Who Stole Ireland’s Pot of Gold
Banking crises come and go, but they become exceptionally complicated matters when the affected country is non-sovereign in the sense that it does not issue its own currency. This is essentially the problem faced by Ireland, which was the first Eurozone nation to experience a fallout from the Great Financial Crisis of 2008. To take a stpe back: Eurozone countries have faced two types of problems by entering the Euro regime. First, they have given up their monetary sovereignty by giving up their national currencies, and adopting a supranational one. By divorcing fiscal and monetary authorities, they have relinquished their public sector’s capacity to provide high levels of employment and output. Non-sovereign countries are limited in their ability to spend by taxation and bond revenues and this applies perfectly well to Ireland (as well as Spain, Italy, Portugal and even countries like Germany and France).
Second, by entering the eurozone, these countries have also agreed to abide by the Maastricht treaty which restricts their budget deficit to only 3 % and debt to 60% of GDP. Therefore, even if they are able to borrow and finance their deficit spending, like Germany, they are not supposed to use fiscal policy above those limits. So countries have resorted to different means to keep their national economies afloat, from trying to foster the export sector, as Germany does, to cooking books through Wall Street wizardry, like Greece and Italy did. These constraints have proven to be flexible but that does not mean that they do not matter. When a nation exceeds mandated limits, it can face punishment by European institutions and also by markets.
At the peak, claims on the Irish banking system peaked at over 400% of GDP. The Irish government promised to backstop all of the depositors AND the secured and unsecured bond holders, a claim which had no credibility as markets came to understand that the Irish Central Bank, led at the time by Dr. Patrick Honohan, did not have the capacity to create an unlimited supply of currency to backstop those liabilities. Worse, the guarantee was made without consultation with the European Commission or the European Central Bank (ECB) This created the possibility of a national bankruptcy crisis, which would have occurred but for the assistance of the ECB, the only Eurozone entity which did have the capacity to create an unlimited supply of euros and therefore backstop the Irish government (much as America’s FDIC is ultimately backstopped by the Treasury, which renders its deposit insurance credible). But it came with a huge price:
The Troika bailout team of the IMF, European Commission and European Central Bank took over the running of the country for 3 years on 18 November 2010. They lent Ireland money and they took control of economic and social policy. The new ‘constitution’ was called the Memorandum of Understanding (MOU) and it was written by the Irish government and signed by the Minister for Finance and the governor of the Irish Central Bank on 1 December 2010.
However, the MOU was written under duress, with the team from the Troika fully negotiating/dictating the details with the cowed government.
The MOU set out explicitly what was to be achieved in each of the 12 quarters. There was to be a deep quarterly review of progress by the Troika. The original fiscal consolidation was largely cuts in public services with some tax rises. There was much detail on bank recovery with capital reviews and reorganisation of the sector and even a promise that subordinated debtors would burden share – which never happened. In fact, as Dr. Honohan points out in his own account of the crisis, the ECB effectively threatened to pull the plug on Ireland unless there was full unconditional surrender to this program. It was the Greek program, long before Greece was forced to submit to something similar. And for all of the talk of Ireland’s recovery, the country is still experiencing 9% unemployment a full 7 years after the start of the crisis, and output has still not surpassed 2007 levels. Dr. Honohan discusses the whole sorry episode in the interview below.