The response of the mass media to the deal on the promissory notes was one of considerable praise to a Government that had won a deal that “appears as good as could have been hoped for”.
The world of finance is notoriously complex so in simplifying the deal for a mass audience the media felt free to simply lie. Thus the headline in the Irish Times said that the ‘Bank debt deal to cut borrowing by €20bn and ease next budget’. The small print revealed it would only reduce the amount paid in the next decade and the debate after the deal has revealed that there is no certainty that the next two budgets will be any less severe than planned. The Troika and others are demanding the original targets are adhered to and being a poster boy of austerity might demand it. The uncertainty surrounding important aspects of the deal leaves open to doubt many of the claimed benefits.
But one thing is very clear: the bank debt was unsupportable despite the responsibility of all the parties for placing it on the shoulders of the Irish people and something had to be done to prevent a disorderly bankruptcy. This would have been caused by inability to raise the financing required to run the State at remotely affordable interest rates. The average maturity of the main sovereign debt of about €80bn is around six and a half years, which has to be renewed by borrowing this amount again to pay it off – ‘rolling over’ the debt. Combined with a possible promissory note repayment of over €28bn averaging five years and continued deficits this looked close to impossible.
Not that anyone dared point out that the deal exposed the lie of the Government parties, of the previous administration, and of the current Governor of the Irish Central Bank that the deb was ‘manageable’.
Ignoring this also allowed the media to largely stay clear of why this deal was necessary in the first place. The Irish State had decided it would protect the investors in two thoroughly rotten institutions, run recklessly by their owners, by promising them that the Irish working class would pay off their gambling bets.
The Irish State never asked workers whether they wanted to, or whether they thought it was a good idea, but conceived the original bank guarantee in the middle of the night, as a scheme concocted without even the presence of cabinet ministers who were supposed to make up the Government. In effect it decided to pledge money it didn’t have to people we still did not know and get everyone else to pay for it, including generations not yet born.
As ever we are bombarded with propaganda that cuts must be made in wages and services; increases must be applied to taxes, charges and working hours and all because we need to be competitive. Yet billions that could not possibly be afforded were pledged and paid that bankrupted the State. This in turn necessitated a ‘bail-out’ by the EU and IMF, which is akin to a blood transfusion to a dying patient so that she can work to earn money to pay the vampire.
As the Croke Park deal is ripped up and more draconian conditions inserted – not ‘extended’ as claimed – on the back of demands for austerity, no austerity is to be inflicted on the capitalist gamblers. While money can be wasted on dead banks money must be cut out of wages and services because ‘we’ can’t afford it.
This is the logic of the capitalist system but it is hidden not just by the mass media and politicians but by the opaque workings of the capitalist system itself, made more complicated by the complexity of the financial system. This complexity is useful because when it is more difficult to understand and appreciate what is going on it is more difficult to fight against it. Only vague ideas that you are being screwed do not help give you confidence to say stop!
That is the importance of understanding as much as possible what the promissory note deal involves.
When the State guaranteed the liabilities of the banks in September 2008 it claimed the problem was one of liquidity, that is the banks were basically sound but were in danger because they would not lend to each other. There might also be a withdrawal of money by depositors. This was the purest rubbish and the gamblers who had put their money into Anglo-Irish Bank and Irish Nationwide didn’t buy it. They took their money and ran. Deposits in these institutions, packaged together as the Irish Bank Resolution Corporation (IBRC), fell from €65.8bn at the end of 2007 to €1bn at the end of 2011 while the value of debt securities funding the IBRC fell from €30.85bn to €6.3bn during the same period.
So if the IBRC was bust where did the money come from to give to the depositors and holders of the IBRC debt? The answer is that it came in the form of Exceptional Liquidity Assistance (ELA) from the Central Bank of Ireland (CBI). This ELA funding to the IBRC was zero in 2007 and €40.1bn at the end of 2011. ELA is money so the question is where did it come from, how did the CBI get it?
In many ways the CBI may be thought of as the Irish branch of the European Central Bank (ECB). The ECB has strict rules about money creation (money printing) so the local branch in Ireland could not just print Euros (metaphorically speaking) although this is one of the things Central Banks can do.
Nevertheless the CBI was able to give money in the form of ELA to IBRC which then paid off its depositors and holders of debt securities. Since this bank and building society were broke the state nationalised them making all their reckless speculation our reckless speculation and making their debts everyone else’s debts. Because the State didn’t have the money either to pay back the speculators they issued IOUs to the Central Bank of Ireland in return for their money’ the ELA.
The result was that the CBI gave money to the State in the form of IBRC and the State gave the CBI promises to pay this money back with interest. Although the two institutions that became the IBRC had issued loans which were due to be repaid many of these were worthless so only through the state intervening could the capitalist investors in these institutions get their money back.
The promissory note IOUs were the promise by the State that through tax increases, wage cuts and public service cuts the working class would ensure they got their money. This is what prevented the ELA being simply money printing and thus prevent the CBI holding worthless pieces of paper.
So the cuts to wages and public services that are justified by the claims that we need to be competitive are partly in order to pay the debts of a very uncompetitive bank. So uncompetitive it is now dead, having been in a zombie-like state for the last few years. When the State pays part of the promissory note IOU to the CBI the Irish Central Bank has ‘taken the money out of circulation’, again to ensure the problem is not solved by printing money. In other words the money workers paid through austerity is simply burnt (again metaphorically speaking).
What could be more uncompetitive than maintaining dead banks on life support through burning money by putting real people on the dole and cutting services such as education? The promissory note episode is one object lesson in the irrationality of the capitalist system.
This course of action could not have been taken by the Irish Central Bank and the Irish State without the approval of the European Central Bank and the European Union and its Commission. For them the over-riding concern has been the protection of the European banking system just as the main objective of the Irish State has been the protection of the Irish banks. Nationalist complaints that the Irish have made sacrifices for everyone else, much trumpeted by trade union leaders, has to ignore this.
If Irish workers have paid more so far it is because the Irish banks have been weaker and more rotten and Ireland remains a subordinated country which is dependent on foreign money for its speculative bubbles.
If the Irish State’s attempt to save the banking system required the ultimate liquidation of the IBRC this is because there was, in the end, little left to save after all the depositors and holders of its debt securities had been paid. Again only the workers, in this case of the two institutions, are threatened with picking up the bill through redundancy.
For the Irish State this promissory note device to ensure that it did its best for European banks (and its own) had some advantages and disadvantages. Of course inability to actually afford it is one big disadvantage but if it can get workers to accept austerity then this is not such an insurmountable obstacle.
The ECB does not want to lend money to institutions that cannot pay it back and since IBRC was bust its actions in approving the lending by its local branch raised some controversy. If for example it lent to a bank that went bust and which didn’t pay back the money lent this money would then have entered the economy (through those people the bank did pay back, its employees or new loans) and this would amount to money creation/printing. This can create inflation and low inflation is the primary objective of the ECB. A strong currency allows a state, or in this case the Eurozone, to command greater resources on the world stage and is thus integral to the project of a strong EU imperialism.
The ECB thus regularly monitors (every few weeks) its ELA so their approval or otherwise was always hanging over the Irish State, although even without this it remains under close and regular scrutiny.
An advantage of the promissory note arrangement that will be lost at some stage with the new deal is that because the State owes the money to the Irish Central Bank profits by the ICB on the loans can be returned to the Irish State. Given the high interest rate of over 8 per cent this is important.
Because a lot of the ELA created by the Irish Central Bank has ultimately been paid by IBRC to banks and institutions in other EU states the ECB has had to lend money to the ICB so that the reserves of the Irish Central Bank do not decline dramatically. The ECB charges the ICB for this money but at a low interest rate so that the difference between this low interest rate charged to the ICB and the higher interest rate charged by the ICB to IBRC is a profit which can go to the Irish State.
What this means in terms of the current benefits of the new deal is that the move to a lower interest rate on the Government bonds that replace the promissory notes is not a gain since the effective rate of interest actually paid on the notes is the rate charged by the ECB to the Irish Central Bank and not that charged on the promissory notes. As explained the profit generated by the latter is taken by the Irish Central Bank and returned to the State.
In the next post I will look at the new deal to replace the promissory notes.