Did the United States throw Ireland to the wolves during the bailout negotiations?

By Michael Breen (17 May, 2011)

An interesting piece of information that was not previously in the public domain surfaced in Morgan Kelly’s now infamous Irish Times article. He stated that:

‘The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.’

Kelly’s statement even prompted a response from a senior US government official. Writing in the Irish Independent, Michael Brennan quotes the official as follows:

‘The ECB and EC were both dead opposed and they are decisive. The US is not a decision maker on European issues,’

With the imminent arrival of Barack Obama, perhaps the media do not want to dwell on this disturbing issue. By suggesting the US government ruined Ireland’s best opportunity to restructure its burgeoning debt, Kelly has cast doubt on the friendship between Ireland and the US. It’s important that this issue isn’t ignored as it may have repercussions for future revisions to the bailout.

Kelly’s main argument is that the US Secretary of the Treasury, Timothy Geithner, is to blame. He suggests that Geithner is ideologically biased towards protecting the financial sector on the taxpayer’s dime. Without Geithner’s decisive intervention, so the argument goes, the IMF’s initial preference for debt-restructuring might have prevailed.

Although the full extent of Geithner’s role in the negotiations is not clear one thing is certain, as a former senior IMF official, Geithner has a deep knowledge of IMF decision-making and international bailout negotiations. He would have been acutely aware of how the private sector can be compelled to restructure debt and provide new loans. This is why it would be all the more disappointing if he did not side with his former colleagues on the issue of the haircut.

Nevertheless, I think it is not appropriate to blame a specific individual when we don’t have all of the facts. And I suspect that even if the US and UK had sided with the IMF’s staff during the negotiations the EC/ECB position would have prevailed.

With the EU authorities providing the lion’s share of the bailout funds, any intervention by the US to block the deal could have seriously disrupted international relations among the world’s major economic powers. It would have implied that the US was attempting to become a decision-maker on European issues. Moreover, it would probably have yielded little as the EU authorities could have walked away from the negotiations and offered funding without IMF involvement.

In summary, Geithner’s alleged actions seem to accord more with US interests and not his personal ideology. If the US was to intervene in European-led bailouts this would surely invite retaliation.

Still, the US could have adopted the allegedUKposition and at least attempt to speak up for the Irish. In fact, in previous high profile bailouts, Germany and the UK have quietly registered their discontent on the sidelines, without preventing the US from dictating terms.

Since President Obama will be visiting Ireland next week, perhaps the government will take the opportunity to ask him whether the US would be willing to support a more generous bailout.

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11 thoughts on “Did the United States throw Ireland to the wolves during the bailout negotiations?

  1. Oh no. Not here as well. US Treasury Secretary Geithner had a front row seat at the New York Fed when his predecessor allowed a relatively small bank (in both US and global terms), Lehman Bros, to fold and the international financial system froze. The lack of regulation and oversight that characterised the international finncial up to then has still not been remedied sufficiently (and certainly wasn’t last Nov.). No regulator or policy-maker still has a proper handle on the contagion that might be caused by an EZ bank restructuring/rescheduling/default event. No one wants to make the decision that could lead to the international financial system freezing again.

    And one should not read too much into the alleged bullishness of the IMF in favour of Irish bank debt restructuring. The contempt of IMF officials for EU officials seeking to get up the learning curve that the former have long ago ascended is pretty well documented. It isn’t much more than the usual turf wars and chest-beating. The IMF, allegedly, was horrified at the inadequate institutional and procedural arrangements underpinning the EZ. The lack of any sort of effective national or EU-level bank resolution procedure was a major deficiency.

    And we have to remember that it wasn’t just one domestic irish bank that was insolvent; the entire domeestic banking system was insolvent. Imposing losses on various categories of funders in a way that would allow a basic viable banking system to be ressurected would require a fully legal and judicially enforeceable process. Such a process did not exist – and is only beginning to be developed and applied to subordinated bonds in the Irish context.

    Over time it is possible that senior bonds in Anglo and INBS will be addressed, but this is fundamentally a political issue. It revolves around how much political capital and treasure senior EZ politicians and officials will be prepared to expend to shore up the EZ and retain its current membership.

    Rather than pointing the finger at this or that international politician or policy-maker it might make more sense to look in the mirror and ask ourselves what we can do to resolve this mess – in particular what we should do to convince senior EZ politcians that they should secure the consent of their very disgruntled voters to dip into their pockets to provide relief to the hard-pressed small peripheral countries.

  2. Intersting posting.
    However, I am puzzled about the relevance of the topic to the main issues on this web-forum.

    I cannot find any insight or opinion on the political and institutional reform in this Republic.

    • @Donal,

      It probably highlights the difficulty of securing support for political and institutional reform. It’s far easier to seek to blame some international power-player for not helping us out of this largely self-created mess (or to plead for assistance from another one) than to roll up the sleeves and tackle what’s in front of us.

    • Donal,

      The current financial mess is first and foremost a political predicament. The genesis of the financial problem goes back about 40 years or so. The financiers were able to finesse and scam politicians into agreeing not to invoke the standard operating procedures to regulate financial entities. It has been fermenting nicely since then. Some of toxic brew leaked out of the container in 2008. The results of this massive unregulated creation of credit money is what we are now experiencing – a massive, global, intractable, unpayable level of debt. The pols were duped. The banksters have scuttled back under their carapaces. The pols have been left holding the turds. They are now using the citizens to cleanse themselves – but not before they painted us all into a financial and economic cul-de-sac. The pols have to extract either us or themselves. Guess whom they will use as their mat? The pols may very well understand their predicament, but they have to play for time. That’s what all the current gasbagging is about. They have about three years. About then the first of the ‘post peak oil’ energy shocks is likely to kick in. Ireland => 1970ish?

      You, and most folk on this site, know that our pols are anti-reform. Its their genetic default position. Bit of re-decoration here and there (the latest rubbish from Big Phil is typical). But nothing significant. Well, I have real good news for you. Those energy shocks. They will force political and institutional reform on the pols – just not in the direction of the type of ‘democracy’ that most of us have in mind.

      Brian

      • @Brian,

        You continuously prophesy about an ‘energy armageddon’ – and you may well be right. But the more pressing threat is the impact in developed economies of costly and wrong-headed climate change and energy market liberalisation policies on citizens and these economies. This is feeding into broader, poorly-defined discontents about immigration, Islamic culture and terrorism, globalisation and economic insecurity.

        And these discontents are being exploited and channeled by right-wing, populist, nationalistic xenophobic parties throughout the EU to secure power and influence. Gert Wilders’s faction of this ilk is supporting a minority centre-right government in the Netherlands from the outside. Similar arrangments (either within or outside government) may be found in Denmark and Finland. The Swedish Democrats prevented the outgoing centre-right government in Sweden secuirng a majority. The split in the corresponding Austrian faction disguises its popular support. Belgium is coming up to a year without a government for this and other reasons. The disgrace of DSK in New York is adding a futher boost to the National Front in France. Italy always struggles to keep a lid on ugly political forces – and a secessionist tendency by the North. The buffoonery of its PM is counter-balanced by a reasonably competent, technocratic ‘permanent government’. Germany alone, for a variety of reasons, has been able to prevent the rise of these factions.

        This is the politcial landscape that much of the core EU is confronting – and it’s not a pretty sight. Nor does it offer much hope to the hard-pressed peripherals. It is the inevitable outcome of the exercise and abuse of excessive executive dominance and decision-making by elites that fails to engage and secure democratic consent.

        For some time centre-right governments have been in power throughout the core EU and voters, understandably, would like to give them a kicking. But the centre-left, as the traditional alternative, is in terminal decline. Any attempt by the centre-right and the centre-left to coalesce to keep out the ‘hard right’ will fuel even more popular anger and discontent.

        The core EU is stting on a powder keg. The only question is when and in what way it will explode.

  3. The short answer to Michael Breen’s question is NO, because our governing elites had thrown us to the wolves some years previously

    As evidence of this, I offer the following

    The National Economic and Social Council (NESC) has clearly admitted how the political,
    administrative and financial elites failed over the past 10 years.
    “In the past decade, Ireland’s approach to fiscal policy, prices, costs and financial
    regulation were not sufficiently adapted to the disciplines of a single currency.“
    (Press Release from National Economic and Social Council (NESC) on a report “The Euro: an Irish
    Perspective” 17th August 2010. NESC is 30-person social partnership body made up of representatives of
    government, business, trade unions, agriculture, community and environment. The Secretary General
    of the Government chairs NESC. Among the seven Government nominees are the Secretaries-General
    of five Government Departments.
    http://www.nesc.ie/dynamic/docs/The%20euro%20MEDIA%20RELEASE%20from%20NESC.pdf)

    For some idea on what we can do to work ourselves free of this, see my contribution to the Dublin City Business Association 10-point Manifesto Towards a Second Republic from p. 57 here
    http://www.dcba.ie/static/doclib/Towards_a_Second_Republic.pdf

  4. @ Paul

    You describe a pretty depressing political scenario, but I guess its what it is. I would wish for something more ‘middlish’.

    My concern about the energy crisis – which is inevitable (its the timing that is uncertain) is that it may well ‘reform’ politics in an way which many citizens will find very distasteful. Our style of ‘western liberal democracy’ – or what remains of it, is totally dependent on some sort of perpetual economic growth paradigm. Absent that and you have problems. First they are economic, then financial (we have successfully completed these two phases), and finally political. So attempting to get political reform in the current circumstances is like attempting to sail to windward – stern first! I do not fancy that ‘powder keg’ analogy. But its most apt.

    Brian

  5. @Brian,

    I think the three of us are at it again – you, Donal and myself. It’s clearly not engaging anyone else. Saothar in aisce, I fear.

  6. Here we are we go again – the Irish looking for someone else to blame.

    The reason we are in this mess is 100% the fault of Irish people, mainly the politicians who failed to do their jobs properly and allowed the banks, the professions and the public sector at all levels to run rings around them.

    It’s not the fault of the EU, IMF, USA, UK, OECD or whatever you’re having yourself.

    We blew the boom. Period and there is precious little sign of this reform and change Fine Gael and Labour were so busy mouthing off about before the election.

    • Salter It doesn’t matter if ECB pocliy is overall’ tight or loose if the regional variation in nominal spending and price trends is wide enough. Germany is doing ok on the Euro, and driving the EMU wide statistical accounts, but other members are choking. This is a loud and clear signal that the Euro is a disaster for Ireland, and in light of other data, that the Euro project is a failure. It would be one thing to have transient regional differences in inflation, but this is outright deflation. For years. How does the ECB reconcile Ireland’s monetary needs with those of Germany?

  7. The Boom was a very complex interconnected matter. Blame, in whatever guise, is completely inappropriate at this juncture. Total waste of space. We actually know who the baddies were (are), so that is not the issue.

    The issue is how the f*** do we exit this fiscal calamity. The current Cast of Players in Leinster House have the responsibility. Think of it as a massive learning curve in political reform and you get the proper sense of the complete implausibility of success.

    Does anyone who clearly understands the true extent of our fiscal predicament come all over with a warm glow of contentment when they think of the principal actors? who will ‘save’ us. These ‘guys’ will fail (in a most skillful and successful manner) to resolve the crisis in favour of us the citizens of this state? Its OK to fail successfully. Just do not fail unsuccessfully (E-voting!).

    An individual ‘reforms’in only one of two circumstances. A loaded gun (and you know it IS loaded with live ammo)is pointed at your head – or you do it voluntarily. The first never succeeds; the latter has an iffy probability. ‘Cool Hand Luke’ ring a bell?

    Brian

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