New govt caves in to bondholders

Last week's bank stress tests have told us two important things - they have, principally, revealed at last how large the hole is in the Irish banks' balance sheets and how much the taxpayer will have to fork out to fill that hole, but they have also confirmed how weak our hand is when it comes to determining our own destiny in fiscal matters. Despite pre-election promises from the incoming government that senior bondholders in the banks would be forced to share the burden of the bailout for those reckless institutions which have mired the country in a swamp of debt, the new coalition already has rowed back on that pledge. The bondholders will not be burned - or even singed - at the behest of Brussels and Frankfurt, and the Irish taxpayer will thus be forced to wear this yolk of debt alone for generations to come. The fundamental injustice of this is not lost on the Irish people, hundreds of thousands of whom have lost their jobs, tens of thousands of whom are forced to seek work away from these shores, and thousands of whom are struggling every month to keep a roof over their heads and pay their household bills. It is an outrage that taxpayers and private citizens of this country who had no hand, act or part in causing the bust should have to bear the full brunt of this €24 billion injection into the banks, while the gamblers in Europe and elsewhere who took a punt on the Irish banks and lost are not expected to at least share the pain. We now know that it is most certainly Frankfurt's way. The only positive news that can be taken from last week's tests is that €24bn is considerably less than some of the wilder figures being bandied about in the weeks preceding the release of the data, but it is still a staggeringly large amount of money on top of the €40-€50 billions already pumped into the system to keep the banks afloat. And while the markets seem to think that this figure finally draws a line under the amount needed to recapitalise these broken institutions, it remains a figure Ireland simply cannot afford to pay and keep the country running at the same time - and only brings forward the day when the inevitable default will happen. The u-turn by the government on its pre-election promise to burn the bondholders was apparently done as a last-minute trade-off for continued cheap ECB funding for Irish banks, and the country's contentious 12.5 per cent corporation tax rate is likely now to be 'parked'. Finance Minister Michael Noonan has admitted the decision on bondholders was taken to secure a commitment to continue the funding to Irish banks at one per cent for the foreseeable future. The previous government's decision to offer a blanket guarantee was described by the ever eloquent former EU Parliament president Pat Cox at the weekend as the "most reckless single decision in the history of the State, whose legacy we will live with for a very long time". This was after Mr Noonan told the Dail that Tuesday 30th September 2008 will go down in history as the "blackest day in Ireland since the Civil War broke out", a day of infamy on which the former government extended the guarantee to the Irish banks, joining bank debt to government debt, and decided that Anglo Irish Bank should be supported and maintained. As a result of that decision, the Irish banks' bondholders have been given a blank cheque and will suffer no pain. Their relief at not having to suffer losses on their investments was evidenced by bank bond prices rising in reaction to the news last week. Taoiseach Enda Kenny said burden-sharing at Bank of Ireland and AIB had been ruled out because the banks will need to raise money from the markets in the future. Even independent analysts seemed shocked, with one US bank's head of global credit strategy saying it was "a sad day for the Irish taxpayer". He added that, by failing to bite the bullet and imposing losses on bank bondholders, it is one step closer to default. Nouriel Roubini, the respected US professor of economics, said that taking all the losses of the banking system and putting them on the balance sheet of the government made no sense. "Eventually, the back of the government will be broken," he said. It is becoming ever clearer that what cannot be paid back, won't be, and if this country continues along this path, it won't only be the back of the government that will be broken; the backs of taxpayers will be broken, too. The only question that remains is how long will Ireland's taxpayers put up with another political cave-in to bankers and to Europe?