Those Merkel proposals on bond markets…

As we gaze in awe at the stunning success of the measures so far to calm the Eurozone, it’s worth reflecting on a piece by the ever excellent Kathleen Barrington (she’s not our politics – at least not exactly, but she’s a good analyst who doesn’t sugar the pill) in the Sunday Business Post about the Merkel proposals on the bond market. And it’s interesting how much ire this has provoked by the usual suspects.

German chancellor Angela Merkel seems to be talking sense. Last week, she reiterated her proposal that new buyers of eurozone bonds should accept liability clauses starting in 2011.

The German government has proposed that in the event of a sovereign debt crisis – such as the one being experienced in Ireland – the clauses would result in the payment period for government bonds being extended. If the solvency problem continued, additional steps would be considered, including ‘‘further extension, interest rate cuts and a reduction in the nominal value’’ on the bond, according to a German government paper obtained by Bloomberg.

And here’s a crucial point:

Merkel is seeking a solution for a very serious problem: namely, that there is no incentive for banks and pension funds to lend sensibly to borrowers if there is an implicit guarantee that they will always be bailed out by the taxpayer – even at the expense of impoverishing a nation, as is happening in Ireland.

The European institutions that lent our banks and our government $509 billion never bothered to consider the risk, because they assumed there was no risk to them.

They relied on their well founded belief that governments were so terrified of the bond markets that they would bend over backwards to keep bondholders happy – even at the expense of alienating their own citizens.

Add to that the observations that Michael Taft made this week about how the bodies charged with oversight, the EU, the IMF and the OECD, throughout the 2000s colluded in the pretense that all was well economically and one can see that a perfect storm developed.

And note that it is the citizens who pay, not those who take the risk.

This is, by any measure, a complete distortion of capitalism itself – and that’s before we bring any left or progressive analysis to bear upon it. Which is why to be fair – and to their enormous credit – it has raised the ire of so many on the economic libertarian and conservative right.

And as Barrington notes;

This is precisely what has happened in Ireland.

And she continues:

Taoiseach Brian Cowen and Minister for Finance Brian Lenihan first kow-towed to the banks when they guaranteed their liabilities, then kow-towed to the bond markets by raising sovereign debt to repay most of the bank bondholders.

They were motivated by a not-unreasonable fear that they would, in future, be punished – either by being locked out of the markets altogether or being charged such punitive interest rates that the country could not afford to borrow.

The problem in Ireland is, unfortunately, so severe that we ended up with the worst of both worlds.

We are repaying most of the bank bondholders with taxpayers’ money, and we are shut out of the sovereign bond markets anyway because the markets have effectively judged that we cannot shoulder the sovereign debt burden we have already assumed, let alone new burdens.

Which is why the discussion over the past two years has been one rooted in utter unreality. It’s not that there was any dearth of voices arguing that the Government line was incorrect. Some of those, and I’ve said it here before, were unformed analyses which rested on arguments with insufficient connection to prevailing economic contexts. And unfortunately some of the left has fallen into the that trap. But if one looks at a range of other voices from right to left including both Michael Taft and Sinn Féin there has been a much stronger analysis rooted in political economy that has provided more than the mere outlines of a way forward.

Yet time and again, despite the continuing failure of the Government approach to these matters, and in some respects unbelievable holes in their argument, these suggested approaches were rejected by a consensus that now has been entirely turned on its head. The point has been made that no-one knew the full scale of the problem in relation to the banks. In the specific that’s correct, but in the general many voices, again those on The Irish Economy, Taft, Sinn Féin and others were arguing precisely this point, that the state was leaving itself exposed to potentially massive and unsustainable burdens, and in attempting to provide what were effectively (in economic terms) cosmetic policies in relation to expenditure cuts that were impacting profoundly negatively on growth and any prospect for a sustainable path out of this crisis (and it is a crisis) it was exacerbating the problem, particularly for when the full shape of the banking costs became apparent.

And worse again it has counterposed two essentially separate entities, the financial sector and the Irish state with one, the latter, being bled to support the former (although there are simply insufficient resources there to sate the appetite and requirements of the former). That is on every level unsustainable, but it’s also entirely wrong and Merkel recognises this (at least in a broader context). A state and its citizens should not have to support a private sector in this way. Moreover a state and its citizens cannot support a private sector in this way. It’s an impossible burden and growing ever more so (and this makes a nonsense of the diversionary tactic as regards state expenditures being ‘too high’. Given the loading in relation to supporting the financial sector the issues with state expenditure are a nothing – though as recently as four weeks ago even the SBP was arguing that the fundamental problem was the latter).

As Taft has argued consistently, the policies taken by the Government could not impact on the deficit as it was presented last year and the year before. Fractional improvements that did precisely nothing to encourage growth, indeed quite the opposite. So why pursue them?

Because the consensus which has prevailed is one our political parties, and Fianna Fáil in particular, have been locked into. An almost unquestioning belief in the primacy of markets, an aversion to the state and state intervention, a blindness that is in some respects remarkable to just how difficult the situation is for many people in this society even before the boom (I have to reference P O’Neill’s excellent post here on Irish Election which notes that the information available from before the crash indicates that the overwhelmingly middle class and comfortable view of the society was precisely that, middle class, comfortable and flawed – the CSO Report O’Neill references is one I will return to soon), and an indifference to what the outcomes of the economic policies implemented over the past three years mean to those on median and lower and no incomes.

And then one examines the class dynamics at work and the relationships to power and capital and one realises that of course the former will be given the free pass, because after all when one has a socio-economic viewpoint that reifies business/etc over citizens, when the society itself is characterised entirely seriously as Ireland Inc., the latter will always lose out.

It’s also about power in its rawest incarnation and standing with power rather than standing with people. About seeing cutting welfare, or the cutting of provision, as preferable (indeed inevitable, though we hear less of that sort of talk these days for some reason, instead muffled by ‘all will suffer’ [sic]) to increasing taxation. And even though this is acknowledged to be both intrinsically unfair, disproportionate in its impacts upon those who are dependent in whole or part to such services/provision and also in economic terms neither preferable or effective still it continues.

That’s the kind of society we live in. The financial sector protected at all costs, massive social transfers from those who can least afford it, a mulish indifference to what this means for us as an economy and a polity. And all presided over and cheerled with the complacent argument that this was ‘inevitability’, that ‘there was no money’, that we had no choices.

Barrington continues:

In that regard, we appear to have been badly let down by Jean-Claude Trichet, president of the European Central Bank, who has also done the bidding of the bond markets by his insistance that no European bank should fail. Ireland must repay the bank bondholders by issuing sovereign debt.

Now that the sovereign debt markets have dried up, we have to borrow more from the European Financial Stability Facility and the International Monetary Fund; more money that will have to be repaid by Irish taxpayers.

But she notes that:

Merkel now wants to call the bluff of the bond markets.

There was a predictable reaction from the bond brigade last week when they complained that Merkel’s proposals would cause further nervousness.

The fact that these proposals have spooked bond markets may be bad news in the short term, as it has driven up the cost of money for borrowers, including Ireland.

But it could end up being good news for European citizens in the medium term, as bondholders digest the realpolitik of what Germany is proposing: namely, that in future there will be no such thing as a free lunch for bondholders in the eurozone.

What’s not to like about requiring the boys in the bond markets to take a little risk for once?

Why should they continue to get away with reaping fat bonuses when they lend recklessly, secure in the knowledge that European citizens will do (or be made to do) almost anything – increase retirement ages, cut the minimum wage, close hospitals, slash the salaries of teachers, nurses and police – just so that they will be paid back?

And that:

She has merely proposed that in future, those bondholders need to understand that when they lend to European borrowers they will be subjected to European rules, which would ensure that they share in some of the risks that they are taking.

The German Finance Ministry document obtained by Bloomberg said the ‘‘blanket’’ introduction of standardised collectiveaction clauses for all government bonds issued in the 16-nation euro region would be ‘‘unproblematic’’, and ought to begin next year.

Merkel’s plans for a permanent crisis-resolution mechanism for the euro region from 2013 sparked a bond sell-off after European Union leaders last month agreed to consider the German proposals.

The Irish government was unhappy that Merkel’s remarks drove up the interest rate the markets wanted for the risk of holding Irish government bonds and the bonds of other peripheral states.

Otherwise?

…if the European Union allows business to continue as usual in the bond markets, there will be nothing stopping lenders making the same reckless lending decisions that got us into such difficulties in the first place.

Indeed I referenced a piece by Tim Leung of the LSE in Prospect magazine some months back where he, and he’s by far not the worst, argued explicitly that market failures would require states to provide bailouts again and again into the future, seemingly suggesting that that was an inevitability. Given how this state is being effectively stripped of its social and other assets by this crisis we can see how appalling that outcome would be for us as citizens.

And if the EU has any meaning at all it is precisely at this point that something must be done to forestall any further crisis of this nature.

I’d prefer if Barrington wrote the word citizen instead of taxpayer in the next sentence, but there’s a degree of truth in it…

Merkel appears to be the only one standing up for the interests of European taxpayers and, for that, she deserves our gratitude – even if the move is coming a bit late for Ireland.

A bit late? Far far too late. A decade or so late.