Financial Crisis

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Irelands’ Bank Guarantee: A Lesson In Class Power

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The following article by Conor McCabe, is taken from the first issue of the relaunched The Bottom Dog, published by the Limerick Council of Trade Unions. Copies of the full print issue are now available in Connolly Books. You can also follow The Bottom Dog on Facebook.  

At the start of 2013 the indepen­dent TD for Wicklow, Stephen Don­nelly, stood up in the Dáil and ta­lked about the bank guarantee. He said it was passed because ‘of a di­ktat from Europe that said no Euro­pean bank could fail, no Eurozone bank could fail and no senior bond­holders could incur any debt.’ It is a curious opinion to hold, as the on­ly foreign accents heard on the re­cently-released Anglo tapes are imitations done by Irish bankers of considerable wealth and influence.

The tapes shone a light on the short-term focus, the scramble for capital that was to the front of the bank’s management team. John Bowe, the head of Capital Markets at Anglo Irish Bank, told his collea­gue Peter Fitzgerald that the strate­gy was to get the Irish central bank to commit itself to funding Anglo, to ‘get them to write a big cheque.’ By doing so, the Central Bank wo­uld find itself locked in to Anglo as it would have to shore up the bank to ensure it got repaid.

The Irish financial regulator, Pat Ne­ary, in a conversation with Bowe, said that Anglo was asking his offi­ce ‘to play ducks and drakes wi­th the regulations.’ Once the gua­rantee was passed the bank’s CEO, David Drumm, told his executives to take full advantage but advised them to be careful and not to get caught.

This was reinforced by an article in the Sunday Independent on 17 No­vember 2013 which looked to the British Treasury’s archives for in­formation on Anglo and the bank guarantee. ‘The documents reve­al’ said the newspaper, ‘that the Fi­nancial Regulator tipped off Britain that Anglo might be “unable to roll €3bn [in funding] overnight,” but not to worry as if that happened the Central Bank or Government would step in to bail it out.’

The idea for a blanket guarantee, however, did not originate entirely with the Anglo management team, regardless of how much they em­braced it. In the weeks leading up to the decision, the idea of a gu­arantee was flagged in the natio­nal media by people such as David McWilliams and the property deve­loper Noel Smyth.

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A Union for Big Banks

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This report was originally published on the Corporate Europe Observatory website today, the 24th of January 2014.

Far from being a solution to avoid future public bailouts and austerity, Europe’s new banking union rules look like a victory for the financial sector to continue business as usual.

In late 2013, the EU took a major step towards a “banking union”. This has been presented as a series of measures in response to the financial crisis to avoid a repeat of the vision of contagious risk and bailed out banks.  In the preceding months a “single rule book” for banks and a European-wide system of supervision had been adopted. Finally in December a set of rules on a common regime of “resolution” (winding up) of ailing banks was agreed, and the European Council decided its version of rules on how to manage the question of the costs of resolution.

EU Single Market Commissioner Michel Barnier was a happy man:

“Today is a momentous day for banking union. A memorable day for Europe’s financial sector… We are introducing revolutionary changes to Europe’s financial sector… I have now delivered 28 proposals to better regulate, supervise, and govern the financial sector and a more integrated, less fragmented single market. So that taxpayers no longer foot the bill when banks make mistakes. Ending the era of massive bail-outs.”1

These bold promises are bound to be received well by the public in most parts of Europe. With the financial crisis, member states took over massive debts originated in the financial sector to save banks. Four and a half trillion euros had been risked for bailouts – and the final bill was 1,7 trillion euro. Not only did this send national economies spiralling downwards and set off a public debt crisis, it also led to a regime of harsh austerity policies, imposed by the EU institutions and the IMF as conditions for loans.

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Britain’s Economic ‘Boom’

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This post originally appeared in Socialist Economic Bulletin on the 19th of November. 

As the British economic crisis becomes more prolonged the outbreak of stupidity that greets every new piece of important economic data becomes more generalised. Previously there has been a campaign to suggest that austerity has led to recovery when the opposite is the case. The recovery is based unsustainably on rising consumption, led by government consumption. The publication of the latest GDP data for most major economies has now led to wild suggestions that Britain is booming and is the strongest major economy in the world.

The level of real GDP in Britain since the recession began at the beginning of 2008 is shown in the chart below. It is compared to the US and the Euro Area. British growth has been almost exactly the same as that of the Euro Area as a whole and significantly worse than US GDP growth.

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Ireland and the Shadow Banking System

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Now that we only have one copy have no copies of the first issue of the print edition of Irish Left Review left and the second issue is now available to buy either online or in these bookshops we are now publishing some of the articles from the first issue on the web. The first is Conor McCabe’s brilliant article on Ireland the Shadow Banking System.

Ireland and the Shadow Banking System

Bretton Woods and the Eurodollar Market

Conor McCabe

Ireland is a tax haven.  It is a hub in the shadow banking system.  The dominant form of business in the Irish state, the one to which national economic policy shapes itself, is that which accommodates the needs of foreign capital and finance, to the detriment of productive and social activity. This business model is an intermediary model. It is conducted by a middleman class which has positioned itself between foreign capital and the resources of the state. These middlemen are found within law, accountancy, stockbroking, banking and construction.

This is not to say that every successful business in Ireland is a middleman business, but rather that these businesses wield the most influence regarding national economic policy. The type of middlemen may have changed over the decades, but the way of conducting business has not.

The intermediary/middleman business model maintains and reproduces itself through the structures of the state. In other words, the class which benefits the most from this economic policy is also the class with the most influence over the dynamics of Ireland’s legal, education and political systems. Governments come and go but the structural dynamics of the state remain the same. As a result of the structural presence this class has within the state, policy change comes dripping slow.

The current privileged status of international finance and wealth management within Ireland – that is, paper assets over production – is the latest field of play for this middleman class. Upon independence it was live cattle exports to the UK and the transference of credit to the city of London; in the 1960s it was free access to the UK economy for international companies with branches in Ireland, followed by similar access to the EEC/EU, giving rise to construction, land and property speculation; all of this was underpinned by the selling of the State’s gas, oil and mineral rights to whatever bidder took the middlemen’s fancy.

The national resource that is for sale today is the right of an independent state to set its own laws and tax policy. In other words, it is Ireland as a mature democracy and legal jurisdiction, one that is recognised by international law that is traded by this middleman class for the private gain of its privileged players.

The current emphasis on paper assets over production reflects the fundamental changes in economic power relations which have taken place over the past forty years in advanced capitalist countries. This period has seen the financialisation of everyday life and the re-emergence of rentier capitalism. The move towards profit-seeking in paper assets is in part a response to the decline in the rate of profit and a tendency towards overcapacity in global manufacturing industries.  The pressure to return profits in a world of declining margins has seen reductions in social expenditures by national governments and stagnation in wages. The resultant decline in aggregate demand is an underlying factor in the explosion of price speculation over production.

This is part one of a two-part article on Ireland and the shadow banking system. The rise of the Eurodollar market and the decline of the Betton Woods system is covered here. The emergence of shadow banking and Ireland’s role in its operation will be covered in a future issue.

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The Euro – exit stage Left?

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Paul Murphy MEP (Socialist Party) contributes to a discussion on what position the Left should take on the euro.

It hasn’t gone away, you know. Although much of the media and political commentary would suggest otherwise, the eurozone crisis is very far from resolved. The economies on the periphery of Europe all face deep economic crisis, the burden for which has been heaped upon working class and poor people, with the devastating social consequences seen at their most extreme in Greece. The situation in much of the rest of Europe is not much better. The political consequences of this ongoing crisis have been seen with near government collapse in Greece, Spain, Portugal and Italy over the course of the summer – with mass disillusionment with austerity a key underlying feature in all cases.

The Irish capitalist class has long tried to separate itself from the other peripheral countries – repeating the mantra that Ireland is not Greece and trying to demonstrate it by more effectively implementing austerity. It has been assisted in that task by the leadership of the trade union movement, which tied to the Labour Party, has attempted to stifle opposition

However, the facts and the crisis remain. The debt to GDP ratio is now at 125% in Ireland and rising. Another dramatic wave of the eurozone crisis could be unleashed at anytime by political or economic developments, the effects of which would be strongly felt in Ireland. The euro will again be at the centre of political developments.

As Ireland moves into primary surplus, the euro could become an important justification for austerity used by the political establishment and a battering ram against the Left. An important reason given not to default on debt or break from austerity policies may be the possible consequence of Ireland being forced out of the common currency. If the experience of Greece tells us anything, it is that an important argument of right wing forces in the next local and European elections, but in particular in the next general elections could well be – if you implement left or socialist policies, Ireland will be out of the euro and economic disaster will result.

Socialists and the Left must prepare to tackle this scaremongering, to demystify the euro and to put forward a left ‘exit strategy’ from the crisis that accepts the possibility of exiting the euro and puts forward radical socialist economic measures to deal with the consequences. There are two pitfalls common on much of the left to be avoided here.

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Welcome to the New Poverty – Insolvency Poverty

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Today the new insolvency service goes live.  Today is the beginning of a new kind of poverty – insolvency poverty.

Our rulers, giving deep consideration to the problems posed by household debt, have designed a solution.  Does it write down the debt caused by the financial institutions?  Well, er, not exactly.  The solution requires that men, women and children undergo poverty-line existence for up to six years – and to do so publicly by having their names published on a register.  Included in this regime is the creation of a new professional class – Personal Insolvency Professionals – who will assist people to navigate their poverty experience and in many (most) cases will get an upfront payment.  Insolvency poverty and insolvency poverty professionals -you really couldn’t make this stuff up.  But they did.

When people apply for debt relief their living standards will be based on the Insolvency Agency’s ‘reasonable living expenses’.   According to the Insolvency website, reasonable living expenses are defined as:

‘. . .  the expenses a person necessarily incurs in achieving a reasonable standard of living, this being one which meets a person’s physical, psychological and social needs.’

The insolvency regime sets down a schedule of such expenses:  food, clothing, household goods, utilities, personal care. It will be for the creditors to approve the reasonable living expenses regime applied:

‘ . . . the decision on the reasonableness or otherwise of living expenses will be a matter for the creditors to determine on a case-by-case basis . . .’

Imagine the scene:  creditors sitting around a conference table in a corner office overlooking the Liffey, ticking off all the expense boxes for John and Mary, discussing whether this item or that constitutes ‘reasonable’.

But the Insolvency Service is anxious to prove that their expenses regime is ‘reasonable’.  They claim that their numbers are based on the model developed by the Vincentian Partnership for Social Justice.  The VPSJ has done tremendous work in ascertaining the minimum level of expenditure that constitutes a living standard that no one should have to live below.

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Latvia Doesn’t Offer Europe a Success Story

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The Council of Europe has confirmed that Latvia will be accepted into the Eurozone from 1 January 2014. Commission Vice-President Olli Rehn has called the Baltic nation “a success story” and said that its “shows that a country can successfully overcome macroeconomic imbalances, however severe, and emerge stronger.” 

At a time when calls for a change in policy direction grow stronger every day, when the Eurozone heads towards recession with the European youth unemployment rate at 23%, pro-austerity officials badly need a success story. Latvia would seem to fit the bill; having weathered its fiscal crisis to return to modest growth, it could be the model student for the indebted European periphery. But those looking to the Baltic for proof that 'austerity works' should look a little closer. 

Much like Ireland, Spain, Portugal and Greece, Latvia experienced a short period of intense growth, with a property market bubble fuelled, in the Latvian case, by cheap credit from Swedish and German banks. When the credit stopped, the economy did too and the Government nationalised Parex, the country’s second largest bank, taking on its Euro-denominated debt. Private debts were transformed into public liabilities, creating a fiscal crisis. So far, so familiar. 

After the dissolution of the incumbent administration, the newly-elected coalition government responded with an aggressive austerity strategy. They targeted healthcare, education and public administration, with 30% cuts to public sector numbers and wage-reductions of 40%. Unlike in many other public-debt troubled countries, Latvia also squeezed old-age pensions, causing significant hardship for retired citizens. Despite IMF suggestions, currency devaluation was ruled out of the question and corporation tax remained unchanged at 15%. GDP shrank by a quarter over two years, leaving one in five workers unemployed. 

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Developing of the Tale of the Tiger: Ireland and the IMF

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The paradox of the hot bath is symmetrical: it draws the blood to the periphery, as well as the humors, perspiration, and all liquids, useful or harmful. Thus the vital centers are relieved; the heart now must function slowly; and the organism is thereby cooled.

(Foucault 1961 [1965: 169–70])

The following essay is an attempt to answer a question of critical importance to the history of the Irish State’s development; Namely, in light of the IMF’s recent disciplinary stance toward the Irish State, and in consideration of the key role played by a number of inter- and supra-national financial institutes in stimulating Ireland’s period of unprecedented economic growth, can the IMF’s stance in the post-crisis period be deemed an attempt to legitimise the institute’s technocratic claims to authority; and what are the implications of Ireland’s bailout within the wider context of Europe.

The essay will be two-pronged in its approach; in the first section, we will seek to offer a revisionist interpretation of the negative consequences of Ireland’s economic growth having been characterised largely by external exigencies. Ireland of the Celtic Tiger era was heralded as a “successful model for small and peripheral states in this era of globalization.”[1] The factors culminating in its dramatic demise thus merit closer attention within the wider context of development (or indeed post-development) studies.

In the latter section, we will seek to contemporise the discussion by focusing on the EU-IMF bailout in 2010. Here we will attempt to offer a political economic approach to the IMF’s intervention and authoritarian stance in Ireland, by contrasting the Fund’s economic surveys prior to and following the financial crisis. We will offer two readings of this: first, we will consider if the Fund’s authoritarian stance can be read as part of the institution’s bid to continued legitimacy– in its failure to prevent the crisis, and in light of its crisis of legitimacy prior to this.[2] Secondly, we will consider how the Fund’s stance toward Ireland relates to its roles as part of a wider international economic system, acknowledging that the IMF and the World Bank function as “twin intergovernmental pillars supporting the structure of the world's economic and financial order.”[3] In so doing, we will seek to offer an alternative reading to the “sovereign” debt crisis.

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Paul Murphy MEP – Challenges Enda Kenny on Bank debt

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A very good opportunity for Paul Murphy to challenge Enda Kenny in the European Parliament and he did it well. Kenny’s response was of course to get a dig in that had absolutely nothing to do with the criticism he made. Murphy pointed out that Ireland is paying 42% of the bailout for European banks. Kenny said Paddy pays his debts.

Paul Murphy challenges Taoiseach Enda Kenny for being the poster boy of austerity and failing to tackle the bondholders over the banking debt. Kenny has driven austerity in Ireland while going with a begging bowl looking for some crumbs from the EU on the private bank debt which was hoisted onto the shoulders of the Irish people. Kenny’s reply can be seen here.

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Eurozone Crisis: What Next?

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Recently engaged in a round of backslapping, the leaders of Europe suggested that we were turning the corner out of the crisis. In Ireland despite all the evidence to the contrary, the government is still trying to talk up the prospect of a 'deal' on the bank debt. But on the ground, the crisis is worsening, austerity is destroying people's lives and the economies of Europe. In the first of two articles on the future of the EU, Paul Murphy MEP examines the immediate prospects for the eurozone crisis in the next months.

Once more, the markets were temporarily calmed in September. The road forward to a stable eurozone was pronounced to be nearer than ever. The relatively tranquil summer for the eurozone was followed by a series of declared victories – the new European Central Bank (ECB) bond-buying programme; the German constitutional court positive ruling on the European Stability Mechanism; the announcement of the European Commission's proposal for common supervision of Europe's banks by the ECB; and the victory of the Liberals and Social-Democrats in the Dutch elections, despite the earlier good showing for the Socialist Party. The bond yields for the crisis-ridden states fell to relative lows and Commission President Barroso took the opportunity to spell out a longer-term vision of a move to a “federation of nation states” in Europe.

That this was simply the calm before the unleashing of a mighty storm of crisis in autumn and winter across Europe has already become evident. The measures announced represent new sticking plasters on the crisis. Yet again, the fundamental contradictions facing the eurozone have not been addressed. A series of deep crises in different states are likely to emerge in the coming weeks and months, putting into question the continued existence of the eurozone as is once more.

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