[Marxism] Celtic tiger dead, RoI back to third world status

[D OC <donaloc@xxxxxxxxxxx>]

A chairde,
 
The Economy here in Ireland continues to deteriorate. Yesterday it was 
projected that the Republic would experience a 6% decrease in economic output 
in 2009 with a 2.5% reduction in 2010.
 

The big story, however, is not simply the sudden collapse of the Irish economy, 
it is the potential that the state itself might default on sovereign debt. 
Liberal commentators are pushing cuts on the back of the Argentina experience.

 

The Irish economy was at one time held up as the shining light of 
neo-liberalism. It was founded on FDI-led growth sucked in by low corporation 
tax levels and attracted by a relatively well educated, low cost English 
speaking workforce in the Eurozone. The initial growth was augmented by US 
companies coming to Ireland to avail of low corporation tax levels which 
allowed, for example, leading US manufacturers to declare production where none 
had occured to avail of lower tax rates.

 

All this kept the Irish government in the cash. The problem was it could never 
stay the course. The US govt lowered its own corporation tax levies on 
multinationals which undermined a considerable portion of Irish tax revenues. 
At the same time, the near full employment experienced resulted in a 
significant hike in the cost of labour. However, the economy continued to grow 
past its sell-by date through inflation in the housing sector which enjoyed a 
prolonged and extended boom turning into a bubble. This underpinned 
unprecedented credit both personal and business. Property developers were 
encouraged to borrow ever more by banks happy to live off interest-only 
repayments ahead of asset price realisation.

 

When the US credit crunch occurred Irish banks were not overly exposed to the 
US sub-prime sector - unlike other EU banks. However, they were incredibly 
impacted by the drying up of inter-bank lending and the domestic property 
crash. No bank wanted to lend to others as no-one could be sure who was 
exposed. The Irish govt thought that it pulled a fast one by guaranteeing both 
deposits and liabilities in all six Irish banks. In so doing however they tied 
the future of the Irish state to that of its banks. In the short run this 
sucked credit from British banks whose depositors were concerned about the 
absence of a British equivalent guarantee. But in the long-run, the market knew 
that the Irish govt could not stand over this commitment and this raised the 
cost of sovereign borrowing.

 

It looked as if it might patch up the banks but the problem was that they 
stopped lending to private sector businesses and this caused even greater 
collapses throughout the property market. Those in trouble couldn't sell assets 
and just went belly up. The situation became even more depressed. Banks now 
started to count up losses accrued from their massive exposure to the Irish 
property market and lent even less.

 

The market sensed failure in the air and despite the lack of any run on the 
banks, the share prices collapsed to many divisibles of their former value. The 
Irish govt had to step in to prevent the collapse of the domestic investment 
bank Anglo-Irish following exposure of corrupt(?) corporate decision-making 
(see below). It is now poised to do the same with the biggest two banks in 
Ireland, Bank of Ireland and Allied Irish. Another two banks, Northern Bank and 
Ulster Bank are both hugely impacted by the near collapse in the banks which 
own them: Banke Danske and Royal Bank of Scotland.

 

The nose-dive across the Irish economy was matched by a neo-liberalist 
prescription reminiscent of Herbert Hoover as the Irish govt considered the 
only way to respond to a collapse in the Irish economy was to cut back further 
on public sector spending. Further reducing domestic consumption.

 

At the same time, Irish state finances look incredibly shaky. The reality is 
that at this stage it may be impossible for the Dublin govt who cannot print 
euros to sustain massive levels of borrowing. The possibility of a stimulus 
package has been discounted both due to neoliberalist prejudice but also 
because it is beyond the state. The status of Irish sovereign debt is about to 
be degraded (the spread for a AAA-graded debt has already reached the extent of 
Greece) and this will increase further the cost of borrowing.

 

So we can expect more cut backs and an objectively revolutionary situation to 
arise in the next few years. No-one is going nowhere as there is nowhere to go 
(emigration) so people are pretty annoyed and stuck with massive mortgages to 
pay off (if they can).

 

The situation in the north is very different. The British economy itself is in 
serious difficulties. It became hugely dependent on the finance services sector 
(a clearing house for super-exploited profits) based in London. Many consider 
that the recent downturn has largely put paid to London as a viable centre for 
this activity. That remains to be seen but for now the situation remains 
serious. Without London providing income, the British state is hugely exposed. 
It already has considerable debt and is borrowing further to enable a keynesian 
stimulus and to nationalise its banks. It is unclear whether this will work but 
in any case, British public finances could become unmanageable in the next few 
years. 

 

The reaction of the British workers has largely been to focus on their rights 
as British workers - in this they were encouraged by the British prime 
minister. It is sadly to be expected that the British labour aristocracy would 
behave in this manner. Although a few years back a similar protest was 
organised by Irish workers about the contracting of work to lower paid eastern 
european workers by Irish Ferries. But I think that this is slightly different. 
The issue then was not so much the nationality but the issue of pay. But it 
always sails close to the wind and the unions seem content to avail of 
chauvinism in engaging their memberships.

 

In any case, the British govt will likely have to further devalue the British 
currency (it has already depreciated considerably against the dollar and euro) 
and will soon start the printing presses rolling (in true monetarist style). 
What this will achieve is far from clear to this materialist but it is clear 
that the British are going to try to devalue themselves out of this hole. The 
net result is that the standard of living of the English working class will 
fall considerably.

 

The impact of this on the north of ireland economy has yet to be felt. The 
reduction in British VAT in an attempt to stimulate consumption has sucked up 
massive consumption from the Republic of Ireland and cushioned the immediate 
impact (to the further detriment of RoI VAT receipts).  However, even before 
the credit crunch the British were imposing stiff cuts right across government 
- 3% per annum. This will likely increase at a higher rate as fiscal policy 
tightens. The bulk of the pain is likely to be felt in London and Home Counties 
areas but the north has little economic base aside from the public sector so it 
also will suffer disproportionately from the cuts that are coming.

 

Things looking rough all around but many opportunities for those with an 
interest in revolution. 

 

My take is that the world economy can not simply reinflate because of 
deleveraging. It will take many years for the ratio of credit to assets within 
the banks to return to its level of 12 months ago (if ever). Without this, the 
imbalance in trade between the net consumers of the west and the net producers 
of the east will remain unsustainable - impacting primarily on state finances. 
Two trends will mark future economics in my opinion, a lowering of western 
living standards to that of the Chinese and the parallel development of niche 
production in the western economies through Keynesian type responses.

 

Le meas,

DoC.

 
 DAVID LABANYI for Irish Times

The State’s two main banks came under renewed pressure on the stock market this 
morning as they suffered sharp falls in early trade.

At 8.45am AIB shares were down 16.7 per cent at 45 cent, while Bank of Ireland 
was 14.6 per cent lower at 32 cent. 

The falls follow sharp declines yesterday and come despite the Government’s 
announcement of a recapitalisation plan last week, which will see €7 billion 
pumped into Bank of Ireland and AIB.

Contributing to the decline in AIB's share price was a downward revision in the 
outlook for its subsidiary Bank Zachodni WBK from stable to negative by rating 
agency Fitch, which led to a 7.5 per cent fall in the Polish bank’s shares 
yesterday. 
At yesterday's close, Allied Irish Banks' 70.5 per cent stake in BZ WBK was 
worth €787 million compared with the group's overall market cap of €486 
million. 

Investor confidence in Irish financials has also been shaken by Bank of 
Ireland’s upwards revision last week of its estimates of impaired loans to €6 
billion over the next three years last week. 

The Irish financial sector is also digesting news of tens of millions worth of 
sterling and dollar loans to former Anglo Irish Bank chairman Seán FitzPatrick 
as part of his loan transfers between the two institutions to conceal up to 
€122 million in borrowings from Anglo Irish, reported in today’s Irish Times . 

This report followed the downgrading of Irish Nationwide’s debt rating – an 
indication of its ability to repay its borrowings – by credit rating agency 
Moody’s. 

Irish Nationwide’s rating is now just one level above speculative or “junk” 
status and Moody’s has a negative outlook for the lender, meaning it may 
downgrade its ratings again soon. 

Aside from specific investor concerns about Irish banks, the sector came under 
pressure across Europe yesterday on fears that further capital will be required 

Yesterday, Lloyds fell 8 per cent on speculation of the need for further 
capital injections post the losses at HBOS, although by 8.45am it was ahead 
just over 1 per cent in London.

_________________________________________________________________
Get 30 Free Emoticons for your Windows Live Messenger
http://www.livemessenger-emoticons.com/funfamily/en-ie/
________________________________________________
YOU MUST clip all extraneous text when replying to a message.
Send list submissions to: Marxism@xxxxxxxxxxxxxxxxxxx
Set your options at: 
http://lists.econ.utah.edu/mailman/options/marxism/archive%40archives.econ.utah.edu