Costs to bail out bondholders of Irish banks has now soared to $142 billion. Worse yet, the new Irish government completely caved in to the EU and ECB and will attempt to balance the entire amount on the backs of taxpayers.
Ireland yielded to the European Central Bank to protect bondholders even as its bailout bill for the region’s worst banking crisis moved to as much as 100 billion euros ($142 billion) after stress tests.
The ECB in Frankfurt was “solidly opposed” to imposing losses on investors in senior bank debt, Finance Minister Michael Noonan told broadcaster RTE today. The ECB agreed to provide “ongoing” funding for the banks, he said.
Ireland agreed yesterday to inject as much as 24 billion euros into four banks, while leaving bondholders untouched. The government already funneled 46.3 billion euros into the financial system and set up an agency that paid more than 30 billion euros to assume risky property loans. The total equates to about two-thirds the size of the Irish economy.
During an election campaign last month, Eamon Gilmore, now deputy prime minister, dismissed ECB President Jean-Claude Trichet as a “civil servant” who would answer to politicians. As recently as March 28, Agriculture Minister Simon Coveney said the government planned to impose losses on senior bondholders in the banks to cut the costs of its bailout.
“Taking all of the losses of the banking system and putting them on the balance sheet of the government doesn’t make sense,” Nouriel Roubini, co-founder of Roubini Global Economics LLC, said today in an interview from Cernobbio, Italy, with Maryam Nemazee on Bloomberg Television’s “The Pulse.” “Eventually, the back of the government will be broken.”
“Rather than go after over 20 billion euros in unguaranteed bonds, the government is making ordinary citizens bear the burden of this debt,” Gerry Adams, leader of nationalist party Sinn Fein, said in statement today. “Rather than act in the interests of the Irish people they are acting in the interest of the banks.”
Backs of Irish Taxpayers Will be Broken
What is the point of throwing the bums out in a massive repudiation of government policy if the new bums have the identical policies as those they replace?
The Euro reacted positively to this turn of events and also to expected interest rate hikes by Trichet. Those hikes with further exacerbate the problems of Greece, Ireland, Portugal, and Spain.
I am sticking to my long-held position “what can’t be paid back, won’t.” The timing is uncertain, and Roubini phrased it well: “Eventually, the back of the government will be broken.”
I might add, so will the backs of taxpayers. The pertinent question is how long the taxpayers put up with another set of politicians who cave in to bankers.
Mike “Mish” Shedlock
Global Economic Analysis