Less than 20 years ago, the Irish currency was devalued amid apocalyptic warnings. Here we are again, heeding the same warnings, while the Irish people face years of austerity
Many years ago, while working in the Central Bank during the 1993 currency crisis, I witnessed a particular drama playing out. Back then, the Irish authorities tried to fight the inevitable – and lost. They tried to prevent the punt from devaluing within the old EU Exchange Rate Mechanism, and they used the same language as they are using today in the sovereign bond market crisis.
Words like ‘credibility’ and ‘reputation’ were bandied about. The story line was that, if Ireland devalued the punt and did what everyone expected, the credibility of the nation would be tarnished forever.
The consensus view was that the credibility of Ireland’s entire economic policy was tied up with the currency – as Germany’s was with the mighty mark. The problem was that sterling had devalued, famously dropping out of the Exchange Rate Mechanism on Black Wednesday in September 1992 and now Ireland was too expensive as regards Britain, our biggest trading partner.
The official line was that, if we devalued, we would be cast out into the wilderness of second rate nations. However, the Irish people did not believe the government and displayed their own views by driving over the border to Tescos in their thousands, taking advantage of cheap sterling.
In the end, we devalued and guess what? The sky didn’t cave in, the world did not end; on the contrary, the opposite happened. Money flowed into Ireland, interest rates fell and the economy took off.
In fact, everything that official Ireland said would happen after a devaluation turned out to be wrong. The economy thrived once the crisis was over.
In the final days of the crisis, having said that they would support us come what may, the German and French leaders supported the franc, which was much bigger and also coming under speculative pressure, but they let the punt go. This move was referred to as a ‘sweetheart’ deal by the then minister for finance, Bertie Ahern.
The same will happen again now. A solution will be imposed on us which ‘suits’ the wider European interest. There were already signs this weekend of pressure on us to sign up for the stabilisation fund. While it will not be conceded at this stage, in the long term, Ireland will not pay back all the borrowings of our banks. We simply can’t afford to. We will not pay the people who lent recklessly to the Irish banks, and the European leaders are opening up this avenue.
German chancellor Angela Merkel said last week that bondholders to troubled countries would need to share the pain – albeit under a new mechanism which will not come into force until 2013 for sovereign debt. In so doing, she is opening up an exit strategy for our leaders.
Surely now, in terms of our bank debts, it is clear that this principle of the private investor ‘sharing the pain’ must apply and we must do a deal. Merkel is saying, in effect, that, when things go wrong, private investors should share the pain and that it is ok to burn – or at least singe – the bondholders.
As she put it, there may be a clash of politics and the markets here, but sometimes the wider political interest has to win out. Yet our government has run so far up its own cul-de-sac that, rather than reach out for Merkel’s olive branch, it responded – and I am quoting Taoiseach Brian Cowen here -Merkel’s comments were not ‘‘helpful’’. Merkel’s comments were a ‘get out of jail’ card. This is one we can’t refuse. But what happened?
We will instead impose austerity on the Irish people to pay the creditors of our banks, when even the creditors’ boss is hinting that private investors must share the pain when things go wrong. We will take the route that favours the ‘markets’ and ignore the wider political interest of looking after the people.
Let’s look at Merkel’s instincts here. She realises, like former chancellor Helmut Kohl did in 1992, that Ireland is not the issue. We are too small to be the issue; the issue is Europe, not Ireland. Back then, the fault line was the franc and if, in order to ease pressure on the franc, the punt had to devalue, well so be it. Now the big issue is the euro. If, in a chaotic period, we slip into the European Stability Fund, so too might Portugal and then, ultimately, Spain.
This frightens the Europeans because Spain is simply too big for the fund to handle. If they can get a structured solution to the Irish situation, the EU leaders might stop the debt crisis on the periphery. In the same way, allowing the punt to devalue stopped the currency crisis in Europe in 1992.
This solution must involve some renegotiation of what we owe – though it may be awhile before this is accepted, because the current intention of the stabilisation fund is merely to tide countries over by giving them cash. Debts will still be repaid in full, we are told. The trouble is that the markets don’t believe it. This is what they are telling us by bond yields of over 8 per cent: sorry, Ireland, we simply don’t believe you are able to pay us back all our money back and also take on all the debts of your banks. Something has to give.
This is not to suggest that there is an easy way out. Any deal to restructure our debts – or those of our banks – will involve haggling and risks. Our EU partners will not give us an easy ride in any deal. They see a country which is still wealthy and ask why they should have to pay our bills. We still have a big hole in our exchequer finances which has to be closed. There is no painless route out of this mess.
Yet we can start on the road back if, as happened in early 1993 before the pound devalued, we finally accept reality. Just as was the case during the currency crisis, the financial markets are sending us a clear message: it won’t work.
They were right then. And they are right again now.
Hi,
Good article.
It begs the question when are the politicians going to start listening?
David is right on the button here! Batt, Mary Hanafin, Dermo Ahern zombies trooped out yesterday to say speculation Ireland going for EFSF was ‘fiction’. Moribund Government sinks lower in credibility as the bunkered crazies try to transform reality into their fictional delusion. The Great Birnam Wood of Dunsinane(international markets) is coming to this Government. If we had a smart,tough, reality based, negotiating team in Berlin, we could use the leverage of contagion of the euro, to negotiate a write down of Anglo’s debt and do a deal with bondholders. Instead, we’ve incompetent at best, corrupt at most, dopes leading… Read more »
David is correct, we are small, we are not the problem but we and our kids will pay for the incorrect decisions being made on our behalf. The Goverment do not have a mandate to inflict this on us. To say we should burn the Bond holders is wrong, it is nor a situation of burning, it is simply a case of them reaping what they sow, they are the risk takers here not the Irish Citizen nor the new Residents of our country.
I think the official line is that Ireland is looking for a hand with the banks and no more. Is this a case of Let the EU look after our banks (nicely?)while not doing too much damage – the odd singeing etc. – while Ireland imposes austerity measures to handle the remaining mess within its own borders. Maybe the banks get the wine lakes while we get to munch on cheese.
In Ireland, Value is the word that people are missing. And there just isn’t any, even now. And when will they realise that the Banks have to burn in a monetary union in order for things to devalue. If you cannot devalue the Issued Paper then you do the next best thing and devalue the secondry paper of the banks. The banks are Limited Corporations, so why the heck, and I’ve another word BTW, have we gone and acted like Names at LLoyd’s. I sorry, but the advise being served to the Government is criminally wrong. I’d even go so… Read more »
British getting nervous, Guardian homepage, number 1 story
Ireland bailout: UK taxpayers could face £7bn bill
http://www.guardian.co.uk/business/2010/nov/15/ireland-bailout-cost-to-britain
Age of Oppression 1172-1922 Age of Independence 1922-Present Age of Economic Decline & Emigration 1922-1997 Age of The ‘Paper Tiger’ 1997-2007 Age of Collapse 2007-2010 Age of Austerity 2010-2020 (Lost Decade) Periphery and Core – has echos of World systems theory by Wallerstein, useful language. http://en.wikipedia.org/wiki/World-systems_theory Periphery in trouble (Greece, Portugal, Ireland, Spain etc), problems could potentially spread like a piece of paper on fire to the core. The same core that kept interest rates low and made massive amounts of money available to the periphery (do you think the Germans and French did not realise the risks involved, come… Read more »
It looks like Angela Merkel is now on the side of the “ordinary” Irish people, because bless us, but our own ruling elite just don’t understand and don’t know what to do. Greed was not at the route of our economic collapse, it was plain old stupidity and incompetence on the part of the ruling elite across so many sectors of the “so calle” upper echelons of our society (trumped up). While they are still there, our country will continue to be managed stupidly, but hopefully for not too much longer. We are in the end game, big changes are… Read more »
I despair.
Lenihan thinks ther is no difference between the state and banks. He is trying to cod the EU now with a plan for rescue “just” for the banks. Watch the bonds soar to 11% just on this news. he has to get out of there and we need soemone in quick who can run the country. God, it`s too late though. We are all FUBAR………
The Irish elite do not act in the best interests of the ordinary Irish people. They never have and never will. They act in their own best interests…which are bound into the European and global banking and political systems which now effectively determine our fate. Their hands are tied. Our sovereignty is a myth. The era of nation states is ending and a new global world order is emerging. The only hope for the ordinary people in all this is for senior political figures with some real power (such as Angela Merkel) to wake up and realise the insanity of… Read more »
Have we learnt nothing ? The headline at marketwatch reads “Dublin dithers over bailout”. Don’t worry folks we elect ditherers not leaders. http://www.marketwatch.com/story/europe-stocks-open-lower-ireland-in-focus-2010-11-15 The indications are that Kildare Street has learned nothing. Yesterday the main economist at ICTU was saying that we should have reduce expenditure by 1 Billion Euros. That means moving from a 25 Billion Euro deficit for the cost of the state in 2010, to a 24 Billion Euro borrowing requirement. This is the sort of stupidity you get from the number 2 influencer in public policy these days. ICTU have learnt nothing. IBEC still have not… Read more »
David, Now that our economic woes are the topic of discussion 24-7 the fallacy that the savings of the German people had something to do with us getting easy credit is being aired a lot and you are being quoted. I think it is now time that you cleared up this misunderstanding of how credit is created and issued. German banks did extended credit recklessly to the PIIGS. The German people are too interested in generating real wealth through REAL CAPITILISM so their banks carried on their system of creditism with swine’s abroad. Banks will do their business which is… Read more »
Firstly the Irish Govt does not have one iota of what they should do and how they should do it. Secondly the Irish state is bankrupt something they do not want to face up to. They bankrupted Ireland in the bailout schemes benefiting the few at the expense of those who cannot pay but must now do so out of futrure earnings. The ridiculous Croke Park agreement is far too expensive increasing the burden of debt further catalysing bankruptcy. And there is a whole pile more but no need to bore you and state the obvious. Thirdly FF know that… Read more »
By the way, I see that the comparison is being made to the early 1990s, and there are definite parallels. And today Portugal in indicating that it might leave the Euro. No idea how this will work out, in fact it will be a disaster for ordinary people if it happens. This situation is actually worse than the early 1990s. The main reason being that the behaviour in the previous decade. In the 1980s there was nowhere near the level of debt buildup or nonsense that has preceded the current crisis. and people were very pragmatic in deciding how to… Read more »
Lenny’s Budget 2010 ‘the worst is over’ may well go down with Neville Chamberlain’s ‘peace in our time’ as one of the most shortsighted comments in political history (they seem to have a knack for it, with Lenny Snr commenting during a period of mass emigraton about the size of the island and the inability to keep everyone on it, and there is Lenny’s brother’s ‘kebab’ comment in relation to Turkish employees of a consturction firm who had pay withheld, nicely exposed by Joe Higgins). An election in early 2011 will sort a lot of them out. It is a… Read more »
Wayalat’s interpretation of the Irish fiscal problem.
http://www.marketoracle.co.uk/Article24284.html
As David stated in “Follow the Money”, it is a case of VietNAMA…trying to prevent the dominoes from falling with Cowen as LBJ…
The Spirit Level, important book, just updated….
Yes, we are all in this together
Richard Wilkinson and Kate Pickett
http://www.newstatesman.com/society/2010/11/inequality-social-health-essay
As long as that solipsistic depleted mindset of whale blubber, the highest paid politician in Europe and his mandarins are allowed to continue to commit treason, Ireland is deprived from learning any lessons.
subscribe.
Cowen may not want to get branded as the Taoiseach who called in the IMF, enough money borrowed till mid-2011, so an election before then seems like a dead cert.
Financial Times: Irish elite keen to avoid humiliation
By John Murray Brown in Dublin – November 14 2010 http://www.ft.com/cms/s/0/1ec6e60e-f022-11df-88db-00144feab49a.html#axzz15Mgk16iI
Coverage of Kileconomics
Three economists walk into an Irish bar…
By Daniel Pimlott in Kilkenny
http://www.ft.com/cms/s/0/d216912a-f01b-11df-88db-00144feab49a.html#ixzz15Mi0Q5ok
David. I think the articles dots you write on are connected there and I reckon its drawn a picture which to me reeks of ‘insider factional wars.’ The insider crony networks in ireland creamed the retail banking sector inflating a property bubble using the euro experiment and the inter bank lending markets and money fell from the skies for 10 year! The ECB seem now to me judging by the noises across the media the ECB appear to be getting jittery regarding the specific point as to wether they’ve been taking for a ride too by the leprechauns are their… Read more »
Economics do not apply to our situation, we cannot leave the euro because our debts are in euro so a deflated punt2 would result in even larger debts. We cannot do anything about interest rates either. So the only option open to us is austerity. We cannot default on debts as they are almost all ECB debts. We owe the ECB 90 billion in intrabank loans and then there is the ECB loans for NAMA of about 40 billion. We owe bondholders 90 billion for our ordinary national debt which will soon be converted into EU/IMF loans. So at the… Read more »
http://www.breakingnews.ie/business/greek-debt-problems-worse-than-ever-481868.html and I suspect 12 months from now, Ireland will be no different with the added complication of the US going faster down the tubes because the Arabs have pulled the plug on the Dollar. I think we had a time about decade ago when so much money was looking for so much yield and like greedy little kid, lapped up all the ponzi schemes there were to be had. I do not blame savers (Germans or irish even). Blame the silly bankers who were competing with one another for commissions. This had to happen. This is hypercompetition and capitalism… Read more »
Smiles of satisfaction from Government spokespeople the spreads are coming down currently around 8%!
(OT anybody got comprehensive list of urls for breaking bond spread info).
Smiles based on the view the markets following the declarations of same spokespeople that Ireland will not go for bailout and will pay back every last penny!
WrooooooooooooooOOOOOng Aagain!
Spreads lowering cause markets believe Ireland Inc might possibly be saved with a good bailout deal from the EFSF.
Little do the markets know what our gombeens have in mind. If they did, spreads would be at 100% !!!!
Such a pity that young people will have to pay for the wrong doings of the country in years to come.
It’s about time that government should stop crying over spilt milk and get their act togehter.
When will we get out of this mess? Is waving goodbye to the euro a possible solution to our trouble?
How the BBC is reporting Ireland: http://bbc.in/9QItjo It is simply not the case that our leaders do not know what they are doing; and FG and LAB have all agreed with FF/GP that the austerity measures already inflicted on the little-people have benefitted the wealthy so far, though driving the economy further downwards. The markets know this and so the spreads grow with promises of further cuts. Our politicians also know this, buth they will all continue creaming-off as much of Ireland’s wealth as they can for themselves and their friends, for as long as they can, before anyone else… Read more »
Had a conversation with an American co. last week that were looking to move to Ireland in the recent past. They’ve abandoned that plan as they no longer believe our corporation tax rate will be sustainable. Ironically, this may lead to more jobs being created in Germany. First hand example of how Olli Rehn’s pronouncements are creating negative FDI sentiment towards Ireland. We need to stop kidding ourselves that we can prosper (or even just avoid falling into the ocean) without some degree of economic independence. Then we had the announcement last week that governmental bond investors won’t share in… Read more »
http://www.claimingourfuture.ie/wp-content/uploads/Consensors-Report.pdf?utm_source=Claiming+our+Future&utm_campaign=5b8314199b-Ezine_test11_15_2010&utm_medium=email
For your information.
From todays Dailymail…. The Dublin government is understood to have held ‘preliminary’ discussions with the EU about an aid package after fears grew at the weekend about its levels of debt. The EU wants Ireland to accept emergency funding but it is thought the loans will come with strings that will effectively dilute its sovereignty. And last night Treasury officials in London confirmed that Britain was prepared to help out because Ireland is a key economic partner. They fear the crisis engulfing the Republic will spread across the EU, which accounts for 60 per cent of UK exports. Sources close… Read more »
Constantin on frontline says a bailout is bad – each individual Irish person will have 33 grand of debt over their head
You got it in one!!! and whats worse is these situations are designed and not contrived, make no mistake about it, capitalism may like to poo poo its equally corrupted and ineffective predecessors of communism and socialism, but all of’em are one big feckin pyramid scheme. Those arrogant and mypoic institutionalised gobshites in gov, are their own worst enemies, and we’re equally wasting the opportunity to get out there and change the course of things, simply and unfortunately because we’re stuck to operate within the same defunked paradigm as they are,and indeed the greater EU and world for that matter!… Read more »
index.htm
http://www.wedemanddemocracy.ie
Our aim is collect over 50,000 signatures and then present them to the President of Ireland and call for the instigation of a referendum on this issue to be held alongside the one deemed necessary on Childrens Rights.
Who the heck is the pundit Prof John McHale, economist, NUI Galway. Every second day he’s hauled onto Pravda RTE to beat the Government drum that, ‘if we’re lucky’, our 4 year plan and our austerity budget, we can do it, we don’t need any bailout. A bailout would involve, ‘damage to Ireland’s reputation’. This is another howler. What reputation, what scrap of reputation do we have left. ‘Reputation’ at one time was gomspeak for not burning bondholders, or restructuring. But at spreads of 8-9%, ‘reputation’ one thing we don’t have to worry about. Pravda RTE then hauled two corporate… Read more »
Hi David, I hope you are well, and judging by the success of the Kilkenomics event, you most likely are. The pressure on Ireland now is different in this case of the euro than it was in the ERM. Back then, there was a weakness in the ERM system itself as currencies were floating yet fixed, and hence “market players” (Soros et al) could exploit that. With UKP exiting and IEP devaluing, it meant that the market could not rely on their ‘play’ of the guaranteed prices for currency X, a carry trade if you will. The Euro system was… Read more »
From what I can see the problem currently is not the state finances. The problem is the silence coming from the BankCentre in Ballsbridge. Once again Ireland’s biggest bank is found to be run by a collection of inept turkeys. Incidentally, when AIB was being created from mergers in the 60s, they consciously headhunted senior civil servants to run the organization. Senator Shane Ross has termed them to be a “big bureacratic bank”. In fact, it is begining to look to me as if AIB was always going to be the problem all along. Maybe that Anglo was a gamble… Read more »
The last time we were told that the EU was facing a crisis of survival, was part of the guilt-trip foisted upon us for Lisbon 2.0.
http://www.rte.ie/news/2010/1116/ntma-business.html
Here we go again. Another guilt-trip. Save Brussels (again). Before Belgium goes into a divorce.
@ David McWilliams – good clear presentation on Pat Kenny’s show this morning. Well done.
Nice reference to you being a ‘citizen’ of this country and not simply a ‘taxpayer’, something I have been advocating for a long time. Worth mentioning the ‘Republic’ as well from time to time, and if possible avoid the term ‘Ireland Inc’, which makes us sound like we are all working for a corporation.
My over view on Kilkeconomics and towards a mature Ireland.
http://irishminx.blogspot.com/2010/11/towards-mature-ireland.html
Virility of T- Bone Steak : Politicians in France are successful when their electorate have evaluated the virility in their personal lives to be active and have given them the allure that they can exchange their savings at the end of a hard working week with the pleasures of ‘moulin rouge sur la Seine’. The virility of the T-Euro ( irish euro ) does not exude the saliva of hunger that we can feel that could digest even pigs feet in moores street .This non performance is liken to a rope on a snooker table .Unless we can see a… Read more »
An article in the most recent Sunday Business Post. http://www.sbpost.ie/post/pages/p/wholestory.aspx-qqqt=TOM+MCGURK-qqqs=commentandanalysis-qqqsectionid=3-qqqc=5.3.0.0-qqqn=1-qqqx=1.asp Basically, the people have power, when they are prepared to work together. For the past twenty years, the “consensus” involved the big players, IBEC, CIF, ICTU, SIPTU, the banks, the senior civil servants, the bosses in the political parties, etc.. hammering out a policy for the rest of us to obey. Here, we see local action deciding the consensus. This frightens the big boys far more than a mob of angry Greeks losing the plot and wrecking the livelihoods of working people trying to make a living. In fact, this… Read more »
Strong Article
//slashing public spending at such a desperate rate at a time of high unemployment is economic masochism.//
//At the moment, the living standards of the entire Irish public are being driven down ruthlessly to pay for the mistakes of wealthy bankers and greedy property developers.//
//The crisis in Ireland and Spain stems from idiotic lending by banks, which pumped up housing bubbles.//
http://www.independent.co.uk/opinion/leading-articles/leading-article-the-time-has-come-for-dublin-to-change-course-2135046.html
I guys and gals. Just wondering why our government is not taking back all our oil and gas off our coasts ? We have by some estimates 420 billion in reserves. Ray Burke signed the lot away i believe back in the eighties i think, now can someone tell me what it would take to take these back into Irish Hands. 420 billion could sot us out fairly lively. Does anyone know how we can go about this ? Let’s take it back for the people!!
Was in the car about one hour ago. There was an excellent discussion on the Joe Duffy Show. Duffy was asking for the opinions of Irish people who left Ireland concerning the current debacle. A man from Donegal, who spent a lot of time in the US, was full of praise for David McW, and traced this back to observsations in “The Pope’s children”. He lambasted the behaviour of people in this country, especially with respect to responsibility over and inside the political system. He blamed what I would term the lack of any form of systematic thinking for the… Read more »
United Left Alliance (ULA) has been formed with a view to contesting the upcoming General Election. ULA The newly established United Left Alliance (ULA), which will be publicly launched at a rally in the Ashling Hotel , Dublin on Friday 26 November, involves the Socialist Party, the People Before Profit Alliance, the South Tipperary Workers and Unemployed Action Group and the Independent Socialist group of Declan Bree in Sligo. The ULA is a joint slate or alliance of candidates that will put forward a real left alternative in the general election and challenge the austerity and capitalist consensus amongst all… Read more »
Rumour has it the proviso for the country being saved will be an agreement to to move to a “normal” European corporate tax rate. This would be the final act of national suicide / treason. Let’s not fool ourselves that our “well educated”, English speaking, flexible workforce is the reason US companies are in Ireland. Any agreement to normalise tax would mean the complete exit of the – Chip and computer industry – Pharma industry – Funds admin industry – and countless others Figure the multiplier impact on law firms, accountants and the wider community and you talking another 250,000… Read more »
“German chancellor Angela Merkel said last week that bondholders to troubled countries would need to share the pain”
It is to be feared that Frau Dr. Merkel is merely engaging in a display of rhetoric destined both for her domestic audience and for the international currency markets: she creates an aura of fiscal rectitude and fairness for herself (cosh the Banks), and she pleases German exporters by talking down the Euro (again). She has yet to exhibit any real intention of challenging financial institutions; in fact, if anything, the contrary is true.
From the Guardian live blog on the ‘Irish Crisis’….
3.18pm: Some breaking news from Dublin — the Irish government is going to release a statement on the economy at around 5pm.
That’s an hour after the eurozone finance ministers’ meeting is expected to start. We are also anticipating a press conference in Brussels around 7pm.
just been watching bloomberg and they have said that clown is going to make a statement on the economy at 5 pm people remember this day 16 nov at 5 pm when our so called government signed away our national rights to eurocrats and the imf. i was watching bloomberg alot today and there was one of there own investigators on and he was saying that the irish problem was not down to us but rather the euro said all the things david did about our economy not suiting the euro and that the irish people are the ones paying… Read more »
I’m not convinced that Europe / IMF managing the country would be worse than FF. The Irish democratically elected government squandered 10 – 12 years of boom and will leave Ireland with a damaged economy for at least another decade. Can anyone else do worse than what the Irish Governments have done to themselves? The Irish electorate voted those governments in. Europe will want Ireland to act responsibly and not put the Euro in danger again. They will not want a ruined economy on the periphery, as that would just mean more EU aid into the future. While the powers… Read more »