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Ireland wastes its money to help Europe solve the wrong problem

by Aaron McCormack on November 2, 2011

We have to ask the question – why would a government with a clear mandate to burn bondholders give Irish taxpayers’ money to hedge funds and the distressed assets desks of global banks?

It was yet another sad chapter in the unfolding story of Irish debt-servitude.  Today, an Irish government that was elected in part on promises that undeserving bondholders in Ireland’s failed banks would “not get another red cent”, made nearly $1bn in bond repayments for Anglo Irish Bank.  Anglo Irish was the worst of the Irish big four.  The bonds were unsecured and unguaranteed.  The owners, whom the government were unwilling to name, probably bought these bonds at rock-bottom prices.  Certainly their real market value today would be zero, or perhaps pennies on the euro.  They are not covered, it seems, by the EU/ECB/IMF deal with the country.  We could have not paid the bonds and there would likely have been no international fallout.  And all this from a government that we believed was elected on a mandate to look after Irish interests first.

We have to ask the question – why would a government with a clear mandate to burn bondholders give Irish taxpayers’ money to hedge funds and the distressed assets desks of global banks?  Why would the government not take the opportunity to lessen Irish indebtedness? (sorry folks, we still can’t afford to plow it back into services)

David McWilliams had a go at it in his column this week with the “Granny’s Good Room” hypothesis that he is fond of.

But beyond the psychological aspect, it is clear that the Irish government believes in the Sarkozy/Merkel project to solve a debt crisis with further debt.

Some joked last week on the subject of the market’s reaction to the supposed Greek solution that “markets rally – details to follow!”  How right they were.  But the problem with the solution is not that the Greek public will now get a chance to vote on it.  It is that Europe continues to tackle the wrong problem.  They continue to extend and pretend.  This is just the latest round of pretending.

Europe has a huge balance sheet problem.  It can try to buy some time with an EFSF, but it is likely that the problem is too large and too widespread.   It cannot fix it by further debt or leveraging of the EFSF – you don’t fix a broken balance sheet with more debt.

The real tragedy is that good money gets poured after bad.  The Irish payment today was not really from the Irish taxpayer alone – it was a transfer of money from those lending to Ireland through to the folks holding the bonds.  Because we don’t know who those bondholders are, we cannot be sure if the Troika would really have approved of the beneficiaries.  But in the Greek case, we know that the funds flow through mainly to mainstream European and US banks who hold Greek debt.

And the people of Europe, hoodwinked and coddled by years of debt-financed government spending and asset bubbles into thinking they were really better off than they are?  They will continue to pay the price as austerity bites harder and as money is siphoned away to pay this further indebtedness.

The economies of Europe need to be weaned off the debt drug and not further addicted to it.  Like any withdrawal it is brutal and painful.  But like any addiction if we don’t take action now, the consequences down the road are more brutal, more painful and more unpredictable.

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