What If Ireland Defaults? (23 page)

As a matter of public policy to protect the interests of taxpayers any requirement to provide open ended / legally binding State guarantees which would expose the Exchequer to the risk of very significant costs are not regarded as part of the toolkit for successful crisis management and resolution.

Once the new government is clear as to why this advice was not heeded, they should be in possession of information pertinent to the tough negotiations ahead.

From Argentina we wish them well.

Endnotes

¹
Sheila Killian, John Garvey and Francis Shaw (2011) ‘An Audit of Irish Debt', available from:

. Anyone who reads this document will see that the access of the academics in Limerick to necessary information was only partial but it is a good start for a government-sponsored audit.

²
Downloadable from the Commission of Investigation into the Banking Sector in Ireland website:

.

³
Subordinate debt has less value than normal debt and is normally written off in liquidations.

⁴
Available from the Independent Banking Commission website at:

.

⁵
This actually happened in 2011 when AIB defaulted on its debt, which triggered cash payouts of €500 million:

.

⁶
See

.

⁷
The results of the audit were published online here:

.

⁸
To watch the film online with English subtitles please visit

or

.

⁹
‘Greece, Ireland and Portugal: Why Arrangements with the Troika Are Odious',
CADTM
, available from:

.

¹⁰
The ‘troika' is the European Commission, the IMF and the ECB.

¹¹
The company Adecoagro, with investments from the Soros Fund, was reputedly interested in purchasing SanCor in its distressed state.

¹²
The Icelandic krona later rose in value against the Euro (in January 2012 €1 was worth approx 161 kroner).

¹³
For more on the financial irregularities of nationalising private debt see Anthony Phillips (2007) ‘Fourteen Billions between Friends',
Project Allende
, available from:

.

¹⁴
Conclusions quoted in Spanish in full:

.

10

Coring out the Big Apple: New York's Fiscal Crisis

Sam Roberts

Sam Roberts is urban affairs correspondent of the
New York Times
.

‘I have been advised by the comptroller', the statement by the mayor began, ‘that the City of New York has insufficient cash on hand to meet debt obligations due today. This constitutes the default that we have struggled to avoid.'

The prepared statement for Mayor Abraham D. Beame, a London-born immigrant and the city's first Jewish mayor, was ready to be released on 17 October 1975 if city and state officials could not persuade the teachers' union to invest $150 million from its pension funds in municipal securities. That's how close New York City came to bankruptcy in 1975: the margin between solvency and default by the largest city in the United States turned out to have been only paper-thin.

The city avoided a formal default, although the State Legislature imposed a debt moratorium that amounted to default in all but name. That moratorium was later declared unconstitutional by state courts, but only after it bought enough time for New York to restructure its debt and impose rigorous fiscal discipline that convinced a reluctant federal government to guarantee city debt.

Even without a formal default, the legacy of what would become known universally in New York as
The
Fiscal Crisis (like
The
War, even 70 years later no one would have to ask which one) would endure for decades with decidedly mixed results. The formal fiscal discipline would persist, allowing the city to return to the credit markets within four years, but the impact of the first mass layoffs of municipal employees since the Depression and other budget cutbacks for vital services would within a decade or so precipitate social, financial and political crises that, arguably, were even more severe than The Fiscal Crisis itself.

‘A crisis denotes a single incident', said Governor Hugh L. Carey, who was widely credited with rescuing the city. ‘This was an atmosphere.'

The Causes

‘The New York City fiscal crisis seemed at the time like a unique interplay of disparate forces', the journalist Steven R. Weisman, who covered the crisis for the
New York Times
, would later write:

… but it was quite similar to other modern debt crises. Like Latin America in the 1980s and Asian countries in the 1990s, and European and American banks in 2008, the city courted disaster by financing ongoing expenses with short-term debt. A reckoning almost always comes in such circumstances.

Lord Bryce, the British historian, wrote in the 1880s that municipal government in the United States was the most conspicuous failure of American life. That helps explain why no former mayor of any city has been elected President since Calvin Coolidge, of Northampton, Massachusetts, in 1924 and why, since the nineteenth century, the mayoralty of New York has been a political dead end. In their seminal
Governing New York City
, Professors Wallace Sayre and Herbert Kaufman wrote that while the presidency can elevate the most mediocre of men – even former mayors like Calvin Coolidge – ‘the mayoralty is the highly vulnerable symbol of all the defects in the city and its government.' By the 1960s, New York was being widely denigrated as ungovernable, but some astute commentators reached that conclusion years earlier. After Fiorello H. La Guardia, a Republican, had been elected mayor of the heavily Democratic city in 1933, H.L. Mencken expressed the hope if La Guardia ‘is well-advised he will make his will, get a shave and haircut, burn all the letters that he has ever received from women' and leap off the Empire State Building.

In 1965, the challenges facing the city seemed so overwhelming that New Yorkers were willing to gamble again on a maverick Republican, as they had with La Guardia three decades earlier. As the year began, a
New York Times
editorial expressed hope that one of the city's few phenomenal Republican vote-getters – perhaps that young East Side congressman John V. Lindsay – might be induced to go down what was admittedly ‘suicide road toward City Hall'. That same month, the old
New York Herald Tribune
proclaimed ‘New York, Greatest City in the World, And Everything Is Wrong with It'. When the year ended, John V. Lindsay would inherit what was, as the
Tribune
's series dubbed it, a ‘City in Crisis'.

That January, welfare workers struck for 28 days, disrupting relief to 500,000 New Yorkers. Twelve separate agencies were overseeing a vast array of anti-poverty programmes. Factories were haemorrhaging 18,000 jobs a year. One-third of the city's public schoolchildren were testing below the norm in reading and arithmetic. Antiquated garbage trucks were out of service 40 per cent of the time. Standard and Poor's lowered the city's credit rating and the city's comptroller, Abraham D. Beame, whom one Lindsay supporter, Democratic Socialist Michael Harrington, dismissed as having ‘accountancy as a political philosophy', was warning about ‘the treacherous fiscal path being followed by our city'.

New York was still reeling from riots that erupted in Harlem and Bedford-Stuyvesant the year before, after a 15-year-old black youth was shot to death by a white police officer on the Upper East Side. Major crime had soared by nearly 15 per cent in the past year alone. During the campaign, Lindsay visited the site in Kew Gardens, Queens, where 38 neighbours failed to respond to the screams of Kitty Genovese, a 28-year-old woman who was being attacked. What the murder ‘tells us', Lindsay said, ‘is that something has gone out of the heart and soul of New York City'.
Time
magazine grimly concluded:

New York seemed a shiftless slattern, mired in problems that had been allowed to proliferate for decades. Its air was foul, and so were its surrounding waters – and there was barely enough water to drink. Its slums rotted away undisturbed, its new apartment buildings and public housing were as shoddy as rapacity and bureaucracy could make them. The city was deep in hock and going deeper; interest on its debt alone was $1.4 million daily – more than the cost of police, fire and sanitation services combined. More and more, it was a place where only the rich and the welfare-dependent poor could afford to live. Its crime rate was rising as inexorably as its traffic slowed down. East Side, West Side, male and female prostitutes seemed like shades of prewar Berlin. Even the fabled skyline had lost much of its old majesty. As Architect Edward Durrell Stone lamented: ‘If you look around and you give a damn, it makes you want to commit suicide.'

The problems, nor the solutions that would lead to more problems, did not begin with Lindsay. Arguably, they could be traced to the New Deal, when New York became more dependent on federal largess, and to the reverberations of cyclical global economic upheavals. The publisher Jason Epstein wrote later that New York seemed to have survived only by dint of ‘a kind of anarchic common sense'. But, Epstein continued,

… by the middle sixties you could see the city changing all around you. New construction was going up everywhere, herding the old residents and their businesses into ever narrower enclaves, or driving them out of the city altogether. Meanwhile, the expanding ghettos were overflowing with refugees driven here by the mechanization of Southern agriculture and by Southern welfare practices that made Northern cities seem deceptively generous by contrast. … Between 1960 and 1970, the proportion of blacks in the city had risen from 14 percent to 21 percent, most of them trapped here by a city that didn't need their labor and that had, in fact, begun to export its menial and routine work to less costly labor markets, often to the same areas which these new arrivals had recently abandoned.

The 1960 census was the first ever in which New York City registered a decline in population – the result of an exodus of mostly white middle-class taxpayers to suburbia. By 1965, exactly 100 years since the Civil War had ended, black impatience with the fruits of emancipation was coupled with another phenomenon, a profoundly divisive one, which Daniel Patrick Moynihan and Nathan Glazer astutely described in the preface to their updated edition of
Beyond the Melting Pot
in 1970: ‘The Protestants and better-off Jews determined that the Negroes and Puerto Ricans were deserving and in need and, on those grounds, further determined that those needs would be met by concessions of various kinds from the Italians and the Irish … and the worse-off Jews.'

Former Mayor Robert F. Wagner's credo that ‘a bad loan is better than a good tax' was epitomised by his decision to issue nearly $256 million in short-term notes to balance the 1965–1966 budget of $43.9 billion – ‘borrow now, pay later', the mayor explained. In effect, the city was taking out a loan against a property tax increase that had neither been imposed nor even approved. It was the first step on a slippery slope that would bring New York to the brink of default a decade later. Many of the costly ‘good intentions' that ultimately got the city into trouble for overspending and that would be identified with Lindsay, began under Wagner. After he broke with the Democratic Party bosses in 1961, Wagner's progressive instincts were galvanised by his new alliance with reformers and their social agenda and with municipal unions, to which he had already granted the power to bargain collectively. His dependence on these ‘expenditure-demanding political forces', Martin Shefter, the political scientist, wrote, ‘helps explain why locally financed municipal expenditures rose twice as rapidly during Wagner's third term as during his first and second terms'. Short-term debt during Wagner's third term soared by what Ester Fuchs, the Columbia political scientist, wrote was ‘an alarming' 79 per cent, adding: ‘The city was saved from fiscal crisis during this period by new revenue in the form of inter-governmental aid, and a prosperous national economy.'

An independent commission – appointed by Wagner – was projecting a deficit of more than $315 million in 1965–1966. A
New York Times
editorial complained that ‘the city is living on a credit card.' Less than four weeks into Lindsay's first term, the city borrowed $253 million, the largest financing in the history of the municipal bond market, and was forced to pay the highest interest rate since 1932.

Lindsay governed at ground zero of the 1960s culture wars. Even given Cold War competition from the Soviets, this was an era when, as Donald H. Elliott, the chairman of Lindsay's City Planning Commission put it, ‘government was expected to make society better and everybody believed it could do so.' That was the underlying conceit of the Lindsay administration's 1969 futuristic strategic plan for New York. For all the administration's naiveté, its utopian illusions and its reputation for taking itself too seriously, the commission's master plan was paradoxical and prescient in defining Lindsay's constituency and in rendering its verdict on his mayoralty. ‘We are, in sum, optimistic', the planners wrote. ‘But we are also New Yorkers. We cannot see utopia. Even if all of these recommendations were carried out, if all the money were somehow raised, 10 years from now all sorts of new problems will have arisen, and New Yorkers will be talking of the crisis of the city, what a near-hopeless place it is, and why doesn't somebody do something.'

The fact is, the crisis came even sooner.

Budgets were generally balanced during Lindsay's first four-year term. By 1969, a recession struck; inflation rose. The budgetary gimmicks begun under Wagner were honed by Lindsay and his colleagues into an art. As Steve Weisman would later write, ‘Though poorly understood at the time, these bookkeeping devices – like artificially deferring costs or borrowing against dubious or non-existent receivables – produced hidden deficits that drove up the city's short-term borrowing from a negligible amount in 1970 to more than $6 billion in 1975.' During Lindsay's two terms, the municipal budget nearly tripled to more than $10.2 billion, while the municipal work force grew from 247,000 to 291,000 (New York City is contiguous with its constituent five counties and performs many of the functions that other cities and counties do separately). Complicity abounded. Why cut budgets to demanding constituents when the day of reckoning could be postponed indefinitely? The city borrowed to pay for expanded welfare rolls and generous labour contracts. The banks looked the other way.

The budget would be balanced by what Charles Morris, in his
The Cost of Good Intentions
, described as $700 million in ‘gimmicks and questionable borrowings'. The budget was adopted despite Lindsay's dissent. ‘Over the next several years', Morris wrote, ‘budget gimmicking was raised from the level of haphazard expedient to an arcane art form, and the practical limits of irresponsibility were pushed further and further out on the horizon.' Day-to-day operating costs were deftly shifted to the capital budget, financed by long-term bonds for major public works projects. Delivering a belated verdict on the fiscal crisis, the United States Securities and Exchange Commission staff concluded that Abe Beame, who succeeded Lindsay as mayor, had ‘misled public investors'.

By 1975, the city's $12.3 billion budget was second in size only to the federal budget. The work force had soared to more than 300,000 in a decade and labour costs had doubled to $4 billion in just five years.

In retrospect, everyone saw it coming. Weisman quoted Edward V. Hamilton, a former deputy mayor now working in California, as likening the fiscal crisis to an earthquake: ‘We know there is going to be a major earthquake in Los Angeles in 50 years', Hamilton said. ‘But we really won't know until the earth starts shaking when it's going to happen.'

The Crisis

Hugh L. Carey delivered a blunt warning when he was inaugurated as governor of New York on 1 January 1975. ‘The days of wine and roses', he said, ‘are over'. Those halcyon days ended even sooner than he could have imagined. The press release on default that would be drafted the following October would be merely the midpoint in a crisis that had been percolating for months of debilitating death marches to the brink of bankruptcy and agonising negotiations over a longer-term solution. It began not with the city but with an agency of New York State, the Urban Development Corporation (UDC), created by Governor Nelson A. Rockefeller in 1968 in the wake of the Reverend Martin Luther King Jr.'s assassination to provide housing and other relief for the poor.