Ireland can save itself from bankruptcy by abandoning its banks and balancing its budget, according to University College Dublin economist Morgan Kelly.
Kelly argues in The Irish Times that Ireland’s ballooning deficit is the result of its banking sector bailout, which was set in stone during negotiations for its own national bailout from the European Union.
He accuses the ECB and U.S. Treasury Secretary Timothy Geithner of preventing Ireland from forcing a haircut on bank bondholders.
From The Irish Times:
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 €30 billion of unguaranteed bonds by two-thirds on average. Lenihan was overjoyed, according to a source who was there, 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 $13 billion 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.
Kelly also accuses the ECB of making Ireland an example for Spain to get its banking sector under control, or be put in a similar position as Ireland.
The result of the banking sector bailout has been a rise in Ireland debts to approximately €250 billion. A default on that debt would be “catastrophic” for the country’s economy, which relies on the confidence of the business sector, according to Kelly.
His solution to the problem involves moving bank debts taken on by the government back to bank balance sheets, forcing the problem on the ECB, which provides support loans to these institutions. That would cut the country’s debt in half. Next, the country needs to balance its budget, by cutting borrowing to zero.
Kelly is not optimistic, and does not expect the Irish government to stand up against the European Union.