Global Economic Crisis

The Taoiseach of the Republic of Ireland, Brian Cowen, has a paper-thin majority of a mere three seat in the Dail, Ireland’s parliament. Its junior coalition partner, the Green Party, is already threatening to pull out and force a general election, unless Cowen agrees to call new elections by late January. Whether or not the current Irish government is forced into an immediate dissolution of the Dail, or agrees to new elections in January, it faces certain retribution at the hands of an increasingly irate and depressed Irish electorate.

There are two primary causes to the soon-to-be finale of the Cowen government. The first involves the disastrous management of the Irish economy and its acute financial crisis. Reckless speculation by the Anglo-Irish Bank created one of the worst banking crises amid the global financial crisis of 2008. As in other countries facing a similar predicament, the Irish government used the taxpayers of the nation as a backstop for the banking system. In effect, the troubled institution was nationalized, and the entire banking system had its deposits and obligations underwritten by the government, meaning the taxpaying citizens. The net effect has been an ever-escalating figure for the cost of bailing out Anglo-Irish Bank, and the concomitant public obligation to cover the surreal expenses of the banking bailout. While the banking system was being “saved,” the ordinary citizens of Ireland have been punished with higher taxes in synchronization with sharp cuts in social appending, as the unemployment rate reached historic highs.

Despite the cuts in public spending and tax increases, the cost of the bank bailout and the increasing spreads  on government bonds defied the ability of a nation of four and a half million people to cover such a large fiscal obligation. Yet, when word leaked out regarding the secret negotiations between Dublin, the EU, IMF and European Central Bank over the terms of a bailout of Ireland itself, the Cowen government at first sharply denied the widely circulated accounts. It turns out that the Cowen government was lying through its teeth, and has now openly admitted to the need for an EU bailout of the Republic of Ireland, to the tune of at least $120 billion.

With Ireland already confronting an annual deficit equal to about 35 percent of its GDP, the even higher levels of tax increases and public spending cuts the EU and IMF bailout will require, on top of the emergence of political instability, point to the meager prospects for the long-term future of the Irish economy. Her sovereign debt crisis is now clearly of catastrophic proportions, and the Irish nation is facing the very real danger of a sustained economic implosion.

First it was Greece and now it is Ireland. In each case, the European policymakers boasted that their massive binge of public borrowing to put together sovereign bailout packages has saved the continent from a much worse financial and economic disaster. But given their track record, how certain can we be that Portugal and Spain won’t be the next dominos to fall? The financial and economic disarray within the European Union appears to be metastasizing rapidly.

Prior to Greece becoming the economic and financial basket case of Europe, it was Ireland that held that  dubious distinction. For when the global economic and financial crisis detonated with full fury in the fall of 2008, Ireland’s own version of the real estate asset bubble imploded, transforming the balance sheets of the nation’s major banks into a toxic waste dump.

As with  America and the UK, Irish politicians informed their nation’s citizens that the big banks must not be allowed to fail, and therefore the taxpayers would pay for the egregious financial miscalculations of the high-priced “talent” that led these Irish  financial institutions into the abyss. While the United States came up with its TARP taxpayers bailout, Ireland formulated its own unique response, the so-called NAMA, the acronym for National Asset Management Agency. NAMA was, in effect, a “bad bank,” which would take the toxic assets off the balance sheets of Ireland’s large banks, in particular the Anglo Irish bank, in return for sovereign bonds. The expectation was that Irish taxpayers would have to accept large losses, but in return the nation’s banks would return to fiscal health, and be able to resume normal patterns of credit and loan creation.

The “bad bank” approach had many critics, appalled that taxpayers money was being used to backstop  private sector losses, in exchange for vague promises by politicians that the end result would be therapeutic for the national economy’s ills. No less an authority than Joseph Stiglitz, Nobel prize winning economist, expressed great scepticism over the efficacy of Dublin’s taxpayer funded bank bailout. Onward with the “bad bank” concept the government proceeded, anyways, oblivious to its critics.

Now the Irish political leadership has informed its sombre citizenry that the banking crisis was far worse than first believed. When NAMA was first established, the authorities believed that the toxic loans being acquired for the “bad bank” would need to be discounted by 30%. Now, an embarrassed government concedes, the actual discount of these toxic loans are coming in at a far worse level, a miserable 47%. Ireland’s beleaguered Finance Minister, Brian Lenihan, has stated that the Anglo Irish bank alone would be receiving from the taxpayers €8.3 billion in just the coming week, with a strong possibility that an additional €10 billion would almost certainly be required to cover anticipated losses at Anglo Irish Bank. All told, it is now being declared by Dublin that toxic loans by Ireland’s banks may cost taxpayers  a staggering €32 billion, equal to more than $43 billion at the current exchange rate. Considering that Ireland has a population of 6.2 million, this reflects a charge of nearly $7000 for every Irish man, woman and child towards the cost of bailing out financial institutions that, in the words of Finance Minister Lenihan, “played fast and loose” with Ireland’s national economy.

With expenditures of 55 billion euros and revenues falling below 35 billion euros, Ireland is facing the daunting paradox confronting a growing host of nations, including the United States. The politicians maintain they cannot implement draconian spending cuts in the face of severe human hardships being created by the Global Economic Crisis. Yet, mathematical realities may constrict the ability of political leaders to infinitely borrow money in order to maintain high structural deficits. With the rating agencies having made their move, the ability of Ireland to finance its deficits through the largess of the global credit market will become increasingly more problematic. It appears that the IMF may be the ultimate lender of last resort for Ireland, and that kind of assistance will impose costs of its own.

The economic catastrophe facing Ireland will cause sorrows that cannot be suppressed by a pint of Guiness. Nothing less than national insolvency threatens this once robust economy. And lest the United States pretend that the economic collapse now underway in Ireland is irrelevant to its own situation, the elements that have brought down the “Celtic Tiger” are almost identical to those now eating away at the very foundation of the U.S. economy.

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