Deal on bank debt may ease Eurosceptic momentum

The year 2008 proved to be a landmark in Europe’s economic meltdown, a year in which policy makers began to realise the true losses on loans advanced by banks across peripheral Europe. September 30th, also known as “Black Monday” to the Irish population, proved to be a day of disaster.

When the Irish government gave a blank cheque to the Irish banking sector, by providing a limitless guarantee on bank deposits and losses on loans, the unfortunate citizens of Ireland were in no doubt that they would have to pay heavily in the pocket for a naïve policy error in their government’s economic judgement. “Black Monday” paved the way for austerity to being the only economic policy in town by which Ireland’s economic affairs could be managed.

The loan losses of the six Irish banks were realised in September 2010, at a tear-inducing €135 billion, a figure deemed by the amount owed by six Irish commercial banks to the ECB at the time that the Troika took control of Irish economic affairs. GDP for 2009 was approximately €166 billion!

It is for this reason that Ireland has been placed under the wrath of draconian economic decision making, hindering growth, employment and voter sentiment, with comparatively Eurosceptic candidates winning six out of 11 European Parliament seats in the recent elections.

A crucial aspect of the increasingly sceptical sentiment which I have described above has been the advancement of €31 billion worth of credit to Anglo Irish Bank by the Central Bank of Ireland (and thus the ECB), which was used to cover the losses of senior bond holders in a bank which had set the trend in Ireland of loosely regulated banking operations. This was done through the creation of a series of promissory notes, only made possible by collaboration between the Irish Central Bank, the ECB and European Commission.

A heavy majority of Irish pundits, both left and right of centre, as well as the centre itself, are unanimous in describing this debt placed among the Irish people as wrong and unjustifiable, as it served to bail out private speculators. Indeed, both the state and supranational authorities intervened to prevent Anglo Irish Bank bondholders from bearing the consequences of very risky business. Indeed it is actions similar to these which have left voters on the periphery of Europe with a sour taste in their mouths. Incidentally, if economic circumstances were more normal in Europe, and the sequence of “Black Swan” events of 2008 onwards had not occurred, I don’t personally think that there would be much fussing over European integration and the European Project more generally.

The most recent plenary session of the European Parliament in Strasbourg demonstrated hope for countries plagued by a principle of public accountability for private losses, with Jean Claude Juncker, the new Commission President elect, discussing in detail, the use of the Eurozone’s new rescue fund, the European Stability Mechanism, to ease the burden on countries who have been left with a legacy debt. This is about as great news can get for disgruntled voters in countries like Ireland, Spain and Portugal.

While this may come as surprise for many, with little evidence of any commitment by former Commission President, José Manuel Barroso, a centre-right counterpart of Juncker, it has become increasingly clear that much a of the bargaining for this possible deal has been done behind closed doors.

Many have forgotten the news that the Promissory Notes, explained above, were replaced with what were known as sovereign bonds, late last year, whereby payment periods for Ireland’s debts were essentially restructured to a lower interest rate, with a longer payoff period. This was highly criticised by many, including myself, as a deal of lip service rather than real action.

What is becoming increasingly clear, however, is that this deal may be only part of an agenda setting process, which will bring the burden on bank debt down over time. After all, if debt write-downs happened in a quick and sudden fashion, both the European Commission and the ECB would lose an unimaginable amount of credibility. This would be a far more fearful prospect than electoral gains for the far left and right in European parliament elections.

It does not take a world class electoral analyst to realise that, if the ESM was to be used in such a fashion, it would greatly ease the pain on European taxpayers, and bring the wave of support for Eurosceptic ideologies to a sudden halt.

Given the vast sums of financial assistance involved with the ESM, it is not irrational to suggest that symptoms of political disenchantment, such as opposition to immigration and economic integration might suddenly disappear, particularly with strong evidence to show that both of these factors have positive, not negative effects on economic growth! You will have to search far and wide to find a credited economist who thinks otherwise.

While this deal is only a possibility, President Juncker’s words should not be forgotten. With political change being a notoriously slow variable, this might be the first clip of news which disenfranchised European voters are waiting for, in a series of pain relieving policies, benefitting Europe’s most indebted countries.

This is all assuming that our new Commission President remains consistent to his rhetoric. And people who follow politics closely will know that this could be a big if.

In any case, all those with a European interest should watch this space closely. Retrospective Recapitalisation may prove to be the method by which redistribution between Member States finally becomes real.

The European Union might just be becoming more social. Whether one should like this or not is subject for another debat.

By Kevin O’Donohoe

Tags: , , , , , ,

Categories: Europe

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