Reflections on the Irish crisis

by Jack Copley

Ireland’s economic woes are front-page news at the moment, as the black hole of debt created by the banks refuses to fill up no matter how much money the Irish government seems to throw down it. In this article I want to briefly outline the recent history that precipitated this crisis and then discuss how – and to what degree of success – Ireland has gone about addressing it. Breaking through the thick mist of rhetoric, jargon and economic confusion reveals a situation that is all too familiar today; one in which taxpayers are left to pick up the pieces of a crisis that they played no part in.

Crucial to understanding the crisis that Ireland now finds itself in, is an explanation of the economic transition that Ireland underwent upon its entry to the European Monetary Union in 1999. These changes saw the transfer of Ireland’s economy from one based upon highly competitive export-based growth to one in which, as University College Dublin economist Morgan Kelly wrote, “the road to riches lay in selling houses to each other” on borrowed money.

Upon entering the Eurozone, periphery countries like Ireland saw their interest rates (the price of borrowing money) converge with EU giants like Germany. This created the illusion that lending to Ireland was no more risky than lending to any other EU country, leading to a frenzy of borrowing by Irish banks from international financial markets. These international lenders extended cheap credit to Irish banks – which they then lent to domestic property developers, residential borrowers and property management companies on a historically unprecedented scale. Irish banks relaxed their lending conditions in order to maintain market share in this new, highly profitably, but inevitable short-term gambling racket. This saw a tripling of credit relative to GNP, while house prices in Dublin increased by 519% between 1994 and 2006!

However, when the European Central Bank increased interest rates in 2006, the flow of cheap money stopped and the property bubble burst – demand for houses plummeted and so did the ridiculously bloated construction and housing industry, that at this point made up 21% of national income in comparison with 5% in the 1990s. The banks that had taken out massive loans from international lenders suddenly faced insolvency as the value of the assets that they had invested in evaporated. However, instead of equally sharing out the costs of these losses among the parties involved, the Irish government decided to “absorb all of the gambling losses of its banking system” by guaranteeing the liabilities of Irish banks – liabilities equal to twice the annual GDP. After adding this incredible amount of debt onto its books – the true scale of which was largely unknown – as well as injecting more than €46 billion into the banking system, market confidence in Irish government bonds (debts issued by the government to investors, to fund public spending) unsurprisingly began to drain away.

Former Taoiseach Brian Cowen and former Finance Minister Brian Lenihan

To restore confidence in its public finances, the Irish government announced a 4-year austerity plan in November 2010 that was made even more severe upon the government’s acceptance of an €85 billion loan from the IMF and EU in December. These €15 billion public spending cuts are the harshest in the history of the Republic. They include; a 12% cut to the minimum wage, a €10 cut in child benefits (per child), an increase in the Irish equivalent of National Insurance tax and public sector pension cuts. On top of this pain, Nobel Prize winning economist Paul Krugman writes that the Irish public are “bearing a burden much larger than the debt – because those spending cuts have caused a severe recession so that in addition to taking on the banks’ debts, the Irish are suffering from plunging incomes and high unemployment”. Similarly, the Financial Times wrote that such an extreme degree of austerity risked further depressing confidence in the Irish economy by unleashing “a torrent of ice cold water” on the “flames of economic growth”. This concern turned out to be true – by March 2011, with unemployment at the highest level in 17 years as well as rapidly growing rates of emigration, the cost of insuring Irish debt was at the same level as it had been before the announcement of austerity. Signaling no improvement in the market’s confidence in Irish government bonds.

Stress tests carried out by the Central Bank of Ireland in late March, which aimed to restore confidence in the Irish banking system once and for all, found that the banks needed a further recapitalisation of €24 billion – bringing the government’s total expenditure on bailout funds to €70 billion. In reaction to this, credit-rating agencies (which assess the quality of government bonds) further downgraded Ireland’s rating – making it harder for the government to borrow money – claiming that while this further bailout was good for the credibility of Irish banks, it made the likelihood of default or some reduction of debt-repayment obligations by the government more likely.

However, two quite troubling factors have made the market’s recent reevaluation of Ireland’s finances far more favourable than expected. Firstly, Morgan Stanley – the US investment giant – claimed that what separated Ireland from other troubled periphery EU countries was the fact that throughout the crisis Ireland has remained a “fully deregulated, fully liberalised market economy” – which reflected positively on its investment credibility. This effectively prescribes Ireland’s continuation of the same policies that landed it in this monumental catastrophe, as key to reassuring the market of its credibility. Secondly, the decline in the cost of insuring Irish bonds in response to this most recent bailout is the result of the new government’s decision not to make those creditors (bondholders) who had lent money to Irish banks take any losses from their gamble. Bloomberg, the financial news network, reported that prior to this assurance, investors “were concerned Ireland would set a precedent for burden sharing as it grapples with banks’ mounting loan losses". This implies that Ireland’s refusal to set a precedent for burden sharing – by saddling its innocent population with the entirety of the costs incurred by the reckless gambling of others – is crucial in creating confidence in its economy. Surely both of these factors suggest an increasingly morbid paradox between what is required for recovery and what is required to save the Irish population from misery; in the short and long-term.

It is easy when reading and researching this latest financial crisis to become caught up in the furiously confusing language of investor confidence, financial recapitalisation, credit-default markets and debt obligations, and to totally overlook the glaringly obvious reality of a) who caused the crisis, and b) who is now paying for it. Paul Krugman advises us to “Step back for a minute and think about [it]”. Ireland’s enormous debt, which supposedly necessitates these austerity measures, was not the result of excessive child welfare payments or runaway spending on public housing or healthcare. Instead, these “debts were incurred… by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts”. The European Central Bank’s refusal to allow the Irish government to make international bondholders share the burden of loss not only flies in the face of what is morally decent, but even in the face of capitalist market logic. It is farcical to entertain the idea that these lenders could not see the massively risky and unsustainable nature of their investments. By 2007 Ireland – with a population 1/14^th the size of Britain’s – was building half as many houses as Britain. If investors somehow failed to see these risks then they have no-one to blame but themselves, and they should pay the price for their idiocy. However, Kevin O’Rourke – economics professor at Trinity College Dublin – candidly explains that “the only people they [European Central Bank] really care about are bank creditors… social welfare recipients have to see their payments cut and ordinary people who have nothing to do with the banking system have to pay more in taxes and get fewer benefits and so on, just to keep bank creditors whole”.

Dolphin House flat-complex in Dublin's South inner city.

During the Celtic Tiger years, Ireland became one of the most unequal of the industrialised nations. Now those that benefited the least from this boom period are the ones who will pay for the bust – and pay dearly. At the end of March, among the many news reports speculating about the financial market’s response to the Central Bank’s stress tests, there was a less pressing report about an inner city Dublin housing estate called Dolphin House. Dolphin House, in Dublin’s Rialto neighbourhood, is one of the largest public housing complexes in the Republic – with a population of nearly 1,000, housed in 4-storey and 3-storey flats. The report detailed that 45% of adults and 42% of children in the flats had respiratory problems linked to appalling living conditions, after biologists discovered the widespread presence of a bacteria known to cause pulmonary disease in humans. As well as breathing difficulties, diarrhea and skin rashes were found to be prevalent amongst residents as a result of chronic damp and fungus. Furthermore, tests carried out by engineers in the estate discovered that water which routinely came up through the plug holes of sinks and baths contained levels of faecal coliform bacteria more than 570 million times the levels of safe drinking water. The engineers concluded that these levels were consistent with “partially treated and untreated sewage waste”. These Dickensian conditions led the president of the Irish Human Rights Commission to declare the situation a breach of resident’s human rights. It turns out, a regeneration plan for Dolphin House was one of the first ‘unfeasible public expenditures’ to be scrapped in the name of austerity. Dublin City Council assistant manager Martin Kavanagh said in October 2010 that due to the economic circumstance the regeneration project was now “years away”. Five other inner city estates, in similar conditions, have also had their regeneration plans cancelled.

These are the people who are now carrying the burden of a crisis that they played no part in. Unlike the bondholders who have been assured that they will not lose a penny as the house of cards that they helped create collapses around them, Ireland’s poor are left desperately struggling for their jobs, their services, their housing and their human rights.