This is getting interesting. The US Treasury has roused itself to issue a narrow denial of an op-ed in the Irish Times by one of Ireland’s most highly respected economists (by virtue of his having predicted a very severe housing crash), Morgan Kelly. To recap briefly, Kelly said that the IMF was willing last November to haircut €30 billion of unguaranteed bonds by roughly two-thirds on average, but that Geithner’s disapproval on a conference call killed the idea:
The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way.
The Irish Independent today reported on the Treasury’s objection:
The US government last night rubbished a claim that one of its most senior officials “torpedoed” a plan to allow Ireland to write-off some of its bank debts….
Last night, a senior US official said this report was “inaccurate”.
The official pointed out the ECB and the European Commission (EC) did not want to impose haircuts on bondholders who loaned money to Irish banks.
“The ECB and EC were both dead opposed and they are decisive. The US is not a decision maker on European issues,” the official said.
Ahem. Notice the statement. It does not say that Geithner was not against the restructuring, merely that his opposition made no difference.
But this finesses what Kelly discussed, which is that Geithner effectively undercut the IMF (notice their complete absence from the Treasury account). As Kelly indicated in his op-ed, the Irish strategy was to hold off on a rescue, since Portugal and Spain would need to be dealt with first, and that would improve its bargaining position. As Richard Smith indicated in a series of posts last year, the Irish debt problem was not a government deficit mess but a banking sector lending binge mess, primairly that of Anglo Irish. The notion was to press for a deal that involved a banking sector rescue only rather than channel the rescue through the government, effectively making the taxpayers responsible. As Kelly recounted:
On November 16th, European finance ministers urged [finance minister Brian] Lenihan to accept a bailout to stop the panic spreading to Spain and Portugal, but he refused, arguing that the Irish government was funded until the following summer. Although attacked by the Irish media for this seemingly delusional behaviour, Lenihan, for once, was doing precisely the right thing. Behind Lenihan’s refusal lay the thinly veiled threat that, unless given suitably generous terms, Ireland could hold happily its breath for long enough that Spain and Portugal, who needed to borrow every month, would drown.
At this stage, with Lenihan looking set to exploit his strong negotiating position to seek a bailout of the banks only, Honohan intervened. As well as being Ireland’s chief economic adviser, he also plays for the opposing team as a member of the council of the European Central Bank, whose decisions he is bound to carry out. In Frankfurt for the monthly meeting of the ECB on November 18th, Honohan announced on RTÉ Radio 1’s Morning Ireland that Ireland would need a bailout of “tens of billions”.
Rarely has a finance minister been so deftly sliced off at the ankles by his central bank governor. And so the Honohan Doctrine that bank losses could and should be repaid by Irish taxpayers ran its predictable course with the financial collapse and international bailout of the Irish State.
And no less than IMF chief Dominique Strauss-Kahn had given coded support in public for the Irish position. This Bloomberg report is from November 13:
The International Monetary Fund stands ready to help Ireland if needed, its managing director said, as market concern about the country’s debt crisis continues.
“Everybody knows that the situation with Ireland, it’s a difficult situation,” IMF Managing Director Dominique Strauss- Kahn told reporters today in Yokohama, Japan. “So far I haven’t received any kind of request. I think they can manage well. If at one point in time, tomorrow, in two months or two years, the Irish want support from the IMF, we will be ready.”….
Strauss-Kahn, who is attending this weekend’s Asia-Pacific Economic Cooperation forum, also told reporters today that Ireland’s debt problems are mostly linked with “one big bank” and are different from those of Greece.
“It’s not the same thing as Greece’s problem,” which was caused by a lack of economic competitiveness in addition to fiscal woes, he said.
Notice the strategy of the ECB was to force a rescue on Ireland even though the need was not imminent. So Strauss-Kahn saying that he was ready when the Irish were ready but “I think they cam manage well” was pointedly standing aside from the matter. This is consistent with the Kelly account:
The negotiations went downhill from there. On one side was the European Central Bank, unabashedly representing Ireland’s creditors and insisting on full repayment of bank bonds. On the other was the IMF, arguing that Irish taxpayers would be doing well to balance their government’s books, let alone repay the losses of private banks. And the Irish? On the side of the ECB, naturally.
In the circumstances, the ECB walked away with everything it wanted. The IMF were scathing of the Irish performance, with one staffer describing the eagerness of some Irish negotiators to side with the ECB as displaying strong elements of Stockholm Syndrome.
The bailout represents almost as much of a scandal for the IMF as it does for Ireland. The IMF found itself outmanoeuvred by ECB negotiators, their low opinion of whom they are not at pains to conceal. More importantly, the IMF was forced by the obduracy of Geithner and the spinelessness, or worse, of the Irish to lend their imprimatur, and €30 billion of their capital, to a deal that its negotiators privately admit will end in Irish bankruptcy. Lending to an insolvent state, which has no hope of reducing its debt enough to borrow in markets again, breaches the most fundamental rule of the IMF, and a heated debate continues there over the legality of the Irish deal.
Now in fairness, what this depicts is a divided Ireland (the Finance Minister versus the governor of the central bank, who also happens to be aligned with the ECB) while the IMF is trying to fight an uphill battle with the ECB to get a more realistic deal. As we have said repeatedly, Ireland is the poster child of “austerity does not work”. Its nominal GDP has fallen 20% since steep budget cuts were implemented, making its debt to GDP ratio worse.
So why was what Geithner said on the call probably more important than the Treasury spokesperson suggested? First, as anyone who has spent a lot of times in meetings can attest, a person who is seen as influential or knowledgable, even if they do not have a formal decision-making role, can wind influencing a decision. Indeed, the theoretical outsider can has more sway by being perceived to be objective.
And let us not forget: the US has more votes on the IMF board than any other nation, and Geithner is the US’s governor. Do you think his expressing a negative view of a haircut might have some influence on the IMF?