With interest rates on Irish bonds hovering around 7%, it is clear that financial markets are increasingly pricing in a high chance of Ireland “going bust”. In this article, socialistparty.net traces the prospects for Irish state insolvency, the deepening economic crisis and the consequences for the workers’ movement.
In recent weeks, the gap between the reality of economic crisis and the pronouncements of government figures have grown ever larger. While the bond markets demonstrate their lack of confidence that the government will pay back its loans, the government announces empty plans to create 300,000 jobs, all the while cutting public sector jobs! Brian Lenihan increasingly cuts a desperate figure, incredibly welcoming the “remarkable turnaround” in the Irish economy, while the figures indicate a continuing recession.
Why insolvency is now a real threat
At the time of writing, the yields on Irish bonds are around 6.8% and the trend (see graphs) is clearly pointing upwards, beyond 7%. At the same time, the annual cost to insure Irish bonds against default rose to a record high of almost €500,000 for every €10 million in debt. Comparisons are increasingly being made with Iceland and Greece as the pressures mount on the financial markets.
While these financial markets are made up of rich speculators and investors, the high interest rates on Irish bonds reflect the real fear that the state will simply be unable to repay its debts. A central reason for the rising possibility of state insolvency is the bailout for the banking sector and in particular the bailout for Anglo Irish Bank.
Standard & Poors, one of the rating agencies that until recently was treated as a God-like institution by the government, estimated that the government will have to spend more than €35 billion of taxpayers’ money to ensure that investors and depositors in Anglo Irish get their money back, while the government has estimated the figure at €29 – €34 billion.
As a result of this and the bailouts for the other major banks, UCD economist Morgan Kelly has estimated that government debt will rise to 140% of GNP by 2012. This is a situation that would be difficult to recover from even in the context of a booming economy, but impossible to recover from in the context of a declining economy.
The reason the bond yields took another sharp jump in the last week of September was because new figures revealed that the economy continued its downward slide.
Is a double-dip recession underway?
On the back of these latest figures, some economists and commentators have begun to talk about a “double-dip recession” for Ireland. If anything, this represents a favourable slant on the figures. A “double-dip” implies that there was growth in between. In fact, while minor growth was registered in the first quarter of 2010, it now appears to have been a blip and the latest figures in reality represent a continuation of the weakening of the Irish economy.
In the second quarter of 2010, GDP contracted by 1.2% and GNP contracted by 0.3%. That means that GNP has now contracted for nine quarters in a row, which compares to an average in the Euro area of four quarters. The depth of the crisis unfolding in Ireland is also demonstrated by the collapse in national income, which is re-inforced by the latest figures. GNP has contracted from its peak by 13.4% in real terms and by 24.1% in nominal terms (not adjusted for inflation).
What would insolvency mean?
The figures again confirm the point that socialists have made – the government’s neo-liberal policies are having a negative effect on economic growth and are contributing to a downward deflationary spiral. This is seen in the figures for personal consumption, which has fallen by 1.6% compared to a year ago.
If the state becomes actually insolvent, as is now a real possibility within months, what will the consequences be? A probable result is that the IMF and EU would step in to provide emergency funding (as in the case of Greece). Such funding would come with massive strings attached. These strings would involve the implementation of harsh neo-liberal measures along the lines of the “Structural Adjustment Programmes” applied in Latin American countries. The wholesale privatisation of the remaining state owned companies would be demanded, together with deeper cuts in public services and harsher attacks on public sector workers and workers’ rights generally.
Despite their public proclamations that all is well, the key figures in the economic and political establishment in Ireland are aware of the growing difficulties they face. A limited renegotiation of a small portion of the Anglo debt with those investors not covered by the guarantee will be attempted. However, that will not come close to fixing the fundamental weaknesses and avoiding the danger of insolvency. Therefore, an intensification of the neo-liberal policies that resulted in this situation is likely, regardless of which establishment parties are in power at the time of the next budget.
Colm McCarthy’s response as the designated hatchet man of the establishment in Ireland was predictable. He declared (writing in the Sunday Business Post 26/9/10) that “It would be desirable if longer-term commitments, stretching to 2014, could be outlined, including further pruning of the capital budget, measures to restrain the cost of public sector pensions and measures to broaden the tax base.”
What this means is that the idea that “the worst is over” and that we had taken the necessary bad medicine was a lie – and that in fact many further assaults will be implemented.
One will be an attempt to sell-off valuable state assets like Bord Gáis in order to quickly raise funds as well as “gaining confidence” in the international markets through a clear neo-liberal approach. Another will be a further attack on vital public services – with more cutbacks in funding to healthcare, education and social welfare. The €3 billion that was previously spoken about as the amount of cuts to be implemented in December’s budget is now likely to be revised upwards in an effort to “satisfy” the markets. As part of that, public sector workers are again likely to come under attack.
The alternative to the rule of the bondholders
What should the response of the workers’ movement be to the real prospect of bankruptcy of the Irish state and the consequent attacks on workers? It should definitely not echo the arguments of the government, as Jack O’Connor, President of ICTU, did recently in an article in the Union Post when he declared that the bondholders “successfully extracted the last cent in terms of interest premium in the confident knowledge that our economy is well capable of honouring the debt.” It is necessary to face up to the reality that right-wing economic policies have resulted in a disastrous economic situation where insolvency is a real prospect.
Acknowledging that reality does not mean bowing down before these bond markets – it means they must be tackled head on, rather than attempting to placate them. Their rule and power must be rejected and policies implemented that are in the interests of the majority rather than a small number of rich bond holders. Contrary to the idea that “there is no alternative” which is promoted by the government and media, there is a realistic alternative. The reason they don’t talk about it is that it involves challenging the rule of profit in Irish society and taking the wealth out of the hands of the minority who currently control it.
Concretely, what that means is that the banks and hedge funds who have invested in Anglo Irish, regardless of whether they invested before or after the guarantee was granted in September 2008, should take their losses. More generally, if the state is faced with bankruptcy, bondholders should be “burnt”, with the government refusing to pay its debt to international speculators and hedge funds, rather than making working people pay.
Instead of implementing further cuts that deepen the downward economic spiral, the cuts should be reversed and policies should be implemented to get people back to work and develop sustainable economic growth. A massive public infrastructural programme could provide work for the 100,000 builders currently on the dole. A cut in the working week to 35 hours with no loss of pay would create 165,000 jobs, by sharing out the work.
A wealth tax on the €75 billion made by the top 1% of society during the Celtic Tiger would generate significant funds. Instead of selling off valuable state assets in order to raise short-term funds, the banks and the key sectors in the economy, including the natural resources like the Corrib gas and oil field, should be nationalised under democratic workers’ control and management, with compensation only on the basis of proven need.
In that way, credit could be provided to small businesses and where people face difficulty in paying mortgages, the principals and interest rates on mortgages could be renegotiated and an economic plan could be democratically constructed to engender a sustainable recovery.
In the short to medium term, these policies would avoid bankruptcy and avoid the state having to go onto the international markets to borrow. However, it is not possible to build a self-sufficient economy in Ireland alone. That is why implicit in the eurozone crisis is the need for a European wide struggle. That struggle is a common struggle against the austerity measures and the rule of the financial markets, IMF and EU. In addition, it must be a struggle for a socialist federation of Europe, where policies based on democratically planning the economies of Europe for people’s needs would mean that co-operation and assistance, including funding where necessary, could be provided for different countries on a co-operative basis.