Barely twenty four hours after Ireland’s parliament voted through the multibillion euro EU and IMF “rescue” package, Ireland’s credit rating had been slashed, after the rating agency Moody’s expressed concern that Ireland’s severe downturn would continue. Little wonder, given that Ireland’s brutal package of austerity and cuts will devastate the Irish economy and society for perhaps a generation, while new IMF and EU loans will further increase the nation’s indebtedness.
Ireland’s continued punishment by the very financial markets which the IMF and EU package was supposed to please, shows how the lives of Ireland’s people will be, more than ever, subject to the whims of the drive for profit. But it also shows that trying to please creditors will not work; Ireland must stand up against its creditors if things are to improve, and say clearly that those responsible for the crisis must take a hit, rather than transferring the pain onto society at large.
Scores of developing countries have been through what Ireland, Greece and others now face. Even by IMF standards, the Irish package is savage. Ireland’s minimum wage will be cut by €1 and round two of a series of very deep cuts will reduce pensions and pension relief, social protection, public services and much more besides.
Zambia similarly made extreme cuts in government spending through the 1980s and 1990s under pressure from the IMF. Whilst the IMF praised Zambia’s success in making the cuts, the southern African country’s debt doubled in size as the economy shrank.
Ireland’s economy will also be restructured, with ‘vigorous action to remove remaining restrictions on trade and competition’, meaning privatisation and deregulation. The emphasis on the private sector would, in other circumstances, be comical given that the faults of the private sector created this public disaster. Ireland’s private sector debt rose to 600 per cent of national income by 2008 as the unregulated private sector went loan mad in its greed for a quick profit.
The pain now being imposed on the public for private recklessness will be felt by ordinary people, the poorest most of all. Economists are saying more clearly than ever that the refusal to negotiate debts with creditors is a huge mistake. Martin Wolf writing in the Financial Times says: “The Irish state should have saved itself by drastic restructuring of bank liabilities. Bank debt simply cannot be public debt. Surely, creditors must take the hit, instead.”
The beneficiaries of the package are, in the main, European banks and other financial creditors. Insulating these private investors from losses is the whole point of the bail-out. Indeed, the UK’s own loans to Ireland – amounting to just under £7 billion - are essentially an additional bail out to British banks - RBS has lent the Irish government £4 billion, and has a further £38 billion of loans to the Irish private sector, particularly mortgages.
For this price, Ireland, and Greece, are now at risk of years of enslavement to debt, and the only alternative is that those debts be renegotiated and reduced. In an Action from Ireland (Afri), paper released this week, Andy Storey lays out the case for a default on Ireland’s debt, arguing that the market could not punish Ireland any more than it already is doing, and that Ireland would recover from any short-term impacts much faster than it will recover from its austerity package. Storey argues that a debt audit, modelled on those undertaken in Ecuador and elsewhere, would be an essential first step in allowing ordinary people to understand exactly how the crisis arose.
The banks have not always won over the last 30 years, and in 2001 Argentina did exactly what many economists are now urging Ireland and Greece to do. On Christmas Eve 2001, Argentina defaulted on its debt originating from an overvalued currency which had been pushed by the IMF. Along with devaluation and introduction of capital controls to prevent money leaving the country, the economy soon began to grow rapidly. Welfare payments were increased to help the poorest cope, while non-IMF approved taxes on exports and financial transactions were introduced to increase government revenue. In 2005, Argentina reached a deal with its creditors where it paid just 35p for every pound that was owed.
Nobel prize winning economist Paul Krugman has said: “you have to wonder what it will take for serious people to realize that punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake”. It is time to learn the lessons of repeated debt crises – governments must stop forcing their people to pay for the behaviour of the financial sector. Private investors do not have to be bailed out at the expense of public austerity. People do not have to sacrifice their rights, welfare and democracy to please the gods of international finance. Neither governments nor their people are powerless. A mixture of debt audits and partial defaults, progressive taxation and capital controls can help return control and sanity to the world.
Many continue to believe that Greece cannot but default on its massive debt. Rumours abound that Spain will be next to be subjected to the diktats of global finance – an eventuality that would bring Europe to its knees. Standing up to global finance is urgent.