The Bailout

This EU/IMF bailout stinks for a whole lot of reasons. Our great leaders went into the discussions and seemed to be happy to give away everything as long as corporation tax wasn't touched. I am not at all convinced by the arguments around corporation tax and the reasons for keeping it at 12.5% but I am pretty sure that flushing the country down the toilet isn't one of them. And even after the draconian measures being imposed on us I'm pretty sure that the bailout isn't going to fix Ireland, Irish banks or stop the spread of "contagion" to the rest of the EU.

As I have harped on about before, the entire mess goes back to the disastrous bank guarantee in September 2008. Turning private debt in the banks into sovereign debt owed by the tax payer was the single most stupid thing ever done by Fianna Fáil and it's not like there aren't plenty of other options to choose from. This has left the tax payer on the hook for the banks' massive borrowings still outstanding to European banks. This is where the biggest stink in the bailout comes from.

We are being loaned €22.5B from the IMF and a further €45B from two EU funds. On top of that we have to immediately throw most of the contents of the Pension Reserve Fund into the black hole of the banks. All of this bank funding is required to enable the German, French and UK banks as well as the ECB to be repaid at some point in the future. So the net result of the liability to the Irish tax payer is that other EU banks remain solvent. Seems to me like that's pretty good leverage to have in negotiating terms on these loans. Instead the government played meekly and took whatever was offered without flexing any muscle at all.

Secondly we have to ask, what is the price being paid for this money? We the tax payer are being lumped with an average rate of 5.8% for the €67.5B external bailout. That's just under €4B per year in interest to the EU/IMF. But when you look at long term financing costs for Germany they come in at around 2.67% on their 10 year bonds, so we are being gouged by our EU partners by over 3%. Hardly, seems like a community coming together to help each other out. Again we should have turned around and say that unless the rate was closer to 3% that we would just default and bring the whole Euro house of cards tumbling down.

Finally, how will this bailout actually help Ireland and our deficit in current spending? The fastest way to close the gap between taxation and spending is to get sustainable growth back in the economy and the best way to do that is via targeted stimulus using the NPRF. Having now blown our main avenue for growth on the banks we are now stuck in a zero/low growth scenario with higher and higher interest payments swamping any increase in taxation due to growth. That means we have to raise additional taxes and since corporation tax is sacrosanct, that means extra income tax, PRSI, property taxes, VAT, excise and the like for the ordinary punter.

We are now in a downward spiral from which there appears to be very little hope of exiting. Thanks a bunch Soldiers of Destiny.