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Private debt, public pain: lessons for Ireland
by Nick Dearden
23 December 2010

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.

Nick Dearden is the director of Jubilee Debt Campaign.

Nick Dearden

is the director of Global Justice Now