David McWilliams: Bailout will sink Ireland before we can even swim

By David McWilliams
Wednesday December 01 2010
Foreign banks and creditors should lose everything they gambled on the likes of Anglo, but instead, they have been saved by the taxpayer
Make no mistake about it, this ‘bailout’ will sink Ireland. We are witnessing a monumental struggle between the innocent average Irish person and the guilty creditors of the bust Irish banks.

Interestingly, the financial markets have seen through what the Government and the elite are trying to do and have reacted with ferocious negativity to the Irish deal.
The markets realise that the Irish State is not bust; rather the Irish banking system is bust. Therefore, rational people can see that any deal which is framed to give Ireland a chance has to sever the link between the bust banks and the solvent State.
However, far from severing the link, the deal solders the link between State and banks, making the Irish Republic itself little more than a bust bank. The rest of the world has twigged that what the elites are trying to do is preserve their system by giving the bill to the people, and this will not work. This is why, far from calming the financial markets, the IMF deal with Ireland has enraged them.
Extraordinarily, the people who were supposed to negotiate for the Irish people not only negotiated against us, but couldn’t see the backlash coming. Perhaps this is because few of them have any real financial market qualifications.
So, rather than force the ECB to account for its own monumental culpability in allowing out-of-control German and French banks to lend recklessly to Irish banks, the Irish negotiators turned sides and acted as debt collecting agents of foreign banks.
Think about what is happening in our country. Foreign banks and creditors should lose everything they gambled on the likes of Anglo, but instead, they have been saved by the Irish taxpayer, who had nothing to do with executive decisions at Anglo and the other banks. These same major international banks will now lend money to the EU who will lend it to us and the same banks will make more money on interest from us.
So the very banks that should be punished for their failures are being bailed out by the Irish citizens and, worse still, they will get paid more interest from us in the loans they are now extending to us, to save themselves!
Let that sink in for a minute. This is not capitalism, it is not European diplomacy; it is a stitch-up.
This is only the first part of the terrible fantasyland we have been led into.
In order to get to the bottom of what is happening, we have to clear up a few things. First, we have to stop calling it a bailout. This isn’t anything like a bailout. Rather it is the EU giving us enough rope to hang ourselves in the hope that we don’t hang all of them.
Of course, as soon as they gave us the rope, they started discussions on a mechanism that would ensure no other country would have to be beggared by a profligate out-of-control administration again.
Amazingly, our so-called negotiators signed a deal that will be the last of its kind ever signed by a European government and, in so doing, they have condemned their own people.
The EU leaders realised last weekend that the problem was bigger than Ireland, so they have committed to come up with a construction in the weeks ahead which will mean that in the future when banks get into trouble for lending too much, they and their creditors will pay. They will share the burden.
But Ireland will not be allowed to avail of such a deal because that would be retrospective. So rather than dig their heels in, our negotiation team signed and allowed the EU to treat Ireland differently to any other country. We can go hang.
So not only have they given us a rope, but the interest rate on the rope is nearly a death sentence in itself. It is reported that the “blended rate at current market prices will be 5.82pc”. As opaque phraseology goes, that one is pretty meaningless.
But let’s accept that at face value, and look to the costs of the financial noose our ‘friends’ in Europe have given us.
There are two sides to the story.
First, there is the cost side. If we borrow the entire €67.5bn and scrape the bottom of our own barrel to come up with €17.5bn, we can add €85bn to the current outstanding €90bn of debt. That will leave us with a national debt of €175bn by the end of 2014. The interest on this will come to about €8.5bn per annum. This, of course, is the optimistic scenario.
Anyone who has watched in horror as the cost of Anglo has risen from zero to €4bn to €12bn to €18bn to €24bn to €35bn over the past 26 months will know exactly what stock to put in government forecasts.
But the other side of the story is growth.
If this debt is not to drown us, we need the economy to grow at a pace that is greater than the interest we are paying on our debt.
With a debt/GNP ratio far above 100pc our growth will have to be in the order of 8-10pc by 2014 for the economy just to stand still. Anything less than that and the interest payments head off on an unsustainable tangent.
Without growth at these levels, the interest payments leaving the economy (a major problem when a country has all its debt owned offshore) will prove such a drain on the State that we will end in a debt-deflationary spiral. This is where our growth fails to meet the interest payments, making the following year’s growth lower as there is less investment, making that year’s interest payment more burdensome, leading to less growth etc, until a huge default becomes inevitable.
So where will this growth come from? Where can it come from?
The assumption underlying the four-year plan is that things will not get any worse. That is some assumption. But let’s allow it for a moment. Has there been any government policy recently that is aimed at improving opportunity for the future? Or have they all been about preserving the past, and the “insider” power nexus that got us here in the first place?
The bailout hits the sweet spot where the interests of our insiders and the European insiders meet. Luckily for us, the financial markets do not have the same interests. The markets want growth, not punishment, which is why they are sceptical.
Without a radical change in the way this country is governed, there is no hope of growth returning. Our only hope is that maybe there is a tide coming that will wash away the ‘insiders’ and take their policy decisions that will bankrupt the country with them.
David McWilliams performs ‘Outsiders’ tonight at the Glor, Ennis; tomorrow at the Backstage Theatre, Longford; Friday at the Dunamaise Arts Centre, Portlaoise; and Saturday at Siamsa Tire, Tralee
– David McWilliams
Irish Independent