Ireland’s “model pupil” act should end now
No matter how many officials praise Ireland for adhering to its bailout terms, the maths still don’t make sense. The country continues to struggle under a mountain of unsustainable debt and the real economy (the one that involves peoples’ lives and livelihoods and not just GDP numbers) continues to go in the wrong direction.
Add to this the considerable risk of internal (mortgage arrears, social unrest) and external (other EU economies, global slowdown) risks and things are far from rosy.
To recap, there was a time back in March 2011 when Ireland’s newly-elected government had a mandate to play hard-ball with the EU/ECB and with creditors in general. Ireland not only had the mandate, but it also had the negotiating leverage – at that point the country was the first wobbly domino in a potentially catastrophic series of EU debt failures.
The incoming government threw that leverage away and has continued on the “model pupil” path ever since. There have been indications of “good news” that may suggest this path could be successful…..the Irish government having gone to the open bond markets in recent months and successfully borrowing at relatively reasonable rates. However, given the liquidity being generated by central banks around the world, and the paucity of investment opportunity in the real economy, it maybe should not be a surprise that this money has to find its way somewhere. Successful Irish bond placements reflect there being few places with the risk/reward profile offered because there is a sense that the government doesn’t have the balls to consider defaulting at any point.
Back in the real world, however, the Irish government is sucking money from the economy to service debt interest, is continuing to repay principal sums to unsecured, guaranteed bondholders in its failed banks and Irish homeowners sit on a veritable mountain of underwater mortgages that have inbuilt rate rises soon to trigger.
The international financial model does little to reward well-behaved chumps, and that is exactly how the Irish government are acting and are perceived. It is hard to know if this is because the leadership is genuinely well-meaning and believe that their primary interest is to save the Euro, or if they are simply being strung along by smarter, more powerful interests in the EU who frankly have bigger fish to fry.
This past week the EU/ECB informed the world that promised relief on Ireland’s bailout terms would be negligible. Despite the insult this presents to Ireland’s political leaders (who staked their reputations on delivering substantial relief) they once again have lacked the courage to respond appropriately.
With a lack of such initiative from Irish leaders, and a strangely subdued and unconcerned populace, it seems that Ireland will only take the necessary steps to threaten debt default when no other option is available. By then the damage to people’s lives and livelihoods will be much more severe.