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More on Ireland
Dec. 8th, 2010 07:30 pmThe Irish situation continues to fascinate. Here's some of the unexpected things which have come out of the current crisis.
1) All credit for the Irish population in apparently being the only state so far willing to face up to reality. "Sure, it was great while it lasted, but now the party's over and we have to pay", seems to be a frequent comment.
2) All credit to the Irish population for spotting that, even though they know they had too good a time, the strong-arm tactics being used by the ECB and the EC (and the IMF, if truth be told) are more in the interest of the European banking system than of the Irish people. I've long thought that Ireland's best bet in this game of financial poker would be to default, to let at least one of its banks go bust, and thus to dilute the Euro-crisis away from ireland and greece and back to where it really belongs -- in the whole eurozone. One "good" upshot of this (where "good" is a relative term, since it would actually be a full-blown banking crisis) is that the real financial fragility of the Landesbanken would probably finally come out into the open. And while the Germans can be all so bloody-self-righteous when it's Anglo Irish Bank on its knees, they might be a little less high-and-mighty when the holes in their own financial system were revealed.
3) All credit to the Irish government for being the first to enact what for two years I have said was inevitable, but which such luminaries as the heads of a couple of private pension companies in the UK have swore to me would never happen - viz, the pensions of those already retired are going to be cut. As I've said many times -- loading all of the weight of our unsustainable pension system onto those still of working age (raising the retirement age, reducing pension guarantees) while maintaining the incomes of those who are lucky enough to have already retired, is just a no-goer. Not in terms of fairness (although people who like the 'fairness' argument could certainly use it) but in terms of whhat needs to be done.
The Irish have cut the pensions of retired public sector employees. It had to be done. It will have to be done here as well. At the moment there is an attempt to do it via the "back door" of CPI vs RPI, but my feeling is that this will not be enough. Eventually those already in retirement will have to face up to a cut in real income. If they are not on index-linked pensions, then that won't be so hard. If they are on index-linked pensions, then promises will have to be broken.
The case put forward by the pensions bosses is that this would result in a legal case along the lines of the Equitable Life Guaranteed Annuity Rates case -- where Equitable argued that it should be allowed to break its GAR promise on the grounds that if it failed to do so then other policyholders would suffer unduly. The House Of Lords, quite rightly, told Equitable Life and its now not-so-confident legal representatives that that this was bollocks.
Surely, it is argued, existing pensioners would have a similar case?
My view is that they would not. For the GAR situation consisted of voluntary customers -- ones who, in a sense, could have established the facts before they took out policies. The GAR customers just happened to be cleverer than the subsequent fools who just went for Equitable because it was always at the top of the Best Buy tables -- without asking whether such a performance might be unsustainable.
With pensions, this is not the case. It's just a matter of the luck of your age. To say that someone who, for example, reaches 60 on December 31 2010 should have his public sector pension guaranteed, while someone who reaches 60 on January 1 2011 should not, is not a matter of caveat emptor but one of luck. When it is decided that those who have already retired will have to take their shhare of the cuts, and when this goes to court, I suspect that this is the view that the courts, right the way up to the Lords, will take.
4) All in all, I really do feel sorry for Ireland and its population here. Sure, they lived life to the full, and they fooled themselves that they really were generating all of this new wealth that would enable them to retire to the Bahamas. But this was, as it were, a mass enthusiasm, and even the brightest of people get caught up in those (see the dotcom bubble) and only a few of the smart guys (see Paul Phillips) get out at the start of the Ponzi scheme, secure in their self-deception that they created wealth, rather than just unconsciously ripping off other people coming later into the same Ponzi scheme. It's those later people who are now skint and having to pay the price, whereas "the really guilty ones" are, at the moment, hiding behind the fact that the senior bondholders have to be made whole, else the entire banking system will collapse. That many of these senior bondholders are German and British adds to the veniality of the whole affair. The strong are indeed bullying the weak here, and Ireland's only real weapon of retaliation is the nuclear one -- default. Personally, I think that they should go for it.
______________
1) All credit for the Irish population in apparently being the only state so far willing to face up to reality. "Sure, it was great while it lasted, but now the party's over and we have to pay", seems to be a frequent comment.
2) All credit to the Irish population for spotting that, even though they know they had too good a time, the strong-arm tactics being used by the ECB and the EC (and the IMF, if truth be told) are more in the interest of the European banking system than of the Irish people. I've long thought that Ireland's best bet in this game of financial poker would be to default, to let at least one of its banks go bust, and thus to dilute the Euro-crisis away from ireland and greece and back to where it really belongs -- in the whole eurozone. One "good" upshot of this (where "good" is a relative term, since it would actually be a full-blown banking crisis) is that the real financial fragility of the Landesbanken would probably finally come out into the open. And while the Germans can be all so bloody-self-righteous when it's Anglo Irish Bank on its knees, they might be a little less high-and-mighty when the holes in their own financial system were revealed.
3) All credit to the Irish government for being the first to enact what for two years I have said was inevitable, but which such luminaries as the heads of a couple of private pension companies in the UK have swore to me would never happen - viz, the pensions of those already retired are going to be cut. As I've said many times -- loading all of the weight of our unsustainable pension system onto those still of working age (raising the retirement age, reducing pension guarantees) while maintaining the incomes of those who are lucky enough to have already retired, is just a no-goer. Not in terms of fairness (although people who like the 'fairness' argument could certainly use it) but in terms of whhat needs to be done.
The Irish have cut the pensions of retired public sector employees. It had to be done. It will have to be done here as well. At the moment there is an attempt to do it via the "back door" of CPI vs RPI, but my feeling is that this will not be enough. Eventually those already in retirement will have to face up to a cut in real income. If they are not on index-linked pensions, then that won't be so hard. If they are on index-linked pensions, then promises will have to be broken.
The case put forward by the pensions bosses is that this would result in a legal case along the lines of the Equitable Life Guaranteed Annuity Rates case -- where Equitable argued that it should be allowed to break its GAR promise on the grounds that if it failed to do so then other policyholders would suffer unduly. The House Of Lords, quite rightly, told Equitable Life and its now not-so-confident legal representatives that that this was bollocks.
Surely, it is argued, existing pensioners would have a similar case?
My view is that they would not. For the GAR situation consisted of voluntary customers -- ones who, in a sense, could have established the facts before they took out policies. The GAR customers just happened to be cleverer than the subsequent fools who just went for Equitable because it was always at the top of the Best Buy tables -- without asking whether such a performance might be unsustainable.
With pensions, this is not the case. It's just a matter of the luck of your age. To say that someone who, for example, reaches 60 on December 31 2010 should have his public sector pension guaranteed, while someone who reaches 60 on January 1 2011 should not, is not a matter of caveat emptor but one of luck. When it is decided that those who have already retired will have to take their shhare of the cuts, and when this goes to court, I suspect that this is the view that the courts, right the way up to the Lords, will take.
4) All in all, I really do feel sorry for Ireland and its population here. Sure, they lived life to the full, and they fooled themselves that they really were generating all of this new wealth that would enable them to retire to the Bahamas. But this was, as it were, a mass enthusiasm, and even the brightest of people get caught up in those (see the dotcom bubble) and only a few of the smart guys (see Paul Phillips) get out at the start of the Ponzi scheme, secure in their self-deception that they created wealth, rather than just unconsciously ripping off other people coming later into the same Ponzi scheme. It's those later people who are now skint and having to pay the price, whereas "the really guilty ones" are, at the moment, hiding behind the fact that the senior bondholders have to be made whole, else the entire banking system will collapse. That many of these senior bondholders are German and British adds to the veniality of the whole affair. The strong are indeed bullying the weak here, and Ireland's only real weapon of retaliation is the nuclear one -- default. Personally, I think that they should go for it.
______________
