Saturday, January 31, 2009


The government has decided to recapitalise Bank of Ireland and Allied Irish Banks with €6bn. That is much more than their combined market value, which last Saturday, 24 Jan, stood just above €1bn after their shares rose 11% (BoI) and 12% (AIB). Their nationalisation, by this government, for the moment, is ruled out.

The crisis of the Irish banks, however, has no end in sight. Since the market value of Irish banks shares reached a peak value of €59.44bn in February 2007; nearly two years later their market value stands at €1,65bn (Irish Times, 20 Jan). Years of speculation; extension of the Irish economic boom by means of credit, and huge profits ended abruptly at the end of September last year when the top executives of the Irish banks informed the government that they didn't have capital to face their liabilities.

The Dáil approved, on the 4th October 2008, the Credit Institutions (Financial Support) Bill 2008 in order to guarantee with €400bn the liabilities of AIB, Bank of Ireland, Anglo Irish Bank, Irish Life & Permanent, Irish Nationwide and EBS building society. Later the guarantee was expanded to €500bn to cover some foreign banks operating in Ireland.

The Minister for Finance said that, “"Were liquidity to dry up in the banking system in the weeks ahead, the inevitable result would be economic catastrophe for this country." (Irish Times, 1 Oct 2008)

The crisis of the Irish credit system just followed the crash of the Irish housing market. House completions fell more than half in 2008, from 90,000 to around 40,000. The crisis in the housing market and the credit system triggered a generalised fall in retail sales and the money supply. The main consequence has been a sharp increase in the number of unemployed, which has reached 300,000 (8.3 per cent) and it is expected to get as high as 400,000 (or around 11 per cent) by the end of 2009.

On the other hand, the economy is expected to contract 5 per cent this year, which leaves Ireland as the country with the second worst recession in the EU after Latvia. In that situation and since the budget deficit keeps increasing as revenue decrease, the government plans to cut €2bn in government spending while BoI and AIB are going to get about €6bn.

Attacks on workers

Speculators and developers have played an important role in the extent that the crisis has reached and for nearly two decades made huge profits. But, while they get bailed out the workers must bear the sacrifices ahead. That is clear from the words of the Taoiseach, Brian Cowen:

“Those who are in employment [not just those who lost their jobs], whether in the private or the public sector, will also share the burden. A particular responsibility lies on those who have benefited most from the rapid growth of the economy over recent years, whether as investors, self-employed or employees. They are being asked to show solidarity with those who are less well off.” (Irish Times, 21 Jan 2009)

Apart for a reference to investors and self-employed in passing, it is clear that those who will have to show “solidarity” are the workers “whether in the private or the public sector”. But solidarity with whom? With the rich? Mr. Cowen tells us as well that the workers were the main beneficiaries of the past economic boom!

The €2bn in cuts are going to come mainly from pay cuts for workers in the public sector and for increases in of the contribution of workers to their pension schemes. IBEC, the employers group, has already let us know also that further pay increases agreed in the last partnership deal will have to be deferred, at least one more year, and the minimum wage cannot be increased. That statement means that also workers in the private sector will have to show “solidarity” with the wealthy.

The strategy of government and employers, according to John Fitzgerald (ESRI) (Irish Times 24 Jan 2009) should be, in the medium term, to lower wage rates in order to “substantially improve competitiveness as “the key to the restoration of full employment” after restoring “order to the domestic banking system”. They don't say a word about how employers and speculators are going to show their “solidarity.

Credit and crises

The banks role in the present crisis has consisted in increasing its magnitude. The Irish economic boom that started in the early 1990s came to an end in 2001 in the productive sectors of the economy. Capitals then shifted to more profitable sectors such as construction. Easy credit allowed a housing bubble to grow way out of proportion. The housing crashes and credit crunches that have followed in Ireland and in the OECD countries are not accidental or merely domestic problems. They are connected; because of the global tendency of the gap between real and fictitious capital to grow, and, ultimately, because of the anarchy of the market economy.

A tight regulation of the Irish housing market might have avoided the housing crash. But at what price? If billions had not been invested in housing in Ireland they would have moved elsewhere. There was no way to avoid the recession within the parameters of the market economy. Now, even right-wing governments are declaring that the credit system must be tightly regulated, but it is not clear how the regulation of the credit system is going to come about. On the other hand, the banks solely cannot account for economic crises. According to Marx, “what appears as a crisis on the money market in actual fact expresses anomalies in the production and reproduction process itself.” (Karl Marx (1978), Capital, V2, Penguin books, p. 393)

What can be done?

Credit, nevertheless, should play an important role in supporting and creating economic activity. A recovery plan for the economy that could benefit workers demands the nationalisation of all the Irish banks. Under public control and democratic scrutiny, credit could be allocated primarily to those economic activities aimed at creating jobs and improving living standards for all. The Credit Institutions (Financial Support) Bill 2008 didn't solve anything. If anything, it only delayed the crisis.

By the beginning of 2009 banks were lacking capital. The Anglo Irish Bank, shrouded in fraud, was the most affected by this lack of capital and the government decided to nationalise it. That nationalisation in its present form, however, means mainly passing bad debts to taxpayers.

After the government taking the risk of guaranteeing banks liabilities for over €400bn, it does not make sense to leave the banks in private hands, particularly when the total market value of the Irish financial system is below €2b. Recapitalisation of the banks on the back of taxpayers without their nationalisation is another way to postpone the final crisis of banks, taking all the risks but none of the benefits.

In order to restore some kind of order to the financial market in Ireland all banks must be nationalised. Considering the huge profits that these banks made during the past decades and their role in the present crisis, the government would be right to just expropriate them without any compensation. Yet, nationalisation per se is not enough. Banks, under public and democratic control, should primarily fund economic development, but on a different basis as stated above. The defence of jobs, equally, would require the nationalisation of the companies that cannot guarantee jobs, labour standards and wages. A way out of this crisis that would benefit workers and the majority of society, rather than the rich minority, demands measures very different to those proposed by the economists and politicians of the establishment.


Anonymous said...

Nationalization of the banks would mean the state being liable for all their bad debts, correct? Why should we do this? The bad debts of the banks might be so large, maybe 50 billion Euros (nobody can know because there is no market for all those properties etc.) that the state might end up bankrupt.
Ironically, Richard Bruton's proposal in the Irish Times to push the bad debts into a toxic bank seems to me to be the most progressive because it tries to prevent the state ending up with all the debt.
Where is the Labour Party's proposal. Sniping at Cowan's gang of messers might get votes, but it does not address the big dilemma.
D O'Connor

Fran P. Bowman said...

"Nationalization of the banks would mean the state being liable for all their bad debts"...

...and also for all their profits. The main four Irish banks, for example, made €21.8bn in net profits between 2003 and 2007.

The alternatives are (1) to let them fall or (2) to guarantee their liabilities and recapitalise them with workers' money and sacrifices. In the first case, we would face a worse economic recession than in the 1930s. In the second case, the state, as it is the case right now, takes all the risks but none of the benefits. And, they are left in private hands with public money!

But the key questions here are that the markets and capitalism have failed. The financial markets cannot be left in private hands. Nationalisations must be argued only in the context of a move towards socialism. At present, nationalisations, under right wing governments are only aimed at saving the skin of speculators and big businesses.

The priorities must be to save and create jobs and satisfy social needs. If we are going to be coherent in that approach, the nationalisation of the credit system and key areas of the economy are unavoidable. That is the programme that the Labour Party should adopt.

On the other hand, I don't see in which way FG proposal is progressive. Does it mean that the state would put all bad debts in the only bank that has been nationalised and leave all the other banks in private hands free of bad debts? Who would assume the bad debts and who would get the profits? In which way would capitalism and the market economy be challenged?