Contracts to pay for the debt of another are where a creditor loans money to a principal debtor and another party, a secondary debtor, undertakes to be responsible for the repayment. The Statute of Frauds Act 1695 defines which contracts must be committed to writing and which can be enforced on solely oral evidence. In this case a verbal indemnity can be enforced on own merits but a guarantee must be committed to writing. There are many who may wish the government guarantee given on the night of September 2008 was given only in verbal form.
My last post was about Brian Lenihan and the tragic echo of unfulfilled promise ala Camelot / Kennedy. The loss manifests in what might have been earlier as much as what might have been later in the sense that his time at the wheel came when the ship was already headed for the rocks.
His period at the helm of Ireland’s finances was possibly the most turbulent any Minister has had to face since independence and must have been especially so for a new Minister only in his brief a matter of weeks when the crisis hit. One cannot help but wonder what might have been had Bertie got over his own issues and recognised talent earlier, and had Brian’s undoubted ability at the cabinet table in the preceding years.
Unfortunately the period will be remembered probably for a series of fairly cataclysmic events running roughly from the guarantee up to the week the IMF landed and including the austerity budgets in between. The full story of those weeks, months, years has yet to be written and it may be many moons before we find out what really went on behind the scenes through that time, if ever. Yet some revelations have emerged into public discourse already such as in Brian’s own BBC interview and in Morgan Kelly’s recent Irish Times piece. I was surprised having coffee with some colleagues recently that these more recent revelations did not seem to have pervaded public consciousness to the extent that I might have expected.
The basic facts are clear. A guarantee was extended in 2009 to cover banking debt, this increased the national debt, along with rapid deterioration in the public finances this created twin pillars of economic and banking crises which proved insoluble in national isolation. Enter the IMF to replace the bond markets along with a programme of austerity agreed in conjunction with the EU and we are where we are.
That much, I believe is understood and uncontested. What is less clear is how, who, why the various events unfolded as they did.
The crisis in the public finances I believe could have been corrected by the austerity budgets. That particular cycle had happened before and may happen again. It was the banking crisis that really did the damage. The banking guarantee appears in hindsight to have been a mistake, yet who is to say what would have happened in the alternative, whether the banking system and perhaps the entire economy collapsed literally overnight? Could a single bank (Anglo) been allowed go to the wall, as effectively happened with Lehman brothers in the states previously. It is intuitively attractive to suggest that it could, yet it seems the prevailing argument against was really one of Euro Zone stability, rather or at least more so, than any vested local interest. Brian Lenihan in an interview for FrontLine in the early days of the crisis repeatedly stressed that no European bank had failed in the post war ear and it wouldn’t start here now. It is possible there was an element of pride in this, that Ireland would not be the one to let the side down. It is also possible and quite probable that the EU were strong arming the position and no bank would be allowed to fail without a flood of punitive consequences for the errant nation. It is also the case that despite the scornful commentary since, the weight of economic opinion at the time was divided on the issue with later critics such as McWilliams at the time calling for such a solution. In fact on the night the guarantee was voted through the Dáil, it was supported by all parties, except Labour who alone opposed. In fact, while it seems ironic now, I remember a Fine Gael friend saying to to me at the time “Labour will pay for this” (for opposing the guarauntee) . And yet one can’t help feel Labour opposed merely because they could as they grand standed on so many other issues in opposition. And of course FG swept home to a huge election victory despite having supported it.
I will return to this subject again in later posts..
Cui Bono? Two of the greatest words in the english language (apart from free beer) :-). You have got to take your analysis to its logical conclusion re the guarantee and try sniff out the motivations. I would agree it’s certainly looking like the ECB strongarmed us into the guarantee. Now we are being told that 15 major banks failed the stress tests? Have the last two years been about moving losses from the banks onto the soverign? Cui Bono?
Cui Bono indeed Mark. Whilst noone covered themselves in glory through this whole thing, it is at least partly reassuring that local vested interests do not seem to have profited from the sorry saga. It appears to have been European investment vehicles and pension / bond funds that were rescued here and by extension the Euro zone or at least the axis of it around Franco-German interests. At least have not seen any evidence of local Irish business interests particularly benefiting, obviously a few individuals at banking management level scarpered with undeserved bonuses etc which was a scandal in itself, but not one connected with the guarantee, and in terms of the much wider picture it does seem to have been the wider Euro zone interests and European banking funds in particular who took any benefit here.
There is also a theory that having absorbed massive losses from a German bank parked in the middle of the IFSC through the boom (DEPFRA?) the German exchequer was in no mood to ‘go easy’ on Ireland and in fact was determined to make an example of us “for our sins”..
Whats your own view on it all?
There are of course rumors of certain well placed individuals seen ‘walking the corridors’ of Leinster House on the night. I suspect there is a story there for us locals.
Bigger picture? Follow the money as they say in the films. Private banks are having their losses absorbed by governments. These in turn having to fund these (currently) through loans which are being made availlable with strings attached shall we say.
One way to look at it is throught the lender-of-last-resort lens. In this scenario to protect the banking system the ECB simply will not let a bank fail, and in true central bank style uses our earnings (future and current) through bonds to do it.I think a lot of people could follow that reasoning.
Of course it’s not the way I see it. Capitalism needs success and failure. At some point these losses will have to be materialized (or inflated away but thats another story). without the failure part what happens? Look at Greece. It will have it’s state gutted and poverty forced on it citizens. Irrespoinsible borrowers need irresponsible lenders.
Because ‘we’ (our economic production as people) are really the ‘asset’ the ECB uses to raise money, ‘we’ now become a big part of game, and when dealing with human beings anything can happen. Look at 20’s/30’s and the rise of Fascism. It’s that kind of game.
Marks correct,
It is that type of game. Politics and finance intermingling to the extent that what is politically correct for France and Germany is not financially correct decision making for the rest of the eurozone.
The cultural aversion of German voters to inflation and debt management stems back to the treaty of Versaille and its consequences for the Weimar republic.
The financial solution now to eurozone difficulties are inflation, quantitative easing and negotiated partial writeoff coupled to rstructuring/loan lengthening on the entirety of the eurozone debt. It is the entire ECB/ eurozone not just Ireland , Greece et al which are now technically insolvent.
Political concerns mean that politicians cling to the prospect of a more politically palatable but less financiallly realistic posible solution involving austerity, denial, can kicking and hope.
I blogged about this idea of the “lessons of Versailles” and discussed it with a couple of FF TDs more than a year ago.
Failure to grasp the financial nettle in a business like fashion pushes other countries perhaps now even Ireland closer to poverty and political turmoil.
It may not be too late for Ireland to avoid a decade of austerity IF the new administration can screw their courage to the mast of negotiated default dressed up as restructuring if the ECB helps by allowing our little boat to float on a new wave of currency devalaution. If the germans steadfastly refuse to devalue the euro we should seriously consider a sterling tied PUNT NUA.
At the risk of it turning into a love in Des you have a one sentence solution right there.
“The financial solution now to eurozone difficulties are inflation, quantitative easing and negotiated partial writeoff coupled to rstructuring/loan lengthening on the entirety of the eurozone debt. It is the entire ECB/ eurozone not just Ireland , Greece et al which are now technically insolvent.”
I’d add in Eurobonds to the mix, with 20 year maturities. Swap them out for existing debt.
I can’t see why we aren’t here yet. I have my suspicions though. I am particularly interested in inflation as a weapon here as well.
It took me a good long while to dig this back out, had almost forgotten about it. Very interesting on the power relationships among the players.
http://www.irishtimes.com/newspaper/opinion/2011/0507/1224296372123.html
“Back when the euro was being planned in the mid-1990s, it never occurred to anyone that cautious, stodgy banks like AIB and Bank of Ireland, run by faintly dim former rugby players, could ever borrow tens of billions overseas, and lose it all on dodgy property loans.”
The John the baptist figure who rolls into town intermittently, ringing the doombell before retreating back to his dusty prefab out in Belfield- good old Morgan gets it right again I think!
John the Baptist is an interesting metaphor.. They were looking for first born sons that time if I remember rightly..Is this the new planned FG tax?!
That piece is very interesting. It’s the piece I mentioned in the original post. Ironically I feel in a way it vindicates Lenihan or at least casts his actions in a more favourable light. Bit of a game of midnight poker and the deeds are in the pot. Honahan as the double dealer and the EU the devil.
By the way I agree with both your comments on “the way out”. Curiously I was less concerned with the guarauntee / banking debt when it first came on the radar as I was convinced Europe would underwrite a deal to ‘restructure’ the debt. My catch cry at the time was “It’s paper money”. Half in jest, whole in earnest. The ECB is a currency issuer. Quantative easing was my preferred solution. It is increasingly concerning how unimaginative they seem to be.
I’ve said it before Jim. History will be a lot kinder to Brian.
ECB is a four lettter word in my house. Remember these lads will put interest rates up next month. QE is a solution of sorts alright and if they are running the show pretty much the only bullet left in the gun.
I’m gonna say a horrible thing now, stagflation.