Massive Rout in Irish Elections; Collision Course with the EU; Default the Best Option for Ireland

The voting is over in Ireland and in this writer's eyes, quite anticlimactic. Fianna Fail, the party that agreed to enormously unpopular austerity measures to bail out UK, German, French and US banks, was blasted to smithereens. The vote was both expected and well deserved.

The real fun begins now, and it is not at all certain what that outcome is. My choice is for default, but I do not get to vote. However, if common sense prevails, the EU and ECB is in for a rude shock.

Ireland's new government on a collision course with EU

The Telegraph reports Ireland's new government on a collision course with EU

Exit polls and early tallies from Ireland's general election heralded political annihilation for Fianna Fail (FF), the party which has ruled Ireland for more than 60 years of the Irish Republic's eight decades of independence.

The unprecedented and historic defeat, Fianna Fail's worst result in 85 years, makes the Irish government the first eurozone administration to be punished by voters in the aftermath of the EU's debt crisis. Voter turn-out was exceptionally high at more than 70 per cent, indicating public anger at the government and the EU.

Late last year, Ireland was forced to accept a �72 billion EU-IMF bailout to cover huge public debts that were ran up to save failed Irish banks.

The bail-out was designed to prevent financial contagion that threatened the existence of the euro, but according to economic forecasts, the cost of servicing Irish bank debt and the EU-IMF bank loans will consume 85 per cent of Ireland's income tax revenue by 2012, a burden that a majority of voters find intolerable.

Brian Cowen, the Irish Prime Minister and Fianna Fail leader, who stood down last month rather than face furious voters, was also pressured into implementing a savage �13billion austerity programme of tax rises and spending cuts drawn up by the EU.

The cost of the EU-IMF bailout in extra taxes for an average Irish family has been estimated at over �3,900 a year. Other deeply unpopular measures include controversial reductions to the minimum wage, unprecedented cuts to public services and 90,000 jobs losses in a country where unemployment is already running at almost 14 per cent.

In Dublin, Fianna Fail won just eight per cent of the vote in an electoral decimation that called into question the future of previously unassailable politicians such Brian Lenihan, the Irish finance minister.

"However bad people thought it would get for Fianna Fail, nobody thought it would get this bad," said Michael Marsh, professor of political politics at Trinity College Dublin. "That is highly significant."

Based on anger and some preliminary polls, I thought FF would get about 10-12% of the vote. By that measure Fianna Fail did as well as could have been expected except in Dublin.

Unfortunately, Brian Lenihan, one of the complete fools behind the Irish sellout to the EU, appears likely to retain his seat. However, he is burnt toast as Finance Minister. Please see Lenihan battles the tears as he claims fourth seat for details.

Returning to The Telegraph ...

Enda Kenny, Fine Gael's leader, will later on Sunday, start to form a new government, almost certainly with Labour, after full election results under Ireland's complicated PR system come through.

Both Mr Kenny and Eamonn Gilmore, Labour's leader, have promised Irish voters that they will renegotiate the EU-IMF austerity programme to reduce the burden for taxpayers and to force financial investors to shoulder some of the bank debts currently paid out of the public purse.

At a summit of centre-right EU leaders in Helsinki next Friday, Mr Kenny will use his position as Ireland's new Prime Minister to beg the German Chancellor, Angela Merkel, and French President, Nicolas Sarkozy, for concessions ahead of an emergency March 11 Brussels summit to restructure the euro zone.

But neither the two European leaders nor the European Central Bank or EU will permit any substantial changes, despite the huge popular Irish revolt against the bailout.

Chancellor Merkel will tell Mr Kenny that if he wants to reduce the high, punitive 5.8 per cent interest rate charged on EU loans then Ireland will have to give up its low corporate tax rates - a measure regarded as vital to Ireland's recovery and one of the few economic policies it has not yet handed over to Brussels or Frankfurt.

The new Irish premier will also be warned that there is no question of forcing privately-owned financial institutions to assume Ireland's �85 billion bank debts because the resulting market panic would spread to Germany and France, tearing the euro single currency apart.

As Irish voters headed for the polling booths on Friday, the European Commission bluntly declared that the terms of the EU-IMF bailout "must be applied" whatever the will of Ireland's people or regardless of any change of government.

"It's an agreement between the EU and the Republic of Ireland, it's not an agreement between an institution and a particular government," said a Brussels spokesman.

A European diplomat, from a large eurozone country, told The Sunday Telegraph that "the more the Irish make a big deal about renegotiation in public, the more attitudes will harden".

"It is not even take it or leave it. It's done. Ireland's only role in this now is to implement the programme agreed with the EU, IMF and European Central Bank. Irish voters are not a party in this process, whatever they have been told," said the diplomat.

Arrogance and Gall of the EU

Ireland, not the EU is in charge here. The opening salute from Kenny should not be to ask for EU concessions but to simply say "Go to Hell" or more politely to offer 1 cent on the dollar for debt.

That will set the proper tone for serious negotiation, and it is something I have been saying for many months.

Calls for a Vote

Dessie Shiels, an independent candidate in Donegal, said: "People have not been given the basic right of deciding whether or not they should have their taxes increased in order to repay bondholders who have lent to the banks."

David McWilliams, an economist and former official at the Ireland's Central Bank, has led calls for a popular vote under Article 27 of the Irish constitution, which requires on a matter of "such national importance that the will of the people ought to be ascertained".

"We have to re-negotiate everything," he said. "Obviously, the first way to do this is to make them aware that if they force us to pay everything, we will default and they will get nothing. So they had better get a little bit of something, than all of nothing. To make this financial pill easier to swallow, we must take the initiative politically. We can do this via a referendum.

"If the Irish people hold a referendum on the bank debts now, we can go to the EU with a mandate from the people which says No. This will allow our politicians to play hard-ball, because to do otherwise would be an anti-democratic endgame."

Declan Ganley, the Irish businessman who led the 2008 No vote to the Lisbon Treaty, said Ireland must "have the balls" to threaten debt default and withdrawal from the single currency.

"We have a hostage, it is called the euro," he said. "The euro is insolvent. The only question is whether Ireland should be sacrificed to keep the Ponzi scheme going. We have to have a Plan B to the misnamed bailout, which is to go back to the Irish Punt."

Calling for a vote is actually a very good idea. It would remove the stigma of Kenny saying "Go to Hell". Instead the people of Ireland can vote to tell the EU to "Go to Hell".

Other than outright default, putting the decision to a vote is the only thing that makes any sense given the stubborn arrogance of the EU.

Onerous Terms Cannot and Will Not be Honored

It is beyond stupid to demand terms so onerous they cannot possibly be paid back. Martin Wolf, writing for the Financial Times feels the same way.

Please consider Ireland needs help with its debt

This is not one, but three, crises: an economic collapse; a financial implosion; and a fiscal disaster. On the first, given the fall in demand and the need for fiscal contraction, prospects for recovery depend heavily on exports. On the second, the direct costs of recapitalising the system are set to be around 36 per cent of GDP, according to Goodbody stockbrokers. On the last, according to the IMF, general government debt could be 123 per cent of GDP by 2014. A little over a third of this increase in the public debt ratio would then be a direct result of recapitalising the banks.

Such a crisis is beyond the ability of Ireland to manage without financial collapse and sovereign default.

Apart from the Armageddon of a sovereign default, two partial escapes exist. The more trivial would be a reduction in the rate of interest on Ireland�s borrowing: a 1 per cent reduction in the rate of interest would save the state 0.4 per cent of GDP a year. That would be a small help, at least. A more valuable possibility would be a writedown of existing subordinated and senior bank debt, which currently amounts to �21.4bn (14 per cent of GDP).

The ECB and the other members of the European Union have vetoed this idea, fearful of contagion. Indeed, the assistance package was partly to prevent just such an outcome. Yet the idea that taxpayers should bail out senior creditors of massively insolvent banks at such risk to the solvency of their state is both unfair and unreasonable. If the rest of the EU is determined to protect senior creditors, it should surely share in the cost of doing so. Why should the taxpayers of the borrowing country pay all? The new Irish government should make this point firmly.

Key Question

Changes in interest rates are meaningless, so would trivial, symbolic writedowns.

Wolf asked the key question I have been asking for months: Why should the taxpayers of the borrowing country pay all?

The answer is they shouldn't. Moreover I doubt they can. It would wreck the Irish economy to do so. If the EU breaks up over this, well that is the EU's problem more than it is Ireland's.

It is high time banks, not taxpayers bear the brunt of stupid lending decisions. There is no better time than the present to send that message, and the best way to do that is have the voters of Ireland decide.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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