Business opinion: Paying a heavy price for slow learning

Ireland cannot solve debt problem alone

The ECB rescued the European project by dint of one little phrase – Mario Draghi’s promise to do “whatever it takes” to save the euro. Photograph: Chris Ratcliffe/Bloomberg

The ECB rescued the European project by dint of one little phrase – Mario Draghi’s promise to do “whatever it takes” to save the euro. Photograph: Chris Ratcliffe/Bloomberg

Mon, Feb 10, 2014, 01:00

One of the more pithy critiques of the 1998 Belfast Agreement was the assertion by SDLP deputy leader Séamus Mallon that it was, in effect, Sunningdale for slow learners – reference to the failed attempt to arrive at a powersharing deal in Northern Ireland that had taken place some 15 years earlier.

There may have been some differences, but fundamentally what was agreed on both occasions was a way in which both communities could share power that would in time lead to a normalisation of the political process.

You could take Mallon’s remarks a step further and say powersharing was inevitable in the North from the moment the Troubles broke out.

None of the other solutions – continued unionist domination or a united Ireland – was workable. The tragedy was it took so long for everybody to realise it and that the other two alternatives had to be pursued by their advocates to the bitter end.

It’s interesting and somewhat illuminating to apply the “Sunningdale for slow learners” analogy to the economic catastrophe that befell the Republic in 2007 and the various policy responses – both internally and externally driven – that followed.

It stands up pretty well, particularly when you look at the problem of the debts run up by ordinary people over the previous five years. It was obvious, to some at least, as far back as 2007 that the banking system was irredeemably broken and would have to be rescued by the ECB, because the State could not afford to do it.

It was equally obvious – again to some – that thousands of ordinary people were hopelessly insolvent as a result of property-related borrowing. They could not all be bankrupted for any number of common sense and political reasons. There would have to be debt forgiveness.

Both of these things came to pass in the end. But only after every other alternative had been exhausted and the scale of the crisis exacerbated. The various proponents of these alternatives exhibited a doggedness that would impress even the most hardened northern politician.

Their arguments were well marshalled and forcibly made, but the inevitability of what had to happen could not be argued away by even the most trenchant advocate of austerity or moral hazard.

Debt forgiveness
We are now starting to see organised debt forgiveness by the main banks. AIB last week gave a glimpse of the process it has put in place for split mortgages. Rather than seeking to punish people for taking a writedown, it aims to encourage them to take as small a writedown as possible. It’s a clever response, but the fact that it has taken five years for the bank to get to this point looks like retail banking for slow learners, to paraphrase Mallon.

In the end, the ECB rescued the Irish banking system through emergency liquidity. Ultimately it helped rescue Ireland via the troika and, most particularly, by going along with the Anglo promissory note deal. Indeed, the ECB rescued the European project by dint of one little phrase – Mario Draghi’s promise to do “whatever it takes” to save the euro. Those words pledged the bank’s balance sheet and money-printing ability to defend the currency. The rest looks like being history.

The reason Draghi had to do what t he did was because everybody knew that, ultimately, the ECB was the only entity that could solve the crisis and that, in the end, it would have to. A similar pledge from Draghi’s predecessor Jean Claude Trichet three or four years earlier could have saved Europe a lot of pain. To para- phrase Mallon again, Draghi’s remarks were central banking for slow learners.

Perhaps the positive point to take from all of this is that, while there are still a number of aspects to the Irish crisis that have to be addressed, each has only one real solution despite protestations to the contrary. The most obvious one is the size of the debt run up by Ireland as it extracted itself from the mess it found itself in back in 2007.

The size of this debt is not unrelated to the prevarication and refusal by many, who should have known better, to accept the inevitable referred to above. But even if this was not the case, the problem cannot be solved by Ireland alone.

For Europe to ignore this and the associated solution – retrospective recapitalisation of the banks or some other form of debt relief with the ESF the obvious vehicle – is to run the risk of being branded a slow learner once again.

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