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Repaying bondholders while immiserating people: Ireland’s EU-IMF programme
by Andy Storey
16 January 2011

Ireland has been a member of the IMF since 1957. Despite ongoing calls from global justice groups for Ireland to help reform the undemocratic governance of the IMF and end the damaging impact of the IMF’s policy conditions, the country has failed to influence the institution in a pro-democracy or anti-poverty direction. Partly as a result of these failures of successive Irish governments, Irish people are now confronted with the same anti-democratic and immiserising consequences the IMF has imposed around the rest of the world.

The Irish government has recently negotiated a ‘bail out’ package with the EU and the IMF. The loan agreement locks Ireland into a very specific neo-liberal economic model. The document, for example, emphasises the need for a “business friendly environment”, “vigorous action to remove remaining restrictions on trade and competition”, and claimed private sector efficiency including in how public utilities (such as gas, electricity and water supply) are run. ‘Bail out’ disbursements will depend on the speedy implementation of the agreement and there is virtually no flexibility to allow for changes to the content of the agreement, even if (as is likely) a new government takes office in the coming months.

In return for this erosion of democracy, what is gained? The loans from the EU and the IMF will be used, in large part, to repay the bondholders (mainly European financial institutions) who lent to the Irish banks that have now crashed and burned, and whose liabilities the Irish state has recklessly guaranteed. As Paul Krugman has pointed out, “The [bank] debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of these debts.”

Many economists are calling for Ireland to default on that portion of the debt that is owed to the bank bondholders on the grounds of both equity and economic sustainability. Irish economist David McWilliams frames the issue: “We are witnessing a monumental struggle between the innocent average Irish person and the guilty creditors of the bust Irish banks. … The Irish negotiators … acted as debt collecting agents of foreign banks. So the very banks that should be punished for their failures are being bailed out by the Irish citizens.”

If a (partial) default occurred, would Ireland be isolated from international financial markets and be unable to raise the funds to keep basic state services running? In fact, the markets are currently punishing Ireland (through exceptionally high interest rates being demanded on Irish bonds), and the ratings agencies are downgrading Ireland’s credit rating, precisely because they see the attempt to repay bank debt in full as futile. Drawing a clear line between the portion of the debt that guarantees the bank bondholders (and which should not be paid) and that portion that is the government’s own debt would actually serve to calm the markets, and allow Ireland to borrow the money necessary to cover government running costs at a reasonable rate of interest.

And any market ‘punishment’ would almost certainly be short-lived – research suggests that markets, on average, fully ‘forgive’ defaulters within three years (though at least partial access to the money markets recovers well before then). The recent experience of Iceland, which defaulted on a portion of its foreign debts and is now able to borrow at reasonable rates, supports this point.

A first step in a default could be the establishment of a debt audit to determine the precise sums and actors involved, as the identity of the bondholders is not precisely known. This initiative would mirror comprehensive debt audits that have been carried out throughout the Global South, including the official debt audit commission established by Ecuador in 2007 to assess the legitimacy (or lack of it) of historical lending to that country.

The stated reasons for opposing an Irish default on bank debt do not stand up to scrutiny. But the real reasons are very different to the stated reasons. As Lapavitsas et a Research on Money and Finance report observed in relation to the Greek ‘bail out’ of May 2010, “Although the rhetoric of European leaders was about saving the European Monetary Union by rescuing peripheral countries, the real problem was the parlous state of the banks of the core. The intervention was less concerned with the unfolding disaster in Athens and more worried about European (mainly German and French) banks facing a wave of losses and further funding difficulties.”

Greece’s debt burden is as unsustainable as Ireland’s. A recent report by Citigroup argues that at the end of Greece’s three-year “adjustment” period, debt restructuring will still have to take place – but that, by then, at least half the debt will be owed to the EU and the European Central Bank. In other words, the private institutions will have gotten off the hook to a significant extent and the write-downs will be largely borne by the public sector. This is the same logic driving the Irish ‘bail out’ – the privatisation of profits and the socialisation of losses.

Opposition to the EU-IMF intervention, and to the Irish government’s cutbacks (including cuts in the minimum wage and social welfare), must demand a default on bank debt and not just a reorganisation of which sectors of Irish society should bear the cost of debt repayments. In the words of the Italian playwright Dario Fo, Irish people need to insist that they ‘can’t pay, won’t pay’ – and shouldn’t pay.

By Andy Storey, lecturer in political economy, University College Dublin, Ireland; chairperson of the NGO Action from Ireland (

Source: Bretton Woods Project

This article is extracted from The IMF and Ireland: What we can learn from the global South, a paper prepared by Afri, December 2010.

Andy Storey