Why Ireland is resisting the bail out.

When other countries are lining up to get a bail out Ireland is fighting tooth and nail to avoid one.  Why?

Does it not seems a little strange to you? I want to suggest that many experts are looking in the wrong place for an answer.

A major part of the reason Ireland is resisting a European led bail out is because of the German led enthusiasm for increasing Ireland’s corporate tax rate.  The connection may not seem immediately convincing so let me see if I can offer you an argument.

Ireland became the Celtic Tiger for three reasons. First it has a very low rate of corporate tax. Second it had already in place lots of reciprocal tax agreements to avoid any double taxing.  So profits booked in Ireland into an Irish subsidiary of a foreign bank or corporation would only get a low rate of tax applied.  Third, there was an incredibly lax regulatory system, if one can call a blind eye a system.

Take a look at where the big American corporations have their European or even world-outside-of-America HQ. Ireland every time. The reason is the low tax rate.  Very, very large US Companies which I could name but won’t for legal reasons and ask you to think of them yourself, as well as a host of Russian companies are based or have their HQ in Ireland for tax reasons.  Companies making sales in Taiwan, India or Spain were and still are booking their profit in Ireland.

The Irish exchequer benefits from tax revenue it would never get otherwise. Because without meaning any disrespect there would be few reasons for them to chose Ireland were it not for the tax rates.  The company benefits from low taxes and ease of repatriation of the profits back home – where ever that might eventually be.

The Irish banks, both Irish ones such as Allied Irish, Anglo Irish and BoI, as well as Irish subsidiaries of European and American banks would benefit by these huge profits passing through their books giving them huge liquidity and wonderful capital holdings.  Much of the money may have only been passing through but like a flow through a pipe, the pipe was always delightfully full.  And some of the money stayed.

And the blind man’s buff oversight regime meant all sorts of wonderful things could be done in Ireland that home regulators might not allow.  More on this in a later post.  Put these things together and you have the reasons for and the engine of Ireland’s growth and success. And it is the hope, the only hope, of both the previous government of Ireland and its present one, that this miraculous money making magic can be restarted.

Now imagine for a minute that one part of this system, the tax part were to be discontinued.  What do you think would happen?

I think Ireland would find that banks and corporations might not be so keen on staying in Ireland and new business might not even look at them.  And yet this is what some in mainland Europe are advocating as part of the ‘concrete roadmap’ they want Ireland to show them as the necessary plan for recovery in order to get a bail out.

On one level you could say it is perfectly reasonable that those who might bail Ireland out should want to see Ireland increasing its tax revenue.  Fair enough, but there is also the very obvious and transparent aspect of cutting off Ireland’s financial edge and feathering their own nest.  Germany and others force Ireland to stop its low tax regime. A regime that undercut their own tax rates. Ireland is forced to raise it tax rate and suddenly Germany and others say, “Well why not some over to us now.”

This, I think, is a major part of what is going on in the bail out discussions. This is why Ireland does not want to agree the bail outs being offered.

This also explains one other thing. It explains why so many banks and private corporations were, shall we say ‘keen’ for Ireland to offer its blanket bank guarantee back in ’08.  If the banks had gone under those companies would have lost all the revenue they had in those banks and found their world wide banking and corporate structures paralysed.  Imagine a very large software company finding its bank, where it had many billions on deposit suddenly not only frozen but GONE. Imagine the same corporation finding it had a world non-US HQ  in a country where it had no banking facilities. Imagine what would happen to its own cash flow.

I don’t think it unreasonable to imagine said company, and many others you will find listed as domiciled in Ireland, getting  on the phone and applying a little pressure, explaining a few consequences.  Call this conspiracy if you wish. I think it is more just thinking through the natural consequences and asking yourself what you would do.

This same companies are still in Ireland.  But I seriously wonder if their cash is still going through Irish banks in quite the same volume. It may  be given that till now the tax benefits are still as attractive as they were. But I would also wonder if part of the reason the Irish banks never seem to heal but seem instead to just bleed and bleed, is because as fast as they are given money by the state, the companies are withdrawing their capital to more stable places. Corporate capital flight on a very large scale.

I think the bail out is being used to try to steal business away from Ireland. We can argue about whether that business has done Ireland any good but you can still see why Irish banks and politicians might feel angry and try to resisit.

Not a nice to feel your friend’s knife in your back.