The Default! Our zombie economy.

February 6, 2011

The question is no longer whether Ireland will default, but when. In order to understand this better, its useful to understand why Ireland will default. In understanding why we’ll default, we may see remedies that need to be applied to avoid the inevitable.

Colm McCarthy in Sunday Independent, Feb 6, p 29, looking at our economy, makes the following observations:

a) IMF/EU will furnish Ireland with €67.5 bn over the next three years. ‘The amount offered will be just enough to finance the huge budget deficits planned under the FF four year plan, the recapitalisation of our bust banks and the refinancing of various debts as they fall due.

McCarthy has been outfoxed by the IMF/EU dealers. Contrary to what McCarthy implies, the bailout was less about financing our budget deficit, than it was about ‘recapitalisation of our bust banks and the refinancing of various debts as they fall due’ http://bit.ly/g5e3ks It’s our bailout trojan horse, money given to us to pay back German bondholders, not save the Irish economy!

Government here could have mounted a programme of default/restructuring based on burning senior bondholders, guaranteeing future bonds to help with the bringing down of the budget deficit while removing the state guarantee covering previous senior bondholder bonds. The bailout is our Ein Danaergeschenk (fatal gift) missile that will wreak our economy. Its not a bailout, but a time bomb.

Later McCarthy notes of ‘the €15bn left in the NPRF, €10 bn has been earmarked for bank recapitalisation.

McCarthy who was chair of  ‘An Bord Snip Nua’ compares public sector rates of pay in Ireland 20 – 30% to equivalent rates in  UK and Europe obviously takes the line that penal austerity for Ireland undertaken in as short a time frame as possible, is what Ireland requires to reset its economy. This along with paying down bank debt and IMF/EU interest rate expenditure.

The question is, is he right?  He doesn’t challenge his own assumption that it is possible we will not default if we accept the EU/IMF bailout measures.

The problem with McCarthy’s analysis is that he fails to take account of the real problem facing Ireland, this is bank debt and its devastating effects on our economy.

At least among some members of FG and Labour and SF, there is agreement on the need to renegotiate our banking debt.

http://www.ft.com/cms/s/0/b803093e-2eba-11e0-9877-00144feabdc0.html#ixzz1DBsfTtRx

“Ireland has already imposed haircuts on subordinated debt holders at Irish banks. But Fine Gael and Labour want to impose losses on the estimated €18.5bn in senior bank debt not covered by a government guarantee. About €3.5bn of that matures in the first quarter of 2011, before any incoming government takes its place.

Bankers said any move that reduced the cost of the bank bail-out should take pressure off the sovereign rating, which S&P downgraded on Wednesday.

S&P cut Ireland’s sovereign debt rating from A/A-1 to A-/A-2, “reflecting our view of the uncertainties surrounding the size of Ireland’s additional capital needs for its largely state-owned financial sector”.”

Lets examine the argument reduction of the government deficit through a programme of fiscal austerity will allow us to pay back bank debt and jump start economic activity in Ireland.

Let’s ignore government propaganda that ‘corners are being turned’, exports are increasing. Re exports increasing these exports are in a large part due to multinational exports. Such exports provide little in the way of employment generation and arguably are composed of financial engineering for the purpose of Corporate Tax transfers that make such figures questionable. This is especially true in the light of recessionary pressures across the world especially in the US and Europe and Asia. But we’ll agree the agri sector is doing well.

Instead lets look at a true barometer of the economic health of Ireland, employment levels. If you disagree with this measure, reflect on the healthy exports from Ireland during the famine years from which the minority of rich benefited, compared to the devastation caused by the famine to the many. Similar to our situation of today when you take into account the contribution to our exports by the multinationals.

http://bit.ly/ewZO2U

Rate of unemployment, 3rd quarter of 2007 to third quarter of 2010  has seen an unprecedented increase in unemployment in Ireland to levels,  last experienced in third quarter of 2000.

And unemployment rates are increasing. With penal, austerity cutbacks now hitting pay packets, the retail sector and service industry in Ireland will be further hit.

So, as the impact of emigration, falling salaries, higher taxes, higher unemployment levels, meet with odious debt levels created by the banks, EU/IMF bailout costs, a tsunami of debt fueled deflation increasing pressure on citizens including  a cohort of citizens on existing mortgage holders fighting personal debt and higher costs, the debt deflationary spiral of debt payback anorexia begins, with its effects eating into the muscle of the Irish economy.

The Irish economy has begun to eat itself. Business in the service industry and retail reduce their costs and jobs are lost and profit margins wither. Meanwhile the taxation burden on the remainder increase beyond the capacity of the burden to be endured..

At the other end of the scale, the costs of recapitalisation of the banks increases with outflows of savings and deposits. Much of the lending of the banks that is not considered toxic is based on property at  cryogenically frozen values with ‘upward only rent reviews’ that further wither business and add to unemployment levels. The more the banks face up to the reality of their losses, the more those losses increase. So taxpayers are on the hook to maintain a fantasy economy

In an unprecedented way, a vampire octopus with tentacles reaching out from senior bondholders guaranteed profit and insurance from loss, developers with toxic loan portfolios funded by taxpayers through NAMA, government policy on the banks led by blindness and disarray, has pillaged the Irish economy and turned citizens into a state of bondage held in place by the ECB and government. The phrase ‘moral hazard’ has gone out of circulation.

Central to the Irish economy is the citizen, the centre under a structure of present banking policy protecting bankers and bondholders at the expense of citizens, cannot hold.

Default is inevitable. We must consider the closure of Irish banks as no longer an option, but a necessity, to avoid further damage.

There is some money left in the economy in the National Pension Reserve Fund. We can either squander this money on the banks pouring more money into the black hole, or we can use this money to buffer a structured default by closing our zombie banks, Anglo, Allied Irish Bank and possibly BOI, and negotiate a full default package with senior bondholders. We do not have to recapitalise banks with €10 bn from the NPRF as McCarthy suggests. The EU/IMF want them recapitalised in order that they be in a fit condition to pay back German senior bondholders. We should let them go.

The argument for this is that if we do not default now, this will inevitably happen in the future, but costs will be far higher.

The problem is our politicians have lost grip on the real economic realities of our current situation. Instead of cool headed leadership, we have instead a bunch of headless chickens spouting nonsense about generating sustainable employment, when the ship is sinking right before our very eyes.

Technically deflation is http://en.wikipedia.org/wiki/Deflation

“In economicsdeflation is a decrease in the general price level of goods and services.[1] Deflation occurs when the annual inflation rate falls below 0% (a negative inflation rate). This should not be confused with disinflation, a slow-down in the inflation rate (i.e. when inflation declines to lower levels).[2] Inflation reduces the real value of money over time; conversely, deflation increases the real value of money – the currency of a national or regional economy. This allows one to buy more goods with the same amount of money over time.”

http://www.rte.ie/news/2011/0131/economy1.html

Central Bank says GNP is in the negative -0.3%  This is deflation ready to spiral out of control.

We need to manage our default before it further destroys the economic base of our economy!

End

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