Dail Eireann – Statements on the Development in the Eurozone – 2nd November 2011
Deputy Dan Neville
I welcome the opportunity to contribute to this debate. I commend the Minister for Finance, Deputy Noonan, for the work he has been doing. Everybody agrees he has risen to the most difficult task with which he was presented on the formation of the Government. I record my admiration and that of the people of Limerick to whom I listen for the work he is doing in responding to the difficulties presented to him.
We are dealing with economics in a very harsh way. I would like to deal with the social aspect which is often depicted only in economic terms. I refer to some information I gathered in undertaking some research into the social aspects of default and a reneging on agreements made by a previous Government and changing the approach taken. This was outlined very clearly prior to this debate when the Minister was responding to a Topical Issue debate, which I found extremely informative.
People are talking about default as a solution. Earlier this year Louise McBride in a Sunday Independent article analysed the effect a default would have on the social fabric of the State and how it would affect the people. It could be debated that default might be an economic solution, but what would be the social implications? It would destroy our international reputation and there would be serious implications for life opportunities and the standing of our citizens. We might decide to leave the eurozone, but if we were to default, it is likely we would be thrown out of the eurozone and revert back to our own currency. It is likely that the value of the Irish currency would collapse causing a currency crisis as happened in Argentina. Before that country defaulted on its foreign debt in 2001, the Argentinian peso was on a par with the US dollar. After the default, it lost 70% of its value. Mr. Kevin O’Doherty, a director of Compliance Ireland, has claimed that a default would probably result in the value of savings being wiped out and make it impossible for people to get their hands on their savings.
He claims that if Ireland defaults on its foreign debt and reintroduces the punt most of the money in our bank accounts would be in punts rather than euro and as such given the economic situation in the country the value of the punt would plummet; the value of savings would decrease as the currency depreciated, and people with life savings in a credit union would find the value of them diminished as the cost of foreign goods and services became more expensive.
I am quoting the experts in this area because I am not an expert but believe both sides of an argument should be presented. Mr. Cian Twomey, a lecturer in financial economics at NUI Galway, claims that if Ireland defaults and leaves the eurozone the value of people’s savings would be halved, our savings would be worth 50% to 70% less in punts than they would have been in euro and that people might also find themselves locked out of their savings accounts. When Argentina defaulted in 2001, the Argentine Government froze deposits to prevent savers converting them into a more valuable foreign currency. It also restricted the amount of money Argentinians could withdraw from their accounts to 250 pesos – €135 – per week. Not long afterwards it was common to see Argentinians search for ATMs that were not empty. Also, people could lose their savings if their bank or credit union went bust.
The Irish Government currently guarantees savings of up to €100,000 and in excess of that figure in particular circumstances. In this regard, Mr. Twomey asks, “If Ireland defaults, how would the Government continue to guarantee deposits?” The Government can only continue to guarantee deposits if its ability to borrow is guaranteed. If Ireland defaults on its EU-IMF loans, the chances of anyone lending it money at non-prohibitive interest rates are slim. More than €100 billion worth of savings were withdrawn from Irish banks last year amid fears caused by our banking crisis. If Ireland defaults and the Government, as did the Argentinians, clamps down on savings, billions of euro could leave the country. In this regard Mr. O’Doherty claims that people with a little money would fly off to France and other European countries to open euro bank accounts. Some believe that if Ireland leaves the eurozone a person with a cheap tracker mortgage might have to kiss goodbye to it. According to Mr. O’Doherty, interest rates on such mortgages could be set to Irish punts, which means one’s ECB tracker would disappear. A tracker mortgage is a contract which a person has with a bank. As such, the question of whether a person would lose his or her tracker mortgage if Ireland left the eurozone remains to be seen. In circumstances where interest rates on mortgages are tied to the Irish punt, following an Irish exit of the eurozone, they would soar.
Less than 20 years ago a currency crisis hit Ireland. The Irish punt was devalued by 10% and Irish interest rates reached unprecedented levels. Mortgage interest rates in Ireland climbed as high as 16% in 1993. What would be the level of interest rates if our currency was to devalue by 50% to 70% against the euro? Those who have taken out a loan from a European bank would also be in deep trouble. An Irish citizen being paid in punts would find it much harder to repay a mortgage in euro as the punt would rapidly be worth less than the euro. What would be the situation if Ireland followed the footsteps of other countries that have defaulted? When Argentina defaulted, it expropriated pension funds transforming them into Government bank loans to service debt. The price of goods in foreign countries embroiled in currency crises has exploded.
A few months after default, inflation in Argentina hit 30%. The same would probably happen here. Domestic prices, including for newspapers or milk, would remain the same because they would be in punts as devalued. However, Mr. O’Doherty claims the cost of products produced outside of Ireland, including foreign holidays, cars and half of what consumers purchase in the supermarkets, given 50% of what we purchase in supermarkets is sourced outside this country, would become much more unaffordable. The only positive of a currency crisis would be for tourists whose foreign dollars or euro would be twice or triple the value of the Irish punt.
As regards what might happen in terms of social welfare, the Department of Finance – I accept some might be concerned about taking its view on board – claims that if Ireland defaults on the EU-IMF loan it would no longer have the financial support it needed to plug the massive budget deficit. The Government would have to unleash spending cuts of €18 billion to fund itself. To achieve this the Government could slash by one third, child benefit, dole payments, State pensions and public sector wages for our doctors, nurses, local authority workers and those working in other sectors.
That is what default means. That is what is being proposed by some members of the Opposition. This is what they see as the solution, namely, the destruction of the social aspect of Irish society.