surely all agree. Given the soundness of your arguments it seems even more likely that the bailout package from the EU/IMF will not be approved in the Irish Parliament, the Dail, next Wednesday.

    I put some suggestions for people wishing to alleviate their personal inconveniences from the resulting likely financial turmoil of a NO Irish vote on my blog Ironies Too, earlier this morning.

  11. Rob Hay
    December 12, 2010

    It’s disappointing that a conservative led coalition did not adopt the measures you list. The fact that it didn’t does not inspire confidence in the competence of the leadership and adds to the feeling that they will go along with anything the EU wants no matter how detrimental to UK interests.

  12. Brian Tomkinson
    December 12, 2010

    The “mistakes” you refer to were all very public announcements. I find it hard to believe that these were not in fact deliberate actions to provoke a situation. Just what the final objective is I do not know but I suspect it will have something to do with the transfer of what is left of sovereign powers to the EU.

  13. Denis Cooper
    December 12, 2010

    This now revolves around the determination of large and powerful international private investors to avoid losses on their investments in the private banks based in Ireland.

    In September 2008 the Irish government reacted to an emergency situation by issuing a state guarantee of those private banks.

    It could have prevented any run by worried retail customers by just guaranteeing that their deposits would be safe and that they would continue to have access to their money in the normal way.

    Instead, at the behest of the ECB:


    it issued a blanket guarantee, covering not just retail savers who could have been panicked into withdrawing their money but also wholesale investors, bondholders, who could not have withdrawn their money even if they’d wanted to do so.

    They could have sold their bonds to other investors, but they could not have demanded money back from the bank itself.

    Having once given that state guarantee to wholesale investors in private banks, the Irish government has been unable to withdraw it and now the liabilities created through that guarantee comprise about a third of the calculated state debt, which will have to be repaid with interest by Irish taxpayers:


    “A bright red line could have been drawn between the third of the government debt that guarantees the obligations of the banks, on the one hand, and the rest of the government’s debt, on the other.”

    It appears that most of the money which was invested in bonds issued by the private banks based in Ireland came from a relatively small number of very wealthy individuals around the world, rather than from millions of ordinary people through their pension funds and other collective investments:

    yet now it is the many, millions of ordinary people, who are being expected to pay to protect the few, those wealthy international private investors, from the losses that they should by rights take on their ill-judged investments.

    And they respond to any suggestion that they might have to accept losses on their investments in the private banks by threatening that they won’t buy the bonds which the Irish government will need to sell to cover its budget deficit and roll over its existing debts; and the EU Commission, the ECB and the German government contradict the IMF and take the part of the investors by insisting that the Irish government must maintain its guarantee to the bondholders.

    There must always be a serious risk of moral hazard if the state guarantees a private bank, or any other private company, unless it’s clearly just a short term emergency measure to prevent a disorderly collapse and create a breathing space for an orderly liquidation, and that’s exactly what has happened.

  14. lifelogic
    December 12, 2010

    Interesting to watch John Major rewriting history on Andrew Marr show this morning. He seems to think he is a hero for fighting for the EURO opt out at Maastricht treaty. Just a shame he did not opt out of all of all of the wretched treaty.

    No mention of the ERM he took us in to and the huge and pointless damage it did to the country or the fact that we have not had a Tory government since and have little prospect of one now.

    Why do these people always talk slowly and as if they are addressing slightly dim 8 year old’s – is it that because they think only they are the only ones who might be taken in by the drivel.

    No double like Porritt, Blair, Brown, Healey, Major and Will Hutton these gurus who have been shown to be wrong on so much will join the list of BBC sages wheeled on to amuse us over the next few year.

  15. Steve Cox
    December 12, 2010

    It’s interesting to see what is going on at the superstate level nowadays, and so publicly, too. Here we have the EU and ECB effectively stuffing the Irish, regardless of what their elected leaders think and say. “Monsieur Paddy, ‘ow dare you donkey riding peasants vote against ze EU Constitution harmless Lisbon Treaty, mon Dieu?” Now we see the EU’s ‘just retribution’ in action.

    At the same time, Joseph Stiglitz, hardly a paragon of right wing capitalism, has openly criticised American QE2 for its effects in inflating asset bubbles in developing countries. Is this what QE and QE2 were actually designed to do in the first place, or is it just a (for the Yanks) a pleasant surprise? The Chinese refuse to devalue the Yuan to any useful extent, so the Americans print zillions more dollars and make sure that a lot are sent to China by the banks and funds that bought them. The result is galloping inflation in China while they try to maintain their dollar peg. In effect, it’s an internal devaluation being forced upon them by the USA.

    This is fascinating stuff, but it seems to be half pique and half happen-stance. Is anyone (apart from Blofeld, perhaps, 🙂 ), actually planning this or in any way controlling it? I can’t believe that the overpaid idiots who created this mess in the first place – and who are still almost all doing the same jobs as before the crisis – are clever enough to orchestrate an internal Chinese devaluation.

  16. electro-kevin
    December 12, 2010

    I don’t care about the Irish loan. I don’t much care about being poor – I see this as an innevitible result of global economic shift from East to West. Most people will be able to cope with being poor.

    What I DO care about is the Tory Party’s plans to release predatory criminals on to our streets. We will NOT be able to cope with the effects of that.

    Had I known that this is what the Tory Party stood for then I would never have voted for them. In fact I would have campaigned vigorously against. And when the ‘bumping offs’ (to use a characteristically flippant Clarke-ism) start getting worse I shall be – with many others, I’m sure – standing the other side to the shield that I held at the Trafalgar Square Poll Tax demo when I was on a police riot squad.

    Go ahead with this and your party risks losing what little support it’s got. It’s as simple as that.

  17. alan jutson
    December 12, 2010

    Once we have to borrow money to lend it to another Country, that has a larger debt problem than our own, for a low margin rate, we really are in trouble.
    This almost mirrors the actions of the Bankers when lending in the Prime mortgage market.

    I see from the Press this morning that Harriet Harmen is now encouraging immigrants to send money back to their own Country from the UK, even when they are on Benefits.

    It seems to be getting more and more difficult to understand some Politicians priorities, and perhaps their hidden agenda.

    The National interest, and the working population of this Country seem to be coming a very poor second on almost every count now.

    Never mind the Happiness Survey will be around soon. Sure as eggs is eggs those who are going to get released (or saved) from Prison will be happy, or will they ?.

  18. BobE
    December 12, 2010

    How many lib dems loosing their seats to labour, will it take before labour will get a majority in the house.? Is this likely to happen over the next two years.

    Reply: No, that cannot happen.

  19. Derek Buxton
    December 12, 2010

    A good explanation, but worrying. It shows the lengths the EU will go to in order to get their own way. Perhaps someone will point this out to Messrs. Cameron, Hague, Clarke and Clegg, who live in some far off la la land, where the EU is wonderful and bringeth forth plenty.

  20. michael read
    December 12, 2010

    Wel, you’ve just to read the DT on the split in the Conservative party over Europe to realise that the views put forward here are not going to have traction even if the electoral arithmetic within the party puts the author in the strongest bargaining position.

    Pity. You’ve shifted my view to arguably sceptic.

  21. Peter van Leeuwen
    December 12, 2010

    Mr Redwood, a question:
    Imagine that the Irish will have a new government in 2011 which will re-negotiate the bail-out. The EU has indicated that this would be possible. Imagine that this new government would want to have some very orderly debt-restructuring (one that doesn’t create havoc throughout the entire eurozone), would that, at least in theory, still be possible?
    Reply: Any negotiation depands on the willing ness and sense of both sides. Any public suggestion that a new government will renege on part of the debt would start a new crisis.

  22. JimF
    December 12, 2010

    ” 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.”

    At the risk of harping on about this, substitute “a future graduate from England” for “Ireland” and the UK Government for the EU in your thesis. The EU are doing to Ireland exactly what our Government is doing to England-based students.

    Financial coercion and leaving the victim as a bullied entity between the devil and the deep blue sea is right in neither case.

  23. Eoin Clarke
    December 12, 2010

    UK’s help is not required. The Irish could probably have avoided availing of any of this credit had MErkel kept her nose out. The nation’s coffers will last until next Easter. Now that ‘we’ have been bullied into accepting a bail out, why should the UK help?

    The money is available elsewhere at a better interest rate. The IMF is not punitive towards Ireland since it is already doing much of what the IMF would like to see implemented elsewhere.

    The UK’s help here strikes me as a flash mate waving his wallet.

  24. English Pensioner
    December 12, 2010

    Presumably, as we are to lend money to Ireland, the rate of interest that we will be charging will be the market rate (if not, why not?). But this government should not be in the business of lending money, even if they think they can make a profit. That was not why we elected them nor what taxpayers want them to do.
    And if Ireland does go bust, we are still liable to repay the money to whoever we borrowed it from, so the poor British taxpayers will suffer once again.
    In my view, it is worse that borrowing money to put on a 100 to 1 outsider in the Derby!

  25. a j kelly
    December 12, 2010

    Many responsible authors in news journals and on the web agree that the “bail-out of Ireland was to protect the precious euro and the German banks ( who used Ireland as a “flag of convenience” to conduct deals that would be illegal in Germany) and devil take the hindmost. There have been no mistakes by the ECB/IMF, they may be evil but they’re not stupid – the north European mindset of Ireland will be more conducive to imposed servitude and repayment than the feckless Cubmed bankrupts.

  26. Bill
    December 12, 2010

    I’m disappointed with this government’s position on Europe in general. (Mr Hague)
    Germany seems to want it both ways, a level field for their exports – no devaluation against them – yet try to limit the help that they provide to a satellite, by suggesting the creditors take a hit (you and me, through our funds)
    No point in staying out of the Euro and then picking up some downsides.

    1. Denis Cooper
      December 13, 2010

      You write:

      “… suggesting the creditors take a hit (you and me, through our funds)”

      I have no doubt that to some extent it will be “you and me, through our funds”, but probably not to anything like the extent which is being implied in order to get the UK public to support what their government is doing and allowing to be done.

      For whatever reasons JR has twice excised a relevant link I provided in previous comments, but I suggest you put the important question:

      “Who are the bondholders we are bailing out?”

      into google and see what comes up.

      For my own part, if my modest investments in unit and investment trusts lose value because the private banks based in Ireland default on their bonds then I will accept that I knowingly took a higher risk by putting some of my money into such funds in the hope of getting a higher return, rather than leaving it in a savings account with a building society, and I will not expect taxpayers in either Ireland or the UK to make good my losses.

  27. Javelin
    December 12, 2010

    I think in a comment I made a week ago that the problem with the loan was that there was a degree of coercion by the EU toward Ireland. The point I was making was that Eire and the EU didn’t break the rules by taking the loan – but that they were forced to take the loan – and as such should not have to pay the interest on the loan back – or even some of the capital if they had a good lawyer. I think the best way to stop this from happening again is to make the risks so high on behalf of the EU that they don’t go down this road again.

    You make the same point about coercion.

    “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.”

  28. Mark
    December 12, 2010

    We have been here before:

    “The Bank was very unwilling to mix itself up with the affairs of the
    company; it dreaded being involved in calamities which it could not
    relieve, and received all overtures with visible reluctance. But the
    universal voice of the nation called upon it to come to the rescue. Every
    person of note in commercial politics was called in to advise in the
    emergency. A rough draft of a contract drawn up by Mr. Walpole was
    ultimately adopted as the basis of further negotiations, and the public
    alarm abated a little.”

    1. Mark
      December 13, 2010

      Extraordinary Popular Delusions and the Madness of Crowds – The South Sea Bubble

  29. edgeplate
    December 13, 2010

    The EU went about things in the way they did because their aims were political not economic. The Euro has always been a political project.

    I am quite sure that the Coalition will continue to fund the bailouts, as it’s very clearly committed to the EU project unconditionally. The perfectly sound arguments you have made will be ignored.

  30. Gary
    December 13, 2010

    I must be missing something badly here. Sure there are sovereign complications, but only as far as these PRIVATE banks transcend borders and the sovereigns(EU , UK, US) are tripping over each others’ toes in their rush to hand out moral hazard bailouts. The whole thing stinks. When are govts of all stripes, including the UK, going to represent the people and not the bankers ?

  31. adam
    December 13, 2010

    elite media like the BBC will never expose globalist financial warfare operations against sovereign nation states

  32. adam
    December 13, 2010

    Head of socialist international handed Greece over to the IMF, then stood in the parliament and called savage cuts ‘patriotic’ according to media reports.
    Socialist international exposed as a globalist front operation, working for world government, not for nationalism.

  33. Lindsay McDougall
    December 14, 2010

    Let’s see the bigger picture and ask about the morality of the entire public sector. The following levels of government debt as a percentage of GDP are given in an article dated September 16 2010 by James Quinn on the marketoracle.co.uk web site:

    Japan 200%
    Italy 128%
    Greece 122%
    USA 92%
    Portugal 90%
    France 90%
    UK 82%
    Germany 81%
    Ireland 80%
    Austria 79%
    Holland 78%
    Spain 68%

    Some of these figures are already out of date. The percentages for the four PIGS – Portugal, Ireland, Greece and Spain – are increasing rapidly, whilst the Italian percentage is already very high. Greece is headed for 150% and Ireland for 110%.

    So for these 12 nations, government debt is 78% or more of GDP. What about debt interest? The more indebted you are, the more you have to pay – with the exception of Japan, which borrows internally at an average real interest rate of 2%. If a nation has to pay interest at 6% pa on 150% of GDP, then debt interest alone is 9% of GDP. Typically, public expenditure is 40%+, which implies that debt interest is getting on for a quarter of public expenditure; the social cost is huge. Note that the USA position is already very precarious. Governments of the ENTIRE WESTERN WORLD are in danger of being considered a bad risk (see Liam Halligan in the Sunday Telegraph).

    The UK must continue to bear down hard on its public sector deficit.

  34. rose
    December 15, 2010

    One honest thing to come out of the EU: at last, questions about the KLA(etc).

Comments are closed.