In Greece, the financial disaster is attributable to unsustainable borrowing to maintain an unsustainable socialist cradle to the grave entitlement state. The Greeks couldn’t live on the money of other Europeans forever and their day of reckoning arrived. In Iceland, a tiny nation of 300,000 fishermen and farmers magically churned themselves into high finance gurus who traded on money borrowed from Iceland’s banks that borrowed the money from foreign banks. The Icelanders did the only thing they could do; they allowed their banks to go bankrupt and started over by going back to fishing and farming. Of course the foreign banks did get stiffed but they also gambled by making stupidly insane loans to gambling fishermen and farmers. The Icelanders also had the advantage of not being a member of the European Union so they didn’t have the Troika noose around its neck. What could the Troika do besides military invade, occupy and steal their fish? For what? There was nothing tangible to get out of Iceland.
But Ireland? Ireland is a real tragedy because the Irish people are paying for the financial sins of its corrupt government, banksters and bankrupt real estate developers. The Irish banks borrowed from foreign banks who lent mountains of money to Irish real estate developers. Irelands was praised by the media and financial pundits as an economic miracle – living proof that borrowed fiat money creates wealth and prosperity until one day it all ended. The great Celtic Tiger ceased to roar and lay mortally wounded in September, 2008.
But Ireland is suddenly in the news again as it possibly (probably) needs another bailout according to an article from The Telegraph.
Ireland, seen as the eurozone’s "poster child" for implementing austerity, could require a second bailout, economists warned.
Apparently all that austerity associated with Irish bank failures and their subsequent taxpayer bailout is not sitting too well with the Irish people.
“As households struggle to pay their mortgages, the country’s rescued banks may need €4bn (£3.2bn) more to cover losses on loans than was assumed in stress tests last year, said analysts at Deutsche Bank. That would hit the finances of the Irish government, which has already pumped about €63bn into its banking sector in the last three years.” The Telegraph
Aside from the fact that the Irish people are idiots for supporting a government that bails out the rich at their expense, the story of how it actually happened is even more horrifying. The gory story is succinctly laid out by Michael Lewis in his outstanding book Boomerang. It all starts with a professor of economics at University College Dublin named Morgan Kelly. Kelly knew nothing about high finance or even much about modern economics as his specialty was medieval economics and weird things like studying the economic impact of the Little Ice Age. But Kelly was an economist and every economist understands a bubble so Kelly started writing articles in 2006 that got published in Irish newspapers about how Irish real estate was overvalued and why Irish banks were in deep trouble. Kelly, of course, was dubbed a lunatic and an idiot by the government and the banksters.
Kelly merely used his Google fingers to dig up information as he pondered what he perceived as a looming financial calamity. Kelly also observed that in the mid 1990’s Irish banks were largely funded by the deposits of the Irish people but all that started to change as Irish banks started borrowing heavily from foreign banks. All this borrowed money was lent to real estate developers. Kelly was concerned. Lewis writes:
It wasn’t until almost exactly one year later, on September 29, 2008, that Morgan Kelly became the startled object of popular interest. The stocks of the three main Irish banks, Anglo Irish, AIB and Bank of Ireland, had fallen by between a fifth and a half in a single trading session and a run on the Irish bank deposits had started.
The Irish real estate bubble was different from the American version in many ways. It wasn’t disguised, for a start. It didn’t require a lot of complicated financial engineering beyond the understanding of mere mortals. It also wasn’t as cynical. There aren’t a lot of Irish financiers, or real estate people, who have emerged with a future. In America the banks went down but the big shots in them still got rich; in Ireland the big shots went down with the banks.But what the Irish government did next was unthinkable. It voted to guarantee the debts of Irish banks which then became the debt of the Irish people. The Irish government told the public that it must save the Irish banks. Lewis makes a most astute observation and discloses that the bailout of the Irish banks was nothing more than a bailout of bondholders:
…if the Irish wanted to save their banks, why not guarantee just the deposits? There’s a big difference between depositors and bondholders: depositors can flee. The immediate danger to the banks was that savers who had put money into them would take their money out, and the banks would be without funds. The investors who owned the roughly 80 billion euros’ worth of Irish bank bonds, on the other hand, were stuck. They couldn’t take their money out of the bank. And their 80 billion euros very nearly exactly covered the eventual losses inside the Irish banks. These private bondholders didn’t have any right to be made whole by the Irish government. The bondholders didn’t even expect to be made whole by the Irish government. Not long ago I spoke with a former senior Merrill Lynch bond trader who, on September 29, 2008, owned a pile of bonds in one of the Irish banks. He’d already tried to sell them back to the banks for 50 cents on the dollar-that is, he’d offered to take a huge loss, just to get out of them. On the morning of September 30 he awaked to find his bonds worth 100 cents on the dollars. The Irish government had guaranteed them! He couldn’t believe his luck. Across the financial markets this episode repeated itself. People who had made a private bet that had gone wrong and didn’t expect to be repaid in full were handed their money back-from the Irish taxpayer.
A political investigative blog called Guido Fawkes somehow obtained a list of the foreign bondholders: German banks, French banks, German investment funds, Goldman Sachs. (Yes, even the Irish did their bit for Goldman.) Michael Lewis in BoomerangAnd it gets worse as Credit Writedowns reported on 3/3/12 that Irish taxpayers are now even paying unsecured bank creditors.
Ireland’s low debt and government surpluses have turned into a huge debt burden and massive government deficits because of the banking crisis – this in spite of, or should I say also because of, fiscal austerity....
The Irish banks have recognized a huge slug of bad debt from the property developers.
In the US the banking crisis was a monstrous wealth transfer from the middle class to the wealthy but that's a story for another day.