In the grand old days before the Irish real estate boom collapsed, the ruling Fianna Fáil party used to campaign the fun way. Infamously, the party held blowout fundraisers every year in a tent at the Galway races. Bankers and property magnates would show up, caked in bling, surrounded by attractive young women and occasionally even their wives, and get drunk with their elected representatives and regulators.
Fianna Fáil held the enviable position which, in the United States, the Republican party has occupied for most of the last few decades. It was the party of the working and the middle classes, and even of about half of Ireland’s rich people—a natural ruling party of the godly, the nationalistic, and the “normal.” Its main opposition, Fine Gael, guarded the habits of the snobby “Ascendancy” that had ruled Ireland before its independence. Fine Gael was more like the Brahmin wing of the Democratic party: sissified, intellectual, irreligious, relativistic, technocratic, and called in only when the populist juggernaut of Fianna Fáil got out of control and did something spectacularly idiotic or corrupt, as it did with some regularity.
And, alas, does. Ireland will have elections on February 25, and Fianna Fáil will lose them. The bursting of the party’s real estate bubble has left Ireland with a 13.4 percent unemployment rate and a budget deficit of 32 percent of GDP. The government collapsed last month in the wake of an unpopular bailout negotiated with the IMF and the European Central Bank. Fine Gael and a resurgent Labour party are together running 20 points ahead of where they were the last time out, in 2007. Fine Gael in particular is making hay because for the first time in ages it understands how the average Irishman feels: bankrupt.
Both opposition parties are appealing to the newly poor with a civil rights agenda for the “negative equity generation.” Fine Gael’s election manifesto promises legislation “reducing the time to discharge from bankruptcy from six years to one,” creating a new category of “honest bankruptcy” and new civil rights laws prohibiting discrimination against discharged bankrupts. If that were all the party wanted to change, these elections would be strictly a domestic matter. But the opposition is now promising to rip up the rescue plan the country has signed with international bankers, and that has got the world’s attention.
The plan, settled by the Fianna Fáil-led government in November, calls for using 85 billion euros to shore up Ireland’s zombie banks. A more bracing way to put it is to say that, in an already shattered economy, the government has piled about $30,000 in fresh debt on top of every man, woman, and child in the country. Ireland will provide 17.5 billion euros of that bailout money itself, by draining its National Pensions Reserve Fund. It will pay 5.8 percent interest on the money coming from Europe and the IMF. That rate, although it is better than Ireland could get on the open market, looks punitive at a time when the U.S. government, for instance, is borrowing almost interest-free.
Eamon Gilmore of the Labour party claims a “mandate to renegotiate” these agreements, and Enda Kenny of Fine Gael agrees. Most of the bondholders who lent to Ireland’s banks have been paid off, but Gilmore wants to give “haircuts”—only partial repayment—to those who remain. “If other European countries continue to set their face against default on reckless loans made by banks in their own jurisdictions to Irish banks, then they should follow through with direct contributions to their recapitalisation,” Fine Gael’s manifesto runs. “It is a basic rule of capitalism that if you lend recklessly, you must take the consequences.”
In theory, there are two grounds on which to claim a “mandate to renegotiate.” One is logistical: The debt is so big that it is unpayable. The second is moral: The debt does not belong to those who have been saddled with it. Both grounds are almost true, but not quite fully true enough to offer the Irish any relief. Michael Lewis’s magnificent report in this month’s Vanity Fair makes an almost airtight case that Ireland’s present problems stem from the decision of its Dáil, or house of representatives, to insure the country’s banks in the dizzy days after the Lehman bankruptcy in September 2008. It was only common sense to insure the banks’ depositors. But Ireland went a step further and insured its banks’ creditors—that is, it promised to cover the losses of other banks and funds that were investing in various Irish bank projects.
There was no economic reason to do this. The threat from a collapsed Anglo-Irish Bank, for instance, which had few depositors but a lot of ill-advised building projects financed by foreign speculators, “was not, by nature, systemic,” Lewis writes. “It became so only when its losses were made everyone’s.” Lewis contrasts Ireland’s predicament to that of Greece. In Greece, where legitimately elected government officials contracted the debt, the taxpayers have sought to wash their hands of it. In Ireland, where unaccountable private-sector moguls contracted the debt, the taxpayers have been saddled with it.
An even better contrast, though, is to Iceland, where speculative bankers poured money into crazy investments in much the same way that those in Ireland did. Iceland put its banks into receivership and promised to protect their depositors. But it threw the banks’ creditors to the wolves. In fact, it distinguished between domestic and foreign depositors and tried to throw the latter to the wolves, too. Britain and the Netherlands, where a good number of the Icelandic banks’ foreign depositors lived, paid off the depositors themselves, then used main force to back Iceland into a repayment agreement that will run—rather like war reparations—for at least three decades. The Icelandic banks’ bondholders, according to a recent Bloomberg report, wound up settling for 30 cents on the dollar.
The tens of billions that the next generation of Irishmen will pay for Fianna Fáil’s stupidity ought to destroy that party’s natural-majority status for a long time. Whether there is anything the opposition parties can do, once in power, to mitigate the damage is unclear, particularly since Ireland’s citizens (which is to say, its tax base) have begun to reacquire the age-old Irish habit of labor emigration. Right now, Ireland’s prospects for renegotiating its debt do not look any more promising than its prospects of paying it off. This does not mean that we will soon stop hearing calls for haircuts and interest-rate adjustments. They are useful to Irish budget discussions in the same way that invocations of “waste, fraud and abuse” are to our own—as a way to forestall, even for a few weeks, any talk about the descent into rage-inducing austerity that surely lies ahead.
Christopher Caldwell is a senior editor at The Weekly Standard.