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What's Another €24 Billion?

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The sky here was dark last week with flocks of chickens coming home to roost. 

After all the promises in the election about a new approach to the economic crisis to protect Irish taxpayers, all the talk about standing up to Europe and making bondholders share the burden, all the guff about telling the European Central Bank (ECB) that we would do things our way, not Frankfurt's way, last week we found out that nothing is going to change. 

There is no real difference in policy between the new government and the last government.   The policy is still to pay up in full and let the Irish taxpayer take the pain.

We will be doing exactly as we are instructed to do by the ECB.  We won't be burning any senior bondholders, or any of the big European banks who lent our banks the money to fuel the property boom.
Instead of that, the Irish state and therefore the Irish taxpayer will be shouldering the full massive debt that is now sinking the country. 

That debt is set to grow even more enormous with the news last week, following the publication of the stress tests on the Irish banks, that our zombie banks need an extra €24 billion.  This will mean that in total we will be sinking an incredible €70 billion into them. 

And bear in mind the main reason they need the money is so they can go on meeting the repayments on all those bonds and on the massive loans they got from the German and French banks.  

In what was the most pathetic climbdown heard here for some time, the new Minister for Finance Michael Noonan last week admitted the truth and even tried to deny that Fine Gael had promised anything else during the election.

Noonan told journalists last Friday that the government had ended its efforts to force senior bank bondholders to accept write-downs because when he had raised this with the Frankfurt-based ECB, they had said "No."
But what about all the tough talk, all the threats Fine Gael and its coalition partners Labor made during the election? 

“We never said we would burn bondholders," Noonan insisted.  "We said we wanted burden sharing (with senior bondholders) but would not do it unilaterally.  We would only do it with Frankfurt’s agreement, and we didn’t get the agreement.”

And the Labor Party, with unbelievable brass neck, chimed in with the same line.   A few weeks ago their core election message was that they would get tough with Europe and the bondholders and demand burden sharing. 

On the campaign trail Labor leader Eamon Gilmore was almost frothing at the mouth at the injustice being perpetrated on the ordinary Irish taxpayer.   Now they are saying that, er, this is not what they meant at all.  Oh no.

It can only be done by agreement, you see, and Europe won't agree.  So we're stuck. 

Another humiliation last week was the news that the ECB would not be providing Irish banks with a proposed medium-term loan facility, to replace the present emergency funding they are on which has to be renewed every week or two. We had been given the impression that this was in the bag.  But again, the ECB said no.  And that is that.

So after all the bullish talk of facing down Europe, the new government has had a baptism of fire and a high speed lesson in who's the real boss. 

And the real boss these days is not sitting at the cabinet table in Dublin.  He and his colleagues are sitting in the ECB boardroom in Frankfurt.

Our problem is that without the money our banks are being  loaned by the ECB, they would collapse in the morning.   We may not like the deal, but we have no alternative because nobody in the money markets will lend to us.   It may not be pretty, but that's the reality.  

The scale of the problem we face grew dramatically last week with the news that the stress tests had shown that the Irish banks need another €24 billion to meet capital requirements.    It's almost inconceivable that they have got themselves into such a deep hole.

In total, as I said above, this means that it will take €70 billion to fill the hole -- an unbelievable amount in a country with four and a half million people.

How did the Irish banks do it?  A few hundred million to this big developer and the same to his buddies, and then a few tens of millions to this smaller developer and the same to his buddies and before you know it you're talking billions -- even €70 billion. 

And of course it wasn't just for projects in Ireland.  We're talking global development here.
All being run from this tiny island on the edge of Europe.  Is it any wonder everyone loves the Irish!   You couldn't make it up.     

On top of that is the amount of money shoveled out by the banks to tens of thousands of property buyers here who were given 100% mortgages at the top of the boom when prices were really crazy.  Now property prices have fallen by more than half, job losses have soared as the economy has shrunk,  and these people can't or won't pay back the banks.  

Even if we could once have followed the American example and done a Lehman’s on it by letting a bank or two go to the wall, that is no longer an option because of the state guarantee given by the last government. 
This means that the bank debt has been transformed into sovereign or state debt.   So if the banks go down, the country goes down with them. 

There is a growing awareness here of just how disastrous that decision two and a half years ago was for Ireland.  In the beginning there were just a few lone voices pointing this out, the odd maverick economist or politician. 

But those lone voices are now becoming a deafening chorus.   The realization that the enormous bank debts are on such a scale that they could bring down the country is beginning to sink in with people in general. 
Last week, in his statement to the Dail (Parliament) on the bank stress tests, Noonan gave the most blunt judgment yet on the state guarantee to the banks.

“Tuesday, 30th September, 2008, will go down in history as the blackest day in Ireland since the Civil War broke out," he said.  “The 30th September 2008 was the day on which the then government extended the infamous guarantee to the Irish banks ... "

On that fateful night in September 2008, the senior bankers covered up or did not understand the scale of the problem, nor did the few government ministers and officials involved in making the decision.  In the rush to stop the collapse of an Irish bank when the markets opened the next morning, the ministers, on behalf of the country, took on debts of such an incredible scale that no one in the room imagined their eventual size at the time. 

“The JCB and the swinging crane had become the logos of the banks, and Irish bankers were as likely to be funding apartment blocks on the Black Sea or dabbling in property schemes in Singapore, as they were to be investing in the Irish economy," Noonan told the Dail last week.

"The country has been left with an appalling legacy: a legacy of debt, of unemployment, of emigration..." 
There were two elements to the crisis back in 2008, and there are still two parts to the problem.   In 2008, we had a mushrooming budget deficit and  banks who were finding it difficult to get funds on the interbank market. 

Today we still have an enormous budget deficit, and thanks to the state guarantee we gave on all our bank borrowings neither the Irish state nor the Irish banks can borrow money on the international markets. 
So we're in a far more difficult position now. Instead of seeing light at the end of the tunnel, it's blacker than ever thanks to the huge amounts we have had to borrow since then to keep going. 

In spite of severe budget cutbacks, we still have a huge deficit because the savings we made are being eaten up by the increased interest payments on our bailout money from the EU and the IMF and on other debt we have. 

When you look objectively at this situation -- which is what the markets are doing -- it's pretty clear that we are in an unsustainable position.  That's why the interest on Irish debt being traded at the end of last week was over 10%.

The fact is that our debt burden and the interest payments on it are so huge that there is nothing left to revive the economy, and we are trapped in a downward spiral at the bottom of which is likely to be a staged sovereign default by Ireland over 2013 or 2014.  It's hard to see it going on any longer than that. 

Nor is it likely that the new government will last any longer than that, despite their huge majority at present.   Labor won't be able to take the pain and will peel off.  And after that it will be chaos.

The only alternative to this scenario is burden sharing, an acceptance by senior bondholders and by the German and French banks who poured money in here during the boom that they must take a heavy hit on the billions we owe them. 

And the EU and the IMF need to stop parroting drivel about having faith in the Irish economy to bear the heavy costs of the bailout.   We can't and we won't.  It's that simple. 

At the same time, the government here must take drastic action on spending cuts to reduce the budget deficit.  All that has happened so far is pussy-footing around that barely scratches the surface of the problem. 

The way we are going now, we are still spending over a third more than we raise in taxes, partly due to the increased interest burden.   Given the catastrophic situation we face that has to stop, and there is no time to do it gradually.  

If we make those extreme cuts in state spending quickly and also force through burden sharing, we have a chance.  If not, we are going to slide into default.  

Those of you who got out of here in the last five, 10 or 20 years because you could not find anything at home can stop feeling sorry for yourselves.  Instead you can start feeling sorry for those of us left behind.

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