We must shake off the ECB loan sharks
Honohan is accused of 'costliest mistake' ever made by an Irishman
Published 08/05/2011 | 05:00
As Ireland edges closer to bankruptcy, and to the prospect of debt default, Morgan Kelly, the radical economics professor, has put forward a dramatic solution for "national survival" which he says would require that Ireland walk away from the EU-IMF bailout.
In an analysis which has resonated with the public, Professor Kelly rounds on the governor of the Central Bank, offers new insights into the bailout negotiations, says the last Government was "spineless", and is strongly critical of new Government policy, which he describes as "lying on the ground with a begging bowl and hoping that someone takes pity on us".
His latest, lengthy prognosis has provoked a huge reaction not only in media and politico/economic circles, but, judging by the reaction on social network sites yesterday, throughout a by now fully engaged society which seems to have been moved to adopt his views, once considered maverick, as a way forward.
Professor Kelly of UCD said that for Ireland to walk away from the bailout, the Government is required do two things: disengage from the banks, and bring its budget into balance "immediately".
He admitted that while his solution was "not painless" it was the "only way" for Ireland to disentangle itself from the "loan sharks" of the European Central Bank who, he said, were intent on making an example of the country to "frighten" Spain.
In a damning critique, published by the Irish Times yesterday, Professor Kelly reserved his fiercest criticism for the Central Bank Governor, Patrick Honohan, who he said had assumed de facto control of Irish economic policy.
But he was no less critical of the last government, which he said had appointed people to negotiate with the EU-IMF who, he said, had displayed "strong elements of Stockholm Syndrome" to side with the ECB.
And he was fearlessly withering of the new Government's current policy, which, he said, was "lying on the ground with a begging bowl and hoping that someone takes pity on us", a position which, he said, did not make for a particularly strong negotiating position.
A spokesman for Finance Minister yesterday said that there would be no response from Michael Noonan.
Yesterday, however, Professor John McHale, head of economics at NUI Galway, said the "targeted nastiness" of the article was "hard to understand". He concluded that the argument made by Professor Kelly was "crazy stuff", and all the more "bewildering" because it came from one of the "heroes" who had stopped the credit-fuelled bubble getting even bigger.
In his article, Professor Kelly said the "destruction" of Ireland wrought by bankruptcy would not just be economic but political. "Just as the Lenihan bailout destroyed Fianna Fail, so the Noonan bankruptcy will destroy Fine Gael and Labour, leaving them as reviled and mistrusted as their predecessors.
"And that will leave Ireland in the interesting situation where the economic crisis has chewed up and spat out all of the State's constitutional parties. The last election was reassuringly dull and predictable but the next, after the trauma and chaos of the bankruptcy, will be anything but."
Professor Kelly was severely critical of Professor Honohan, who he accused of a miscalculation of the losses in Irish banks which, he said, was the "costliest mistake ever made by an Irish person".
He also said that Professor Honohan had "deftly sliced off at the ankles" the former Finance Minister, Brian Lenihan, when the Central Bank governor intervened on November 18 last to say that Ireland would need a bailout of "tens of billions".
At the time, Mr Lenihan was in a position to exploit a "strong negotiating position" to seek a bank bailout only, according to Professor Kelly.
European finance ministers were urging Mr Lenihan to accept a bailout to stop panic spreading to Spain and Portugal. But Ireland was, by then, funded until the following summer and could "hold happily its breath" unless given suitably generous terms -- while Spain and Portugal had to borrow every month.
As well as being Ireland's chief economic advisor, Professor Honohan "also played for the opposing team" as a member of the council of the ECB, Professor Kelly said.
"And so the Honohan Doctrine that bank losses could and should be repaid by Irish taxpayers ran its predictable course with the financial collapse and international bailout of the State," he said.
Professor Honohan was unavailable yesterday. But just nine days ago, a Central Bank spokesman told the Sunday Independent that the governor had acted in the "interests of the Irish banking system" last November when he contacted RTE radio from Frankfurt to disclose that a bailout was imminent at a time when the Government was trying to resist pressure inspired by the ECB to accept such a bailout.
The Central Bank spokesman said Professor Honohan "was acting in his own independent capacity as governor of the Central Bank of Ireland and was speaking in the interest of the stability of the Irish financial system."
Asked where the governor's first loyalty lay, the spokesman said: "He has sole responsibility for the performance and the exercise of powers conferred on the bank by or under the EU Treaties or the ESCB Statute."
The governor's intervention last November came, he said, when he learned the night before that an editorial was to appear in the Financial Times "saying effectively people should be planning on bank runs". He was concerned about the possible effect it would have on financial stability and felt he needed to provide reassurance.
Yesterday, the Department of Finance refused to engage on the analysis put forward by Professor Kelly other than to dispute the accuracy of some of the figures he had quoted in relation Ireland's debt levels.
A spokesman said: "The cost of bank recapitalisation is already included in the debt level of €190bn, so it should not be double-counted. The Nama debt is €30bn and not €45bn. Also, the Nama business plan projects a profit, therefore, it does not make sense to add the Nama debt to the State debt.
Predictably, while Professor Kelly has provoked a huge level of debate, there are few who are prepared to contradict outright his central argument that Ireland is heading for bankruptcy.
At his most radical, Professor Kelly outlined what he effectively believed to now be the only solution open to Ireland after what he feels were a series of wrong turns taken -- from the decision to stick to the September 2008 blanket bank guarantee, to the "miscalculation" of bank losses and subsequent intervention of the Central Bank governor.
He said the ECB now finds itself with the Irish banks "wedged uncomfortably far up its fundament, with no way of dislodging them".
He said: "This allows Ireland to walk away from the banking system by returning the Nama assets to the banks, and withdrawing its promissory notes in the banks. The ECB can then learn the basic economic truth that if you lend €160bn to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner. At some stage the ECB can take out an eraser and, where "Emergency Loan" is written in the accounts of Irish banks, write "Capital" instead. When it chooses to do so is its problem, not ours.
"At a stroke, the Irish Government can halve its debt to a survivable €110bn. The ECB can do nothing to the Irish banks in retaliation without triggering a catastrophic panic in Spain and across the rest of Europe. The only way Europe can respond is by cutting off funding to the Government.
"So the second strand of national survival is to bring the Government budget immediately into balance. The reason for governments to run deficits in recessions is to smooth out temporary dips in economic activity. However, our current slump is not temporary: Ireland bet everything that house prices would rise forever, and lost. To borrow so that senior civil servants like me can continue to enjoy salaries twice as much as our European counterparts makes no sense, macroeconomic or otherwise.
"Cutting government borrowing to zero immediately is not painless, but it is the only way of disentangling ourselves from the loan sharks who are intent on making an example of us.
"In contrast, the new Government's current policy of lying on the ground with a begging bowl and hoping that someone takes pity on us does not make for a particularly strong negotiating position. By bringing our budget immediately into balance, we focus attention on the fact that Ireland's problems stem almost entirely from the activities of six privately owned banks, while freeing ourselves to walk away from these poisonous institutions.
"Just as importantly, it sends a signal to the rest of the world that Ireland -- which 20 years ago showed how a small country could drag itself out of poverty through the energy and hard work of its inhabitants, but has since fallen among thieves and their political fixers -- is back and means business.
"Of course, we all know that this will never happen. Irish politicians are too used to being rewarded by Brussels to start fighting against it, even if it is a matter of national survival. It is easier to be led along blindfold until the noose is slipped around our necks and we are kicked through the trapdoor into bankruptcy."
In his analysis, Professor Kelly introduced new insights into what he said had occurred when the last government was in negotiation with the EU-IMF.
"Ireland's Last Stand began less shambolically than you might expect. The IMF, which believes that lenders should pay for their stupidity before it has to reach into its pocket, presented the Irish with a plan to haircut €30bn of unguaranteed bonds by two-thirds on average. Lenihan was overjoyed, according to a source present, telling the IMF team: 'You are Ireland's salvation.'
"The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13bn from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers.
"The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.
"The negotiations went downhill from there. On one side was the European Central Bank, unabashedly representing Ireland's creditors and insisting on full repayment of bank bonds. On the other was the IMF, arguing that Irish taxpayers would be doing well to balance their government's books, let alone repay the losses of private banks. And the Irish? On the side of the ECB, naturally.
"In the circumstances, the ECB walked away with everything it wanted. The IMF was scathing of the Irish performance, with one staffer describing the eagerness of some Irish negotiators to side with the ECB as displaying elements of Stockholm Syndrome.
"The bailout represents almost as much of a scandal for the IMF as it does for Ireland. The IMF found itself outmanoeuvred by ECB negotiators, their low opinion of whom they are not at pains to conceal. More importantly, the IMF was forced by the obduracy of Geithner and the spinelessness, or worse, of the Irish to lend their imprimatur, and €30bn of their capital to a deal that its negotiators privately admit will end in Irish bankruptcy.
"Lending to an insolvent state, which has no hope of reducing its debt enough to borrow in markets again, breaches the most fundamental rule of the IMF, and a heated debate continues there over the legality of the Irish deal."