It feels like a long time ago. Reading through the government memos and advisory documents leading up to the November 2010 bailout shows the deepening sense of crisis spreading through government circles as the year went on.
They are a window into recent history, a story of a gradual dawning realisation that we were heading for a bailout – and a sign of just how little negotiating power Ireland had in the final months. It was ground hurling, but we were playing without a stick.
Government policy and the regulatory systems failed terribly in the years before the crisis hit. But do the memos and minutes now coming to light – and the hard evidence of what has happened in the meantime – suggest big mistakes being made after the crisis broke? Could the pain of austerity have been eased?
The answer, pretty much, is no. Burning the senior bondholders would have made us all feel better. But it would not have made a really significant difference to the sums.
We borrowed €100 billion to bridge the gap between State spending and revenue during the crisis years. Even on an optimistic view, it is hard to see how more than €10 billion could have been recouped from senior bondholders, barring a decision to let Anglo collapse around the time of the guarantee with goodness knows what consequences for its depositors and the banking system.
A Europe-wide bank wind-up process – of a kind now being put in place – would have helped, but at the time it did not exist. And even the scheme now being introduced still leaves a lot of the burden on the national government in the event of bank collapses. There is only scope for outside intervention as a last resort. And moves to introduce Europe-wide deposit insurance are only now being put on the table. You would wonder, if tested, how it would stand up. The first lesson of the crisis – the need to break the links between bust banks and sovereign governments – has only been half-learned.
What about the lessons for budget policy? The common view, as expressed again by former International Monetary Fund official AJ Chopra this week, is that Ireland was pushed to implement austerity too quickly. However, what has happened here in the meantime provides no evidence that delayed budget cuts would have made things easier.
Quite the contrary. Luck played a part, for sure, but the correction of our budget arithmetic has allowed the State to borrow money at ridiculously low interest rates internationally, at a huge benefit to us all as it leaves more money to spend elsewhere.
Undoing the damage
It has provided us with an extraordinary opportunity to undo a lot of the damage to our national finances from the bust, albeit the huge costs on society will never be undone. If low interest rates persist, it could even help to lower the long-term cost of bailing out the ugly sisters that were Anglo and Irish Nationwide under a deal struck by then Central Bank governor Patrick Honohan in 2013.
As he departed this week, Honohan completely rebutted the “too much, too soon” theory of Irish budget cuts. In fact, he said that if we had taken the axe to the budget a bit more quickly, the economy might have started to recover in early 2012, rather than after the middle of that year as happened. Austerity, in a small open economy like ours, is best done quickly, because you need to get it done if confidence is to return. What was done in the crisis budgets was harsh, but the worst message from the early years was that there was so much more to come.
Without wishing to state the obvious, the clearest lesson is not how to get out of a budget crisis, but that you are better not getting into one in the first place. Once the budget momentum turns against you and a hole opens up between tax and revenue, it can take years and a lot of pain to move it back in your favour.
The public surely understands this, explaining why “stability” will be a key argument in the election campaign. The Government parties will play this card, but are trying to have it both ways as well, arguing that they are the ones to protect the public finances, while at the same time promising to take an axe to the universal social charge.
Election economics
The crisis, and the bailout, suggest that risk-aversion is a good policy – because the costs of getting into a mess are so great. This suggests that we should aim to eliminate our deficit and cut our debt to safe levels as quickly as possible because we simply don’t know for how long the golden combination of strong domestic growth and rock-bottom interest rates can hold. But “let’s eliminate borrowing and see can we afford tax cuts after that” is not a very attractive election slogan. So we are being promised both “jam” and stability.
It is, perhaps, time to consign the bailout debate to history. Once the crisis hit, we could have done some things better, for sure, but the die of austerity was pretty much cast. But the lessons remain. And chief among them is how quickly a hole can open up in a country’s public finances once the economic tide turns.
You would hope we will not have a general election campaign where promises are made on the very edge of what might be affordable if everything goes well. But you just know that this is precisely what will happen.