Equality think-tank TASC today issued its response to the €85 billion EU-IMF agreement with Ireland, concluded on Sunday. Speaking this afternoon, TASC Director Paula Clancy said:
"This is not a good deal for Ireland and it is not a bailout for Ireland. It is a bailout for the European banking system by the Irish taxpayer. Responsibility for the crisis does not lie at the door of ordinary Irish people, but at the door of Irish and European policymakers, particularly the ECB, which created the conditions that have created the current problem.
"Private institutions - both those in Ireland, and those lending to Irish financial institutions - fuelled the boom through their reckless lending and it is entirely appropriate that they take responsibility for the ramifications of their failed lending decisions.
"The deal is inequitable, won't work and will either lead to a sovereign default or will condemn the Irish people to a prolonged period of economic stagnation. It is in the interest of the Irish people that the deal be re-negotiated on more favourable terms, including a write-down of at least 50 per cent of the banking debt. This is crucial to economic recovery. "The burden of the current crisis is bigger than Ireland can manage and can only be solved at European level. There are currently proposals at the EU level for creditors on loans issued after 2013 to absorb some of the losses on severe bank debts. This is an acknowledgment that sovereign countries should not be responsible for the entirety of losses in the banking sector.
"The solution to the current crisis has to involve the banking debts being spread between Ireland, the ECB and the European banks themselves. One option would be a debt for equity swap. This would mean that the creditors would take on the banking debts in exchange for ownership of the banks. An alternative solution would be for the ECB to take over the banking debts itself, with Ireland then recompensing the ECB for part of the total amount at a fxed value per annum over a long time period. A third option is to simply insist that the creditors ( the bondholders ) absorb a portion of the bank debts. This would be appropriate as the creditors themselves must take responsibility for their own reckless lending.
"TASC is particularly concerned at the decision to include NPRF funds in the deal. By removing the possibility of using the NPRF to fund strategic investments, the agreement concluded between the Government and the IMF-EU effectively shuts the door to economic recovery in the next few years", Ms Clancy said.
TASC's analysis of the implications of the EU-IMF deal is summarised below.
Shutting the door to recovery
The EU-IMF agreement with Ireland is not a bailout for Irish taxpayers. It is a bailout for the banks and other institutions that lent to the Irish banking system, so as to prevent those banks taking losses on their loans.The decision to use the National Pension Reserve Fund to run down part of the debt will preclude the State from engaging in targeted growth enhancing stimulus measures and increases the likelihood of a prolonged period of economic stagnation.TASC notes that, by extending the deficit reduction target to 2015, the EU-IMF have implicitly accepted that the proposed austerity measures will dampen the economic growth needed to create jobs, increase tax revenue and reduce the deficit.The EU has already downgraded Ireland's growth prospects for 2011 to 0.9 per cent. This is just days after the Government forecasted a growth rate of 1.75 per cent and implies that the 2014 deficit targets are almost certain not to be met.The Bank recapitalisation is a strong signal that a debt-for-equity swap will not be forthcoming. This is because all of the recapitalisation money would subsequently be lost under a debt for equity swap.The decision not to require the senior bondholders to pay some of the price for their reckless lending has created a moral hazard whereby banks now know they can lend as recklessly as they wish until 2013 without suffering any consequences for their actions.Low income and vulnerable groups will pay the highest price
The agreement concluded between Ireland and the EU-IMF does not reflect European Union requirements to eliminate inequality and combat social exclusion, nor does it reference the objectives contained in Ireland's own National Action Plan for Social Inclusion.The proposed cut in the Minimum Wage and other negotiated minimum rates of pay, included in the Government's four year plan endorsed by the IMF-EU, together with a likely reduction in social welfare rates, will further exacerbate poverty levels. In this regard, TASC notes the findings of the most recent SILC report which shows that consistent poverty levels increases by 25 per cent in 2009.From an equity point of view, the EU/IMF agreement will inevitably limit spending on social protection and public services, with consequences for vulnerable groups and for the economy as a whole.The absence of a debt restructuring and the high interest rates imposed will lead to higher interest rates in the real economy. This will impact on mortgage holders and on business, will choke off demand and exacerbate the employment crisis. An increase in the at-risk-of-poverty rate will be the end result.Why piling debt upon debt won't work
Beyond a certain threshold, the rate of interest charged simply becomes unsustainable and there is a strong probability that the announced 5.83 per cent rate falls within the category of unsustainable.The scale of the Irish banking debt crisis is so large that it can only be resolved at the European level. Ireland does not have the financial resources to deal with the crisis.The four - year austerity plan, and the inability to source funds for targeted investment due to the loss of the NPRF, will ensure that Ireland follows a path of stagnation.The interest rate charged, and the refusal by the ECB to countenance a debt write-down, will lead to an annual level of debt interest repayments between €8 billion and €10 billion per year. This is unsustainable given the projected low growth rates and will choke off investment in the economy.The losses in the banking system will continue to grow as the personal debt/mortgage crisis worsens in 2011 and beyond. These increased losses may lead to more funding requirements for the banks, which in turn will lead to even higher interest repayments, which will choke off investment even further.In the absence of a different approach, a banking default and eventually a sovereign default must be considered probable.There is a way out
Further lending will not by itself solve Ireland's problem: There needs to be a renegotiation of the agreement.It is essential that the bank liabilities and the sovereign liabilities be separated.A bank resolution scheme should be enacted as soon as possible.Instead of proceeding with an agreement which will fail in its own terms, the debt should be split three ways between the Irish state, the ECB and the creditor institutions: part of the debt should be written down and part of the debt should be taken over by the ECB.The key difficulty associated with forcing the senior bondholders to share some of the burden is that the potential risk of contagion throughout the eurozone associated with such a shock are genuine. However, even if the European Central Bank is correct on its view that senior bondholders must be protected to prevent contagion; the onus must be on the ECB itself to effect a genuine 'bailout' of Ireland, by taking on a portion of the banking debt.The ECB can fund this strategy by placing a tax on European banks. The revenues generated in this way would be used to support a facility capable of responding to future banking crises.An alternative option would be to pursue a debt for equity swap mechanism. If such a mechanism is pursued the Government must take care to ensure a functioning credit system is retained. This may imply that a good bank be set up to take over the existing branch network and keep the payment systems functioning. This could be done with a portion of the money in the National Pension Reserve Fund. The remaining portion of the NPRF should be used to support an investment strategy for growing the economy. The markets will not respond favourably to Ireland unless there is a demonstrable and credible growth strategy.There are routes out of this crisis. But they are all premised on renegotiating the EU-IMF package in the interests of the Irish people and the economy on which we all depend.
TASC launched its proposals for Budget 2011, Investing in Recovery, Jobs, Equality, on October 14th. The full document is available here, and the Executive Summary is available here.
If you would like more information, please contact TASC's Research and Policy Team at 01-6169050 or email contact@tascnet.ie
"This is not a good deal for Ireland and it is not a bailout for Ireland. It is a bailout for the European banking system by the Irish taxpayer. Responsibility for the crisis does not lie at the door of ordinary Irish people, but at the door of Irish and European policymakers, particularly the ECB, which created the conditions that have created the current problem.
"Private institutions - both those in Ireland, and those lending to Irish financial institutions - fuelled the boom through their reckless lending and it is entirely appropriate that they take responsibility for the ramifications of their failed lending decisions.
"The deal is inequitable, won't work and will either lead to a sovereign default or will condemn the Irish people to a prolonged period of economic stagnation. It is in the interest of the Irish people that the deal be re-negotiated on more favourable terms, including a write-down of at least 50 per cent of the banking debt. This is crucial to economic recovery. "The burden of the current crisis is bigger than Ireland can manage and can only be solved at European level. There are currently proposals at the EU level for creditors on loans issued after 2013 to absorb some of the losses on severe bank debts. This is an acknowledgment that sovereign countries should not be responsible for the entirety of losses in the banking sector.
"The solution to the current crisis has to involve the banking debts being spread between Ireland, the ECB and the European banks themselves. One option would be a debt for equity swap. This would mean that the creditors would take on the banking debts in exchange for ownership of the banks. An alternative solution would be for the ECB to take over the banking debts itself, with Ireland then recompensing the ECB for part of the total amount at a fxed value per annum over a long time period. A third option is to simply insist that the creditors ( the bondholders ) absorb a portion of the bank debts. This would be appropriate as the creditors themselves must take responsibility for their own reckless lending.
"TASC is particularly concerned at the decision to include NPRF funds in the deal. By removing the possibility of using the NPRF to fund strategic investments, the agreement concluded between the Government and the IMF-EU effectively shuts the door to economic recovery in the next few years", Ms Clancy said.
TASC's analysis of the implications of the EU-IMF deal is summarised below.
Shutting the door to recovery
The EU-IMF agreement with Ireland is not a bailout for Irish taxpayers. It is a bailout for the banks and other institutions that lent to the Irish banking system, so as to prevent those banks taking losses on their loans.The decision to use the National Pension Reserve Fund to run down part of the debt will preclude the State from engaging in targeted growth enhancing stimulus measures and increases the likelihood of a prolonged period of economic stagnation.TASC notes that, by extending the deficit reduction target to 2015, the EU-IMF have implicitly accepted that the proposed austerity measures will dampen the economic growth needed to create jobs, increase tax revenue and reduce the deficit.The EU has already downgraded Ireland's growth prospects for 2011 to 0.9 per cent. This is just days after the Government forecasted a growth rate of 1.75 per cent and implies that the 2014 deficit targets are almost certain not to be met.The Bank recapitalisation is a strong signal that a debt-for-equity swap will not be forthcoming. This is because all of the recapitalisation money would subsequently be lost under a debt for equity swap.The decision not to require the senior bondholders to pay some of the price for their reckless lending has created a moral hazard whereby banks now know they can lend as recklessly as they wish until 2013 without suffering any consequences for their actions.Low income and vulnerable groups will pay the highest price
The agreement concluded between Ireland and the EU-IMF does not reflect European Union requirements to eliminate inequality and combat social exclusion, nor does it reference the objectives contained in Ireland's own National Action Plan for Social Inclusion.The proposed cut in the Minimum Wage and other negotiated minimum rates of pay, included in the Government's four year plan endorsed by the IMF-EU, together with a likely reduction in social welfare rates, will further exacerbate poverty levels. In this regard, TASC notes the findings of the most recent SILC report which shows that consistent poverty levels increases by 25 per cent in 2009.From an equity point of view, the EU/IMF agreement will inevitably limit spending on social protection and public services, with consequences for vulnerable groups and for the economy as a whole.The absence of a debt restructuring and the high interest rates imposed will lead to higher interest rates in the real economy. This will impact on mortgage holders and on business, will choke off demand and exacerbate the employment crisis. An increase in the at-risk-of-poverty rate will be the end result.Why piling debt upon debt won't work
Beyond a certain threshold, the rate of interest charged simply becomes unsustainable and there is a strong probability that the announced 5.83 per cent rate falls within the category of unsustainable.The scale of the Irish banking debt crisis is so large that it can only be resolved at the European level. Ireland does not have the financial resources to deal with the crisis.The four - year austerity plan, and the inability to source funds for targeted investment due to the loss of the NPRF, will ensure that Ireland follows a path of stagnation.The interest rate charged, and the refusal by the ECB to countenance a debt write-down, will lead to an annual level of debt interest repayments between €8 billion and €10 billion per year. This is unsustainable given the projected low growth rates and will choke off investment in the economy.The losses in the banking system will continue to grow as the personal debt/mortgage crisis worsens in 2011 and beyond. These increased losses may lead to more funding requirements for the banks, which in turn will lead to even higher interest repayments, which will choke off investment even further.In the absence of a different approach, a banking default and eventually a sovereign default must be considered probable.There is a way out
Further lending will not by itself solve Ireland's problem: There needs to be a renegotiation of the agreement.It is essential that the bank liabilities and the sovereign liabilities be separated.A bank resolution scheme should be enacted as soon as possible.Instead of proceeding with an agreement which will fail in its own terms, the debt should be split three ways between the Irish state, the ECB and the creditor institutions: part of the debt should be written down and part of the debt should be taken over by the ECB.The key difficulty associated with forcing the senior bondholders to share some of the burden is that the potential risk of contagion throughout the eurozone associated with such a shock are genuine. However, even if the European Central Bank is correct on its view that senior bondholders must be protected to prevent contagion; the onus must be on the ECB itself to effect a genuine 'bailout' of Ireland, by taking on a portion of the banking debt.The ECB can fund this strategy by placing a tax on European banks. The revenues generated in this way would be used to support a facility capable of responding to future banking crises.An alternative option would be to pursue a debt for equity swap mechanism. If such a mechanism is pursued the Government must take care to ensure a functioning credit system is retained. This may imply that a good bank be set up to take over the existing branch network and keep the payment systems functioning. This could be done with a portion of the money in the National Pension Reserve Fund. The remaining portion of the NPRF should be used to support an investment strategy for growing the economy. The markets will not respond favourably to Ireland unless there is a demonstrable and credible growth strategy.There are routes out of this crisis. But they are all premised on renegotiating the EU-IMF package in the interests of the Irish people and the economy on which we all depend.
TASC launched its proposals for Budget 2011, Investing in Recovery, Jobs, Equality, on October 14th. The full document is available here, and the Executive Summary is available here.
If you would like more information, please contact TASC's Research and Policy Team at 01-6169050 or email contact@tascnet.ie
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