Wednesday, November 24, 2010

Crisis Deepens

Since I last wrote several significant developments have taken place making it clear that the present crisis both in Ireland and in Europe is much deeper that initially realised.

Indeed there is an even growing risk now that the whole financial system - not just in Ireland - but in the Eurozone generally could spiral out of control with disastrous consequences for its citizens. And unfortunately this risk is aggravated through a lack of effective action at the EU level (where intervention is most necessary).

To be honest I was deeply shocked at the manner in which the EU reacted to the growing Irish problems last week.

Though I have been a persistent critic of the terrible mismanagement of our economy (especially since 2000) at least I could not fault the Government for its determination to play by European rules. So for example, despite considerable domestic criticism, Brian Lenihan consistently maintained the Government's intention to fully redeem all senior bondholders in our banks (despite the inevitable huge burden that this would place on domestic taxpayers).

Now I had always assumed that this assurance was pressed on him by the the ECB who in return for such loyalty would guarantee liquidity to the Irish Banking system. After all, given that our National Central Bank is part of the European System of Central Banks, the ECB is now in effect "our" bank.

One of the essential functions of a properly functioning Central Bank is to act as lender of last resort! And as the Irish banks cannot borrow from anyone else at present then certainly this "lender of last resort" facility could never have been more necessary.

Last week as the threat of contagion spreading to Portugal and then Greece increased, the ECB panicked to assume its new role as "part lender of last resort" Admittedly because of the enormous liquidity hole in the Irish Banking system it was using up a great amount of the resources it had available (about 20%).

However the attempted solution to this problem is so inept as to beggar belief.

Ireland had already become a seriously overburdened nation debt wise, with growing doubts as to whether it was at all viable to expect taxpayers to absorb all these losses (without any sacrifice asked with respect to senior bondholders).

Then the ECB decided to pull the plug by setting a limit to the extent to which they willing to fund the Irish banks. So Ireland was inevitably pushed into an ignominious bailout that seems inadequate from every point of view.

From Ireland's own perspective it greatly increases debt at a time when the nation is already overburdened debt wise. Therefore this bailout is not "free money" but rather comes at an onerous interest rate close to 6%. Furthermore it means that independent decision making will be forfeited now for some years.

Personally though in the circumstances we had no option but to accept the bailout, I believe that we have been let down badly by our European partners (who unfortunately are now quickly changing their role to that of our European masters). Worse still despite Government loyalty we find ourselves to a degree betrayed by that very institution on which we believed we could most trust. So it was the ECB that put out the rumours that Ireland would need a bailout and then decided to have the matter confirmed through the Governor of our Central Bank.

This bailout is highly unlikely to reassure the markets in any case. If the ECB cannot guarantee full funding to support the Irish bank losses, how can it possibly have sufficient reserves to deal with the financial problems of the much bigger economies? And a remedy that attempts to place the entire burden for the losses (recklessly funded by large European banks) on to the domestic taxpayers of Ireland is not only morally unjust but is very shortsighted in economic terms. For such a tactic only reduces the ability of the economy to attain growth (which is a precondition for honouring those debts).

So as I write - the day after the package was finalised - the markets have responded in predictable fashion with share prices around Europe falling.

I take no satisfaction in now stating that so many of the problems that I have always seen in the economic system are now coming to a head.

Make no mistake about it! What we are now witnessing throughout Europe is endemic of deeper inherent faults in the way the capitalist global system operates.

Important decisions, so often decided by narrow domestic considerations are hugely inadequate in relation to the scale of problems we are facing (as exemplified by the bailout package to Ireland yesterday).

Perhaps even more serious is that the time scale for which decisions are taken is far too-short term (again largely dictated by sectional political interests).

Also the attempts to treat the market system as an impersonal mechanism (without due concern for the moral implications of those taking decisions in the markets) leads inevitably to great injustice in social terms.

In particular this has already led to an enormous build-up of problems with respect to financial and environmental issues.

So what we are now witnessing is not just a crisis for Ireland or for Europe. It is in fact a defining crisis for the capitalist system.

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