Model Reformer in Trouble: Ireland Lobbies to Have Europe Share Banking Risk

By Christoph Pauly

Ireland's reform policies have been widely praised for helping it emerge from the crisis, but the truth is bleaker. If the government fails to get European taxpayers to assume some of the risk of its ailing banking sector, the country could soon require another bailout.

Photo Gallery: Ireland's Dangerous Debts Photos
AFP

In his home country, Irish Prime Minister Enda Kenny, 61, has a reputation for being somewhat wooden. But when he meets with German Chancellor Angela Merkel and other top German politicians, he's capable of unaccustomed gallantry, as the Irish have noted with surprise. For instance, Kenny has recently proved that he's a master of the diplomatic art known as "air kissing."

This Tuesday, the Irishman will have yet another opportunity to demonstrate his skills. Kenny is traveling to the southern German village of Wildbad Kreuth, where the conservative Christian Social Union (CSU) -- the Bavarian sister party to Merkel's Christian Democratic Union (CDU) -- is holding its annual gathering. At it, Kenny hopes to schmooze with Horst Seehofer, the CSU's chairman, and Gerda Hasselfeldt, head of its federal parliamentary group. Shortly after breakfast, and before a speech by the chairman of the Bavarian Farmers' Association, Kenny plans to present his country as a model of successful reform policies.

Kenny's charm offensive is not entirely altruistic. For over two years -- and to the delight of the Anglo-Saxon media -- the conservative leader has been trying to get European taxpayers to foot the enormous bill for bailing out Ireland's ailing banking sector. But, taking their cue from the Germans, the Europeans have so far balked at the idea.

Instead, Chancellor Merkel has been quick to praise the way Ireland has implemented economic reforms and used money from European bailout funds over the past few years to emerge from the crisis: Exports have risen, the country has regained its competitiveness, and it has even succeeded in getting private creditors to lend it some money.

Unfortunately, this gleaming fašade obscures a rather dismal reality. Although Ireland's economy has stabilized, its debts continue to mount -- despite the fact that the country has been diligently fulfilling all of the demands made by the troika of lenders, which consists of the European Commission, the International Monetary Fund (IMF) and the European Central Bank (ECB). This year, Ireland's public debt is expected to increase to 122 percent of its annual gross domestic product (GDP) -- in other words, beyond the limit at which the IMF believes long-term debt sustainability can be achieved.

The €68 billion ($90 billion) in bailout funds are only expected to meet the country's financial needs until the end of 2013. But Ireland has a trick up its sleeve that it hopes will allow it to avoid a second official aid package: Kenny would like to transfer one-quarter of Ireland's public debt -- the amount that was amassed solely from bailing out the country's banks -- to the EU. "By June, following the decision of the European Council, we expect agreement on the modalities of reducing the burden that the Irish taxpayer took on from the recapitalization of the going-concern banks," Kenny reportedly said shortly before Christmas.

Spreading the Pain

On Jan. 1, Ireland assumed the presidency of the European Council, which rotates every six months. During this period, Kenny is expected to forge important compromises among the EU's 27 member states. But, more importantly, he intends to use his position to highlight Irish concerns.

Ireland's demands are very precise -- and could be costly for the Germans. At stake are the €31 billion that the country received from the system of European central banks to save two crisis-ridden Irish financial institutions in 2010. The country is expected to pay this money back in installments over the next 10 years.

Already last year, the Irish pushed long and hard until they were allowed to pay back the first installment with the help of a new loan. But that was not a long-term solution. Starting this year, the state will explicitly be liable for the debts of Ireland's nationalized banks. This has prompted the Irish to look for a more creative solution this year. "We would like the payback period for the debts to be extended and the interest rates to be cut to a reasonable level," European Affairs Minister Lucinda Creighton told SPIEGEL.

This notion has met with resistance from the ECB, however. ECB President Mario Draghi regularly snubbed Kenny when he broached the topic at the numerous Brussels summits last year. The ECB wants to avoid any more accusations of directly financing ailing euro-zone member states. For Draghi, the simplest solution would be for the European Stability Mechanism (ESM), the euro zone's €700 billion permanent backstop fund, to step into the breach and take over the debt.

Kenny would ideally like to use the ESM as a way of getting European taxpayers to shoulder the risks associated with all the debts of the Irish banking sector. He intends to use the six months of his European presidency to push through a banking union that would also make the bailout fund responsible for dealing with toxic assets in the European banking system left over from the financial crisis of 2007-2008.

But to achieve this, Kenny will need the support of Chancellor Merkel and Germany's parliament, the Bundestag. If he manages to push through his agenda, Europe's taxpayers will have to absorb a significant portion of the risks of Ireland's banking sector. If the Germans refuse, it will become more likely that Ireland will have to be bailed out a second time this autumn.

It looks as if Kenny's newfound talent still has to be put to the test.

Translated from the German by Paul Cohen

Article...
  • For reasons of data protection and privacy, your IP address will only be stored if you are a registered user of Facebook and you are currently logged in to the service. For more detailed information, please click on the "i" symbol.
  • Post to other social networks

Comments
Discuss this issue with other readers!
1 total post
Show all comments
    Page 1    
1.
peadar400 01/09/2013
You really need to understand what happened. How many years into the crisis and you still don't explain to your readers what happened? Look at this clip where a the ECB's Klaus Masuch is left speechless by Irish Journalist. http://www.youtube.com/watch?v=pCHu1kRT6hU&sns=fb Some months ago I wrote here in response to another article: http://forum-international.spiegel.de/showthread.php?p=113916 "Germans do not understand their banks' role in the Euro Crisis, say the Irish". Your article does not inform your readership of the real background. Some people have written: "German money should belong to Germans." (1) which is true, but therefore: "German private bank-loans should belong to German private banks", whether the loans make a profit or a loss. And this is what we're talking about here. Ireland (the Government & the Irish people) did NOT get this money originally! It was the debt of Foreign banks (including German) that Ireland was forced to (continue to) guarantee that is central to this crisis! You should understand that Ireland (the government & the people) DID NOT receive this money. This is unlike the situation in Greece, Spain, Italy etc., where the sovereign did actually get the money. In the discussion about money owed to bond-holders people used the phrase "if Ireland can't or won't pay it back". It was incorrect to use the word 'back'. What was being considered was whether to 'pay it', or not, but as we, the Irish citizens, never received this money in the first place it was and is wrong to talk about paying it 'back'. In fact not only did Irish taxpayers not receive the money, the fact that FOREIGN banks lent the money irresponsibly meant that the vast majority of Irish people were disadvantaged by massively inflated house prices. Sensible people never wanted this money to flood into Ireland in this way in the first place. Foreign PRIVATE risk-taking banks lent money to PRIVATE banks in Ireland. Later when these PRIVATE banks were going bust, in an attempt to stop a contagious disaster throughout Ireland and Europe, the Irish government said they'd try to guarantee this private debt (but the Irish citizens weren't asked and certainly did not agree to it). Professor Honohan and others said that Ireland prevented an event worse than the Lehman's collapse in Europe. When it was obvious that the little Irish citizen couldn't possibly pay this huge debt belonging to private risk-takers, and were not going to renew the guarantee, Europe (ECB etc.,with major German influence) stepped in and insisted that there should be no 'frightening the horses', and haven't yet let the debt be given back to those whom it belongs to. There was (& is being made again) a real solid economy, based on real things, before this cheap money flooded in, looking for private sector "investment opportunities". Ireland took ~30 years putting the pieces in place to create this solid economy, and then two parasite so-called professions - bankers (foreign & Irish) and property lawyers - came along and not only sucked the blood out of the economy, they expelled huge numbers of the next generation to emmigration. And they did this sitting in offices putting immoral contracts & 40 year mortgages down on paper, pushing house-prices out of reach for any sane calculation (but then lending 12 times salary to panicked novice first-time-buyers who are now also destroyed), they didn't create ANYTHING, they didn't even physically build any part of one of the surplus houses, and they could've done all that they did with 18th Century quill pens & ledgers and so on, so out of touch are they with what it means to contribute in a modern society. As one U.S. commentator asked (1): "Why should the Irish people be forced to bail out the Germans who loaned the Irish banks the money in the first place? Shouldn't the German bondholders who took the risks be required to take a major haircut? Isn't that how capitalism works?" Thank You, Peadar Coleman (1) New York Times article responses: http://dealbook.nytimes.com/2011/10/...rish-debt/?hpw
Show all comments
    Page 1    
Keep track of the news

Stay informed with our free news services:

All news from SPIEGEL International
Twitter | RSS
All news from Europe section
RSS

ę SPIEGEL ONLINE 2013
All Rights Reserved
Reproduction only allowed with the permission of SPIEGELnet GmbH



From DER SPIEGEL

State Debt in Ireland, Italy, Portugal and Spain Zoom
DER SPIEGEL

State Debt in Ireland, Italy, Portugal and Spain


European Partners
Presseurop

Politiken

Corriere della Sera

Renzi Ups the Pace

50 Italians Fighting with ISIS


Facebook
Twitter