The most likely outcome of Ireland’s debt crisis is the collapse of the single currency, writes Eoin Brady
Deckchairs are being rearranged on the Titanic. €1 off the dole. €500 extra for college. A few thousand voluntary redundancies. It doesn’t add up to much. In the context of the banks’ losses, all of the swinging cuts and punishing tax increases aren’t going to make much of a dent. €6bn in a year, against borrowing from the ECB of €130bn?
The banks’ losses dwarf any effort the Irish government can make to get our accounts in order. The main reason we are being subjected to these measures is to keep the ECB and the IMF onside. As they are the only entities willing to fund us at reasonable rates of interest, we need them.
We have to keep doing exactly what we’re told because when the IMF gives someone a loan, they don’t just give someone a loan. A borrower from the IMF gets three months’ worth of cash, and if after three months they aren’t making the progress the IMF feels they should be, the next payment gets cut. This nearly happened to Greece, when Austria complained that they weren’t making enough progress. So we’d better keep arranging those deckchairs.
The pertinent question here, however, is whether there are bigger deckchairs being rearranged on a bigger Titanic. With the turmoil we’re going through at the moment, it’s hard to keep an eye on the big picture. The big picture is the future of the single currency.
With 20 per cent of what the ECB had set aside as a fund for keeping the entire eurozone stable hoovered up by Ireland’s banks, people are starting to get rather uncomfortable in Brussels. This fund was supposed to be so vast it would restore confidence to the markets, and never even need to be touched. But it hasn’t worked out like that.
Events are taking a very different, and markedly worse, turn. Not only is the fund being used, it’s being drawn upon so heavily that the people paying for it in Europe are beginning to feel the pinch and would really prefer to stop paying for it. This is what motivated German Chancellor Angela Merkel to suggest that some of the losses are taken by the investors who loaned the money to banks, rather than by instructing the Irish public (and by extension, the ECB) to pay for it.
She had to backtrack from that position when bond yields in the peripheral eurozone countries shot up, indicating market nervousness. A few short weeks later – in a U-turn so evocative of the ones our Brians have been making that it would funny, were it not so serious – the ECB and the IMF are drawing up plans to make the investors take a hit.
From the point of view of the Irish public, the benefits of not having to pay back vast sums of someone else’s money are obvious. However, the effect it will have on the ability of Portugal and Spain – and even more disturbingly, Belgium – to fund themselves remains to be seen.
Portugal and Spain have seen increases in the spread of their yields over German in the last few weeks. The cost of insuring Belgian sovereign debt is at a record high. This means investors are demanding more compensation for taking on what they perceive to be riskier bets. This is happening despite Spain and Portugal’s protestations that they are “not Ireland” – a claim reminiscent of Ireland’s leaders a few months ago – that we were “not Greece”. Of course, that turned out to be partially true – we were actually in much worse shape than Greece.
Ireland is a deckchair, and the eurozone is the Titanic. As the ECB and IMF hammer out little discounts here and there on Anglo’s subordinated debt, Portugal – a country with an economy similar in size to Ireland – and Spain – whose economy is six times larger – are shaping up to do just what we are doing right now.
Spain’s economy is a tenth of the eurozone total. While the Irish banks might have been too big to fail, Spain is unquestionably too big to rescue. If the markets get sufficiently spooked – and the portents are that they will – the ECB will have to cut Spain loose. A disorderly default within the eurozone would do such reputational damage to the single currency that the surviving members will want to distance them from it. At that point, the costs of holding the eurozone together would outweigh any remaining benefits.
Nobody really knows what’s going to happen. However, based on this evidence, it looks like Europe will be a drastically different place in a year and all the ECB is doing is rearranging deckchairs.