2008–2010 Irish financial crisis

[Gero]

I was hoping to view a Mises Daily on this subject. Lacking one, here is my analysis:

Ireland applied November 21, 2010 for an EU-IMF loan. Ireland, previously known as the Celtic Tiger for its seemingly strong economy, has been and is now shown to be a paper tiger.

Ireland’s economic problems seem to be mostly, if not wholly, self-inflicted.

Irish banks borrowed much cheap money after joining the eurozone in 1999. The banks bet most of the borrowed money on properties in Britain, Ireland, and the United States, a strategy that paid good dividends during the housing bubble until it popped in 2008.

In 2008, Ireland insured its banks against all losses, costing it more than €50 billion ($69 billion).

Anglo Irish Bank, the bank with the most money to lose, neared bankruptcy in September 2008, but it and other Irish banks persuaded Irish Finance Minister Brian Lenihan to give them money for short-term cash problems, not a serious long-term problem, they claimed.

Two years later, Anglo Irish Bank and two other small banks have been nationalized. Financial aid has been given to Allied Irish and the Bank of Ireland.

Ireland is currently spending about €50 billion ($69 billion) while tax revenue is about €31 billion ($42 billion).

Lenihan said Ireland needed less than €100 billion($140 billion) to help its banks that are losing deposits and paying more to borrow money.

He “said the bailout was necessary because Ireland’s banks have become wholly dependent on loans from the European Central Bank and, just like the government, look likely to be frozen out of normal credit markets for at least a year.”

Note that an EU-IMF loan is considered a bailout by a Finance Minister. This leads me to ask: has any nation offered money to an industry with no expectation of being repaid?

The European Central Bank and other eurozone members had been pressing behind the scenes for Ireland . . . to accept a bailout that would reassure investors the country won’t, and can’t, go bankrupt.

The EU and the IMF may be able to postpone bankruptcy, but the economic consequences cannot be postponed. Besides being money stolen from taxpayers, the EU-IMF loan is an example of using other people’s money. The financial community has deemed Ireland unworthy of loanable funds, except at higher interest rates. Money will be diverted from profitable endeavors to a weak banking system. The expectation of bailouts for financial irresponsibility will continue and be strengthened. Spain and Portugal, the likely next bailout recipients, can be confident that they can easily acquire other people’s money. Instead of a profit-and-loss system, there is a growing private profits and public losses system.

I hope the economic suffering in Ireland will teach it a lesson, but I strongly doubt it. Ireland’s and other European financial difficulties can be blamed on capitalism which was nowhere near the disaster. The European Central Bank, the Federal Reserve System, and bailouts are not capitalist. They are crony capitalist at best.

The solution for Ireland is simple: separate banking and state. Accept the losses. Allow economic correction to occur. Let prosperity follow. Realize government is a parasite. Abolish it. Restore anarchic ancient Ireland. Show the world what liberty is.

[billott1]

All a bailout does is give people the incentive to risk more. If they bail us out of a 50billion euro hole then how about a 100billion or 200billion? I laugh at the German and French folks who sit by and watch the EU Central bank destroy their savings when they should be saving up to bail out the USA whose banking system and government is not in that much worse condition than Ireland.

[Kakugo]

Good reading Gero.

There are some hints Ireland was ready to default on at least part of its debt but was pressured by other EU members to “accept the loan” (they sound more and more like a character out of a Mario Puzo novel). One of the reasons is German banks own a whooping 100 billions in Irish debt, both private and public, and would have taken a huge hit, just like French banks risked back in May when Greece was running close to default. You speak much truth when you talk about “financial irresponsibility”: the Irish government knew it couldn’t keep up the present spending spree, German banks just didn’t care because they knew they will be bailed out no matter how bad their decisions. European banks have saddled themselves with Spanish bonds: the September auction was a huge success. They know the country is very likely to follow Greece and Ireland but do they care? No, because the ECB will step in. In turn Spain will be forced to “restructure” in a way that will ensure it will be even less competitive relatively to Germany. Yes, Germany… a few months ago I shocked a few people saying the EU and the EMU are Germant’s third attempt at achieving hegemony in Europe and they are succeeding beyond their wildest dreams. The Monetary Union and the Maastricht Treaty hurt countries like Italy and Spain immensely: they could not rely anymore on devalutation of currency to be competitive on International markets, they were saddled with very high costs to comply with ridiculous “safety at work norms”, costs which swallowed capitals much needed elsewhere, and their relatively low capital-per-workers investments made sure they could not hope to compete with Germany, one of the world’s leaders in this respect. Also through various monetary Ponzi schemes “weaker” countries like Greece or Portugal were made to bear the burden of the ECB “easy money” policies: Germans may rightly complain about the teuro (a joke on the euro and teur, meaning expensive, overpriced) but what they experienced is nothing relative to what we’ve been through. Dante put traitors in the lower reaches of Hell: I sincerely hope he was right, so the whole European political class may find its way there, especially those who sold their countries so cheaply.