So, as I suspected would happen, the push-back against the suicide pact continues. This week Spain managed to convince the EU that it should be allowed to loosen its deficit targets for this year a little in return for a greater push in 2013.
Eurozone finance ministers have given unemployment-ridden Spain more wiggle room in cutting its big deficit, signalling that new, tighter rules against overspending in the currency union retain some flexibility for hard-hit countries.
The ministers from the 16 other states that use the euro said Spain had to make further cuts worth 0.5% of gross domestic product, which indicates that the country is now expected to slash its government deficit to around 5.3% of GDP this year from about 8.5% last year.
That is still below the 5.8 % deficit target Spanish prime minister Mariano Rajoy announced earlier this month, but significantly softer than the 4.4% deficit the country had originally promised to its partners in the euro.
Jean-Claude Juncker, the prime minister of Luxembourg who also chairs the meetings of eurozone finance ministers, said it was “of the utmost importance” that Spain brought its deficit down to below 3% of GDP – and back in line with European Union rules – by 2013.
Well at least we are seeing a little reality creeping into the crisis, but an attempt to cut 3.2% of GDP in government spending against a very depressed private sector while maintaining a trade deficit still utter delusion. I would suggest that, once again, you prepare for a disappointing outcome followed by more requests for leniency because the Spanish economy has not behaved “as expected”.
At the same time that Spain has been pushing for some leeway, so has Ireland. The Irish government has been asking for an adjustment in terms of €31bn worth of promissory notes issued by the government in 2010 connected with restrucutring of Anglo Irish Bank. The Irish government appears to have attempted to use the upcoming referendum on the fiscal compact as a leverage over Europe to get a better deal.
Given the economically delusional policies of the Europe’s central bureaucracy I am not surprised at all by the rebuke from Olli Rehn.
“I actually wonder why this has to be asked at all, the principle in the European Union and the long European legal and historical tradition is, in Latin, pacta sunt servanda – respect your commitments and obligations.”
Which brings up the question of exactly what the Eurocrats think is the commitment and obligation of the elected government of Ireland? To set policy and deliver services to the Irish people for the betterment of their lives, or to guarantee that the international lenders of funds to commercial banks, even the unsecured ones , get their money back ?
The promissory notes are an outcome of the failed bailout of the Irish banking system that started in September 2008 when the government unconditionally guaranteed the deposits and bonds of the Irish-owned banks. Since that time the Irish taxpayer has been on the hook for their losses.
Even a brief glance at some of the associate documentation of the original deal tells you that it wascompletely one-sided deal with Irish citizens taking responsibility for the failings of European banking regulators including responsibility for financial instruments that should have been written off on day one.
Anglo is one of the financial institutions covered by the Irish Guarantee Scheme for financial institutions (“the Guarantee Scheme”), which was adopted under the Credit Institutions (Financial Support) Act, 2008 (hereafter the “Act”), and approved by the Commission under State aid Rules on 13 October, 2008.
The liabilities covered under the Guarantee Scheme were those liabilities existing at close of business on 29 September, 2008 or at any time thereafter, up to and including 29 September, 2010, in respect of the following: (i) all retail and corporate deposits (to the extent not covered by existing deposit protection schemes in the State or any other jurisdiction); (ii) interbank deposits; (iii) senior unsecured debt; (iv) asset covered securities; and (v) dated subordinated debt (Lower Tier 2), excluding any intra-group borrowing and any debt due to the European Central Bank arising from Eurosystem monetary operations.
Despite its coverage under the Guarantee Scheme, the impact of the global financial crisis on the Bank as well as difficulties that arose with regard to its corporate governance, led the Irish Government to announce on 21 December, 2008, its intention to make a capital injection of €1.5 billion into Anglo. The Commission issued State aid approval for the proposed recapitalisation on 14 January, 2009.9
For more on that point I would advise you to watch this video in which a member of the ECB, Klaus Masuch, is unable to provide a valid answer to an Irish journalist as to why this deal ever occurred.
Making matters worse, the Anglo Irish bank was nationalised in January 2009 after it was realised that recapitalisation was impossible given the mounting liabilities stemming from the collapsed Irish housing market and the GFC. As we have seen so many time before, it also emerged that the banks books were dodgy and contained assets which were in fact circular obligations between itself and another Irish bank, Permanant TSB. You can read more about this incident here.
Over the period of next 18 months the true losses of the banking system became apparent and by September 2010 emergency lending against the ECB by the Irish banking system had reached €120bn and Irish government support had risen to over 30% of GDP. As a fallout government sector debt exploded, while the economy collapsed leading to a huge rise in yields. In September the Irish government, under extreme pressure from the ECB and EU re-newed the banking guarantee, which meant by October 2010 the Irish government 10 year bond yields surpassed 7% and the government was forced to seek a bailout.
In November 2010, the EU/IMF granted Ireland a €85 billion fund under the usual austerity terms which meant cuts to welfare spending, a rise in the Value Added Tax rate, and cuts to public services. Ultimately this has meant more strain on the economy of Ireland and therefore its people.
It is quite obvious that Ireland continues to suffer considerable economic strain due to its agreement to bailout the European banking system, yet Europe doesn’t seem to want to return the favour. What makes Olli Rehn’s comments even more surreal is that even in the face of obviously failing austerity policy, Ireland wasn’t actually asking to default on the deal. It was simply asking for a change in terms to match those that were previously been granted to other periphery nations under emergency programs, such as Greece.
Ireland is requesting that the promissory notes be replaced with longer term EFSF bonds, which would both lower its interest payments and also provide collateralised liquidity via the ECB. These requests aren’t much different to what has been granted to Greece its 2nd bailout, yet it is very obvious that Ireland has done far more to attempt to support Europe than Greece ever did.
As we continue to see with Greece, even in the face of years of mounting evidence to the contrary, the European financial elite continue to believe that demanding nations pay ever mounting debts while taking away their ability to do so is sound financial policy. If I was voting in the Irish Referendum I would tick the NO box.