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Dublin: 10°C Tuesday 19 January 2021

Column: How our Government frightens the children with the ECB bogeyman

Ministers tell us the country will collapse if we burn the bondholders – but this is just a scare tactic. The Government has real options in dealing with debt, writes economist Michael Taft.

Michael Taft

THERE IS ONE argument in the current bank bailout debate that is getting tiresome. It goes like this:

If we do something the ECB doesn’t like they will cut off loans to our banks and the ATMs will dry up by the morning. Therefore, we have no alternative but to do what we are doing.

This broken-ATM argument comes from the ‘frighten the children’ stable. It is used to counter any alternative to the current Fianna Fail/Fine Gael/Labour strategy. We can’t do a or x or z because the ECB will cut us adrift. This argument limits options and debate, requiring nothing more than assertion. Ultimately, it justifies political inertia.

At its core, this broken-ATM argument requires us to assume that the ECB is irrational. We are told the ECB won’t tolerate anything that would result in cutting even one strand of bondholder hair for fear of the contagion it would cause throughout European finance. Then, in the next breath we are told that if we do alternative x, then the ECB will cut off our bank funding.

Imagine what would happen if they did this? Of course, our banks would melt down but there would be more losers than just us. The first loser would be the ECB itself. It would have to write off billions it loaned to the banks (yes, those assets are backed up by ‘assets’ – what chance those assets would compensate for the losses?) So the ECB loans billions to our banks and then pulls out the rug ensuring that it can never be repaid. Sound rational?

The second set of losers would be those financial institutions – primarily German, French and British banks – exposed to Irish banks. They would realise massive losses which their governments would have to make good. I’m not sure that Nicholas and Angela would be impressed with the ECB’s precipitous action.

Another set of losers, and this is all intertwined, is the impact on the banking systems of the peripheral countries. As Karl Whelan points out, the markets would start gambling on which country would be next for an ECB cut-off – sending their financial systems in a tailspin, multiplying the impact of the Irish bust.

The ECB’s actions to date are predicated on preventing contagion, or even the hint of contagion, from seeping out from Ireland into the wider eurozone. Yet, if the ECB withdrew their funding it would be contagion squared and then squared again. And it wouldn’t even take the ECB to go this far. Even the hint that they might do this would be enough to start a chain-reaction. Which is probably why no ECB official has ever referred to this possibility. This is why the markets have not factored in this extreme possibility – because it is so far-fetched (even for the most delusional and irrational investor) that it is not part of the risk landscape.

Except: in the Irish debate. Only here does the threat of ECB withdrawal get thrown around with abandon. Lucky for us international markets don’t pay much heed to our political debates. What might help get the debate back to some semblance of reality would be for a TD to ask the Minister for Finance under what conditions the ECB told the government that they would withdraw liquidity funding for Irish banks. The answer would be instructive.

The broken ATM argument rests on a highly irrational assumption. This is not to say that the new Irish government can tell the ECB to get stuffed. This line of action also has unforeseeable risks – and risk is the one thing we are trying to remove.

But between these two extremes there is a range of options and alternative strategies. The Irish room for manoeuvre is limited; but it is not non-existent. It will take hard work, creative work, a bit of risk, a lot of calculation and, most of all, an open and honest dialogue with the public; but there are options. In other words, it will take politics and the art of the possible.

So the next time you hear a new Government minister, taking over from Fianna Fail, using the broken-ATM argument – just remember: this is not a description of reality. But it may be an admission that the coalition parties didn’t have a strategy entering into Government (beyond election rhetoric); have not had time to come up with their own; are just tinkering with the old Government’s strategy; and are afraid of where a new strategy might take them if it starts from the wholly reasonable and rational proposition that the state shall not be obliged to honour private debt.

Sometimes it is safer and easier to frighten the children.

Michael Taft is Research Officer with UNITE the Union; author of the political economy blog Notes on the Front; and a member of the TASC Economists Network.

Andres Blumenthal: What happened when MY country defaulted on its debts>

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