Nobel economist criticises Irish bondholder payments
NOBEL PRIZE-winning economist Joseph Stiglitz has described the continued payments by the Government to unsecured bondholders as “unconscionable”.
Ireland’s chances of cutting its way back to health were negligible he said, and its prospects were being compounded by German chancellor Angela Merkel’s austerity rhetoric.
“Why should Irish taxpayers have to give up health and education to make good on a loan from a private bank when the previous government failed to do an adequate job of regulation?” asked Prof Stiglitz in an interview with The Irish Times.
There were cases where austerity programmes led to quick recovery, he said, but there were so few and in circumstances so different to Ireland’s that they weren’t applicable.
“The only instances in which they worked tended to be when there was a weak country with a strong trading partner and typically with a flexible exchange rate. You have a fixed exchange rate and a Europe in recession.”
In the complexity of the discussion over bondholders, Prof Stiglitz said simple facts were being overlooked: the unsecured bondholders were paid a normal interest rate for bearing a risk by investing in Irish banks, which was and is the nature of the market economy.
In addition the process of internal devaluation – a drop in salaries and other costs– would, he said, only fan the flames of recession.
“Your ability to make mortgage and other debt payments is diminished and you already have a problem in your real estate market,” he said. “In that sense the suffering, the bankruptcies and the foreclosures are going to only increase.”
A staunch defender of the Keynesian principle of governments helping sustain economic demand, Prof Stiglitz of Columbia University is pessimistic of the euro’s chances of survival.
Prof Stiglitz is no fan of European austerity measures, describing them variously as a “mutual suicide pact” and “medieval practice of blood-letting to get rid of bad humours” which eventually only made the patient sicker.
In the case of Ireland, he urged the Government to shrug off the peer pressure it was experiencing, saying that threats from creditor banks and political partners were as predictable as they are toothless.
“They always say if you don’t all hell will break lose but the fact is, whenever it’s tested, it’s never true,” he said. “Russia defaulted and was back in the market a short time later. And that was a government defaulting, Ireland is socialised debt of an unsecured creditor.”
He was scathing of the leadership from Germany, saying Dr Merkel was doing much to drive the anti-EU feeling emerging on the periphery of Europe. “She uses the vocabulary of solidarity without the substance, the solidarity that we will sink together.”
His pessimism about euro zone countries was shared by other US figures in Davos such as Harvard University’s Prof Kenneth Rogoff, a former IMF chief economist.
“It’s not just Greece, that’s ridiculous . . . you’re going to need other restructuring before this is over,” he said. “It’s a manageable problem but if you have a governance system that cannot reach a decision, no matter how obvious then, we have a problem.”