Why does this sound so familiar?
From the BBC:
If you add together all the capital provided to Ireland's banks by various arms of the state, taxpayer support to those banks in the form of capital injections is around 30% of GDP.
That would compare with around 6% of GDP in the UK for the equity injected into Royal Bank of Scotland, Lloyds and Northern Rock.
In Ireland, some would also include in the cost of the rescue the further 25% of GDP that is being provided to the banks in form of state-backed bonds, as payment for the toxic loans they've transferred to the banking rescue fund, the National Asset Management Agency. In other words, more than 50% of Irish GDP has been devoted to keeping its banks afloat.
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From the WSJ:
It's almost an iron law of financial crises: Private debt becomes public debt. So it has been in Ireland. The ratio of Ireland's government debt to the size of its economy stood at 25% at the end of 2007. At the end of 2010, according to Finance Minister Brian Lenihan, it will be 98.6%.
Most of that increase comes from the fact that the Irish government has chosen to pay the creditors of its decrepit, mostly state-owned banks in full.
Shareholders have already been hammered. In a decision over who should suffer the pain of covering the remaining losses caused by years of excessive and evidently foolish lending by its banks, the government has decided that that burden should fall on the shoulders of Irish taxpayers.
Depositors will be kept whole. More controversially, so will the holders of the bonds the banks issued to fuel their lending spree, as well as other creditors. The only exceptions are a minority of holders of subordinated bonds.
It's a gamble. Swelling the government's own debts instead of allowing the banks to default on payments to creditors increases the risks that the government itself will default.
The government's "guarantee of most of the unsecured bank liabilities cannot but create doubt about the ability of the Irish state to prevent default on the sum total of its own debt and the bank debt," said Willem Buiter, Citigroup's chief economist, in a research article last month.
The government, however, decided it would pay creditors in full. The reason, as described by Mr. Lenihan: Allowing the banks to default would be almost as bad as the government itself defaulting.
"We have to fund ourselves as a state with senior debt. And other banks have to fund themselves with senior debt. … You cannot send out a message in an economy like Ireland that senior debt can be dishonored. We're far too dependent on international investment," Mr. Lenihan said.
"Any alternative strategy as advocated by some creates a significant risk of jeopardizing the banking system's and indeed the state's access to international debt markets and cannot be countenanced on that basis," he added.
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Now read this bit of U.S. style 'protect the helpless bondholders' propaganda:
The only time I was taken aback when interviewing the Irish finance minister Brian Lenihan on Friday was when he said - with striking passion - that he did not wish to see losses for international banks and other financial institutions that have lent to Ireland's bloated, ailing banks.
More or less the same point, that Irish banks' wholesale creditors must be protected from the error of their lending ways, was delivered to me with equal vehemence by Peter Sutherland, the grandest of Ireland's globetrotting financial grandees (at various times chairman of BP, chairman of Goldman Sachs International, a European commissioner, director-general of the precursor of the World Trade Organisation, and so on and so on).
We can assume this is the view of the Irish political establishment, since Sutherland is not a supporter of Lenihan's weakening Fianna Fail government.
Which may strike you as a bit odd, given that Ireland's economy has been taken to the brink of bankruptcy, by the reckless lending of its banks to property developers, home builders and house buyers - and that this reckless lending wouldn't have been possible if the banks themselves had not been able to obtain cheap money from overseas banks and institutions.
So there is a strong argument that since Irish taxpayers are incurring huge and rising losses to clear up this mess, the pain should be shared with all the guilty parties, who surely include the sophisticated financial professionals at foreign banks that foolishly provided Irish banks with the means to mortgage an entire economy.
But here's why for Lenihan, Sutherland and Ireland's mainstream political class it is heresy to adopt a policy of caveat emptor (or buyer beware) to the distribution of banking losses: Ireland's dependence on credit from abroad is so great that the economic consequences of that credit being withdrawn would be catastrophic.
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DB here. The madness never ends. It's really quite simple -- force bank bondholers to take haircuts, and perhaps they will learn a lesson about excessive lending into global housing bubbles. Reward them with full payment on their reckless investments and you are guaranteeing a future crisis.
What happened to capitalism? Does it even still exist...
Further reading:
From the DB archive: