This is not an IMF bailout but end to ECB life support

ireland / britain | economy | opinion / analysis

Sunday November 21, 2010 17:47

by Paul Bowman - Workers Solidarity Movement

Ordinary families and households here face the imposition of even more severe cuts to services, jobs and incomes. But we must understand that the driving force behind that brutal logic is coming from the Eurozone, not the Washington-based IMF. [Italiano]

This is not an IMF bailout but end to ECB life support

Why is the director of the IMF complaining that the rate of progress of the IMF negotiations in Dublin is going too slowly? What's wrong with this picture? The answer is nothing, so long as you understand that the IMF are not the driving force in these negotiations.

Despite the newpaper headlines, what is happening is not an IMF bailout. This is a European debt restructuring process in which the IMF are playing a merely supportive role as consultants. This is a Eurozone process and although the political masters of the Eurozone, through their EU Commissioners, have the final say on passing or vetoing the final agreement, the true driving force behind this process is the ECB.

As the negotiations continued between the government and the representatives of the IMF, European Commission and the European Central Bank (ECB), the IMF's managing director Dominique Strauss-Kahn, expressed frustration at the planned slow rate of progress. "The sovereign crisis is not over," he said, "The wheels of cooperation move too slowly. Repairing the financial sector is taking too long, in part because policy makers are not paying enough attention to the pan-European dimension." In fact the EU officials have made it clear that no details of the rescue loan will be announced until after the governments four year plan and the Donegal by-election. Klaus Regling, head of the EU's 440 euro stabilisation fund, has even indicated that it might take as much as two weeks for the negotiating team to reach its conclusions - i.e. after the December 7th budget.

To understand why this is so, we need to understand what, exactly, has happened to the Irish banking system in the last months.

First, the corporate and institutional deposit flight that the Sept 2008 bank guarantee was supposed to prevent has now happened in the last 3 months. That horse simply vaulted the stable door and is long gone.

Second, as the global interbank market is now shut to Irish banks, their only source of funding is the ECB which is funding the black hole that is the Irish banking system at their 1% base lending rate. In the last month this took one quarter of all liquidity being provided by the ECB to the entire Eurozone. Given that we are only 1.3% of the Eurozone population (329 million), and were only 2.4% of its GDP at our height, that's problematic.

Effectively, this means that the government has not only made Irish taxpayers liable for the losses of the Irish banking system, but that the losses are now being exported to the Eurozone as a whole via the ECB. In the immediate aftermath of the crisis of 2008 and even earlier this year with the Greek crisis, the ECB was willing to pay this price to save the Euro. No longer.

The proposed "offer we can't refuse" loan will effectively replace this ECB 1% funding with funding at a rate to be agreed, but likely to be closer to 5%. In other words, the losses of Anglo, AIB, etc. will be firewalled in the sense that the banks and investors from the rest of the Eurozone will be recompensed for lending to the Irish State and banks, by making the spread between the ECB 1% base rate and whatever Ireland is charged. This is no bailout, it's an end to the life support from the ECB that has been keeping the local banking system afloat for free.

But let's be clear this is not about Ireland alone, but about managing the finances of the Eurozone as a whole. The "structural adjustment" package of loan conditions that will be imposed on Ireland by this process is not for our "benefit" alone, but an attempt to discipline the other "peripherals" like Portugal and Spain. Everybody is more or less resigned to Portugal following Ireland into ECB receivership in short order, but the big target is Spain, the Eurozone's fourth largest economy. Spain's size is seen as potentially posing an existential crisis for the Euro as a whole, if it was to suffer the same loss of access to the money markets that has done for Ireland and is currently strangling Portugal. One hedge fund executive put it pithily as Spain being "too big to bail". It is to avoid this nightmare scenario that the ECB is restructuring its loans to Ireland on a more punitive (and profitable) basis.

In the meantime the ordinary families and households here face the imposition of even more severe cuts to services, jobs and incomes. But we must understand that the driving force behind that brutal logic is coming from the Eurozone, not the Washington-based IMF.

If we wish to resist this inhuman logic, and we must, it's up to us to make that mental shift and raise our awareness that, language and history aside, the US and UK are no longer the main poles of power that we must balance between. Our future will be determined a lot more by our success or failure in participating in the composition of a fight back by workers across the European "periphery" against the austerity logic imposed by the ECB and the "core" EU powers. As a small island nation, the struggle for sovereignty requires a perspective that is not only against the market dictatorship of capitalism, but also internationalist in scope.