Chapter 73 TROUBLE IN THE EUROZONE
don’t know what the ECB is up to, but if the politicians and Eurocrats don’t
move fast we’ll be in trouble.’
‘We’re in the Eurozone, what difference will it make.’
‘If it goes down we go down with it! Look at Greek bonds, not far off twenty
percent at the moment! Imagine twenty percent interest on a mortgage!’
‘I don’t have a mortgage.’
‘The trouble with you Pat is you’re not much of an economist…or a banker for
that matter.’
Kennedy sniffed and looked at his feet. That was unfair.
‘It’s Creditanstalt all over again.’
Kennedy perked up, that sounded German, the continent, his field of delectation.
‘I don’t remember that.’
‘You wouldn’t Pat, it happened it 1931.
‘Oh.’
‘Yes, in 1931, a one of your Dutch banks wrote a letter to Creditanstalt, then
Austria’s largest bank, raising its monthly interest rate. The bank instead of
accepting the new rate paid off its loan. The problem was reducing its liquidities
was a mistake, because just three months later it was in trouble again after
absorbing several smaller banks that were having difficulties. A rescue plan was
put together by the central bank, but it was too late to stop a run on the bank. To
cut a long story short Creditanstalt went under. That got the Austrian government
in trouble, then Germany, followed by an attack on sterling and a run on the dollar.
In a nutshell, all of that contributed to the rise of Hitler, and made the depression
even worse.’
‘Sounds like HBOS. A chain reaction,’ Kennedy said trying to sound more
knowledgeable.
‘Right Pat. Austria’s economy had never recovered from the First World War. Its
industry was run-down and it was burdened with huge debt.’
‘Sounds familiar.’
‘Yes, that’s exactly the situation we’re facing today. As far as Ireland is
I
concerned it started with Allied Irish pulling down the whole country. Now there’s
Greece and Portugal, not to forget Spain. On top of that Angela Merkel’s dragging
her feet with a rescue plan.’
‘…with Dublin and the others looking on and wondering what’s coming next.’
‘There’s the making of a real fuck-up,’ said Fitzwilliams uncharacteristically
cursing.
‘Jesus, what would happen if feckin Greece defaulted?’
‘Well Pat, I suppose the Greek banks would go bust and would be nationalized. If
it is forced to quit the euro then its new money ― drachmas or whatever ― would
be worth less than half the euro. That would mean disaster for every Greek.’
‘…revolution?’
‘Or a coup d’état.’
‘…and those who held Greek debt?’
‘To the knackers’ yard,’ he laughed. ‘Ireland and Portugal following suit. As for
us banks, both British and European, it would be a rout with nationalizations across
the board.’
‘That bad?’
‘I’m afraid so.’
‘So what would happen…I mean to the financial system?’
‘Printing presses and hyperinflation.’
‘Is Cyprus Greek?’
‘Why do you ask that Pat?’
‘Well a lot of Russians have money there.
‘No, it’s a different country.’
A couple of days later an ECB team headed for Dublin. Brussels’ shock troops,
armed with computers and spread sheets, were about to invest the besieged Central
Bank of Ireland and present their terms for a humiliating bailout. The Irish
government and the directors at Banc Ceannais na hÉireann urgently assessed the
cost of the concessions they would be forced to make for the rescue plan, bailout,
or whatever they liked to call it.
After the cost of borrowing on the market had spiralled out of control, Ireland had
been forced to turn to the ECB for one hundred and thirty billion euros to cover
bank losses, government debt and budget shortfalls. The bailout would cover the
state’s borrowing needs with a fixed rate of interest, but give the lenders the right
to intervene in all matters relating to Ireland’s economic policies. Failure to respect
the conditions would mean default and ruin for the country.
The imposed austerity programme would mean public pensions cuts, welfare
reductions, slashing government jobs, privatisation of state owned assets, cuts in
capital spending, increases in VAT, increases in excise duties, a widening of the
property tax base and a luxury goods tax.
The Irish were humiliated, their country’s sovereignty thwarted, by what they saw
as a German bailout, with a few mortifying shillings thrown in by the British
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chancellor. They had ridden a tiger, even named it their own Celtic Tiger, but like
the monkey who rode the tiger they ended up as the beast’s diner.
Not only would the banks and high flyers pay the price, many thousands of public
sector workers, including teachers, police and nurses would face wage cuts or job
losses. They would join those already hard hit, amongst them small business
owners and artisans, men like Tom O’Hara who had built his family run business
supplying the property developers with windows and doors. O’Hara’s went under
with the collapse of the building industry and was left broke, on the dole, owing
the Allied Irish a million euros.
There was no bailout for the small people, the O’Haras and other small
businessmen, or for that matter the hundreds of thousands of homeowners in hock
up to their necks. The Irish people were bitter as they saw the banks bailed out and
they were reminded of their predicament each time they passed by one of the
derelict housing developments estates that dotted the Irish countryside, homes that
would never be sold, a monument to the collective folly of the nation. All and
sundry had been enchanted by the tune of the Pied Piper, who had lured them to
debt, bankruptcy and unemployment.
More sensitive politicians were reminded of Jonathan Swift’s words written in a
pamphlet in 1729. Where he sardonically wrote the impoverished Irish could ease
their economic troubles by selling children as food for rich gentlemen and ladies: ‘I
grant this food may be somewhat dear, and therefore very proper for Landlords,
who as they have already devoured most of the Parents.’ Times had changed and
the landlords had become bankers, whose foolishness and greed was about to thrust
the ordinary people of Ireland into years of misery, unemployment and despair.
Tens of thousands of bright young Irish men and women were queuing up to
leave the country whilst others lingered in the forlorn hope that an Argentinian
style default would wipe out their debts.
First there had been Greece, now Ireland. The price was high, too high. Ireland, a
small country that had won a long bloody struggle for independence against the
British crown, was now facing economic and fiscal governance from Brussels.
Who would be next on the list? Portugal? Spain?
The extent of the crisis could be measured by the sums paid out by the Irish
government, which according to one account was: Anglo Irish thirty seven billion
euros; Allied Irish twenty five billion; Bank of Ireland thirteen billion; TSB seven
billion; Irish Nationwide five billion; Casey Insurance; two billion. On top of that
was one hundred and thirty billion from the ECB, IMF and bilateral loans, plus
twenty billion from the Irish Central Bank. Not counting fifteen billion from direct
tax transfers. The grand total was in the order of two hundred and fifty mind
dizzying billions.
Whatever the figure, it was mind boggling, beyond tragic Brian ‘Biffo’ Cowen
and his government’s comprehension or that of anyone else. Two or three hundred
billion for a country of barely four and a half million souls. Fifty or sixty thousand
euros for every man, woman and child, in a country where the average annual
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wage is in the order of thirty five thousand euros.
The origins of the problem were many: salaries in all sectors of the economy,
both public and private, had spiralled out of control, in the same way as had
property prices. Ireland had been living beyond its means in a world of Neverland
where irrational borrowing had become the norm. Detractors pointed to Brussels
and the euro. The Irish government had implemented a policy of low corporate
taxes, less than half the rate of the UK and Germany, whilst it continued to borrow.
They were warned that without the means to levy taxes or regulate interest rates the
day of reckoning would surely come ― and come it did.
Banks, both Irish and British, had profited from Ireland’s laissez-faire and
untenable policies by consenting to property loans in the Republic, regardless of
long term economic considerations. Ireland had followed the path of its neighbour
Iceland and for the same reasons. As Cowen’s stricken government went into its
death throes, markets turned their heinous eyes towards their next victim ―
Portugal. The laws of nature followed their course with the strong rounding in on
their prey ― the weak.
On the other side of the Irish Sea, as Ireland’s Celtic Tiger was transformed into a
bedraggled gutter cat and banking shares collapsed, British justice was served up to
those responsible for the banking collapse. Fred the Shred, severely condemned for
his management of the Royal Bank of Scotland, was cleared of any wrongdoing.
The shamed banker was free to enjoy his ‘reduced’ £342,500 annual pension after
the bailout of the bank he had headed for eight years.
RBS fared no better than its Irish counterparts, requiring a forty five billion pound
state bailout. It was a logical consequence to a long series of reckless decisions and
its disastrous forty nine billion acquisition of ABN Amro. RBS was effectively
nationalised with the state owning over eighty percent of its shares following it
colossal loss; the largest ever recorded in British banking history.
