Ireland Calling by John Spain
Can Ireland get a Greek deal too?
Posted on Wednesday, November 09, 2011 at 09:43 AM
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|Sinn Fein president Gerry Adams attends a protest in Dublin last week to protest the payment of €700 million worth of unsecured Anglo Irish bonds.|
It was the reverse of waking up from a nightmare. We woke up from a few weeks of pleasant daydreaming and joking about who we should choose to be our next president to find ourselves deeper than ever in the economic nightmare.
After all the pious, pretentious waffle from the second rate candidates in the presidential race about inspiring us to get through our present difficulties, it was clear last week that inspirational speeches were not going to be much help. The mess we're in won't be fixed with poetic blarney.
The shock awakening from our presidential day dreaming began last Wednesday. That was the day the former Anglo Irish Bank was due to pay back over €700 million (or around $1 billion) to unsecured bondholders.
Anglo, as you know, is bust and is being wound up. It owes tens of billions to European banks that it borrowed during the boom.
Much of this debt is secured. But a lot of it, like the Anglo bonds due last week, is unsecured. The investors got a higher interest on these bonds because there was some risk involved. That's what "unsecured" means.
Given that we are facing huge cutbacks in state spending here in the budget in a few weeks time, a lot of people here felt that we should not pay this unsecured bond back in full. A lot of services that are about to be cut could be kept running with that €700 million.
Yet to the horror of people here the government insisted last week that, yes, we were going to pay back all the money. We are not going to go down the same road as Greece, Minister for Finance Michael Noonan said.
Our problem, of course, is that all our bank debt has been guaranteed by the Irish state. That's why we're in this terrible mess.
The state guarantee covers all bank debt, including unsecured bonds. Cover for these bank debts was part of our EU-IMF bailout. But it's the ordinary taxpayer here who will be paying for the bailout for years, through lower services and higher taxes.
So understandably people here are looking at the deal Greece has got and are asking can we get that too?
The latest deal that Greece got just a couple of weeks ago includes French and German banks writing off nearly half of the massive mountain of debt that the country owes them. They are doing this even though
Greeks have behaved badly since they got into the EU, borrowing, overspending, failing to collect taxes and cooking the books to hide what was going on.
They have failed to meet the reform targets set for them in the past few years. Yet they are now being rewarded for this irresponsible behavior not just be getting even more money, but by having half of their debt written off.
Meanwhile the Irish, the good boys of Europe, are getting no debt relief. All we have got from the EU-IMF inspectors is praise for sticking to our austerity program to reduce our budget deficit. We've got lots of praise, but no debt relief.
This matters to everyone here because in the end the burden of repaying the huge EU-IMF bailout falls on our
taxpayers. Our services are about to be slashed and we will be paying a lot more tax.
And the misery is going to continue for at least the next three years, with huge cutbacks and extra taxes in each budget up to 2015 in an austerity program which was outlined by the government here last week.
So the announcement last week that the government was going to repay this unsecured €700 million euro bond in full enraged people here. It seemed unjust and unnecessary. Unjust because of the deal that was cut for Greece and unnecessary because the bond was unsecured.
There was outrage in the Dail (Parliament), with the opposition demanding that the government give a severe haircut to the Anglo bondholders.
We don't know, but it is likely that many of the original bondholders will have sold on to other investors at a reduced rate anyway, perhaps at 80 or 70 cent in the euro, or even less. The speculators who now hold these bonds probably can't believe their luck that the Irish government has redeemed them in full.
And the Anglo nightmare doesn't end with the bond that matured last Wednesday. There's a bigger bond, also unsecured, maturing next year and more to come after that.
People here last week were furious when the €700 million euro Anglo bond was repaid in full. It's going to be even worse in the years ahead as the cuts and taxes bite deeper and deeper.
So there was a strong view among people here last week that we need to stop being the best boys in the
European remedial class and start being as difficult as Greece. Maybe we should threaten a referendum as well!
The government here explained last week that we really had no choice. We have been instructed by our EU masters that all bank bonds must be repaid in full.
That's why we were given the bailout, partly to cover the sovereign debt and partly to stop our banks defaulting. Ongoing payments under the bailout depend on us repaying bondholders in full. But people here are not buying it. It's more of the same stuff, they say.
If Greece got a deal, why can't we? Europe is giving us the mushroom treatment (keeping us in the dark and throwing manure over us).
At the very least we should be burning unsecured bondholders, people here were saying last week. These bondholders took the risk and they need to take at least some of the pain.
It's a popular view and one that is hard to disagree with. But sadly things are never as simple as that in the financial world.
In spite of the fury of people here about this, the truth is there is no easy answer to the problem.
Yes, we can start burning bondholders, but we need to be very clear about where that could lead.
The first thing that could happen if, say, we had imposed a 50% haircut on the bond we repaid last week is that all other Anglo bondholders would start looking for their money back. If one bond is not paid, legally all other bonds become payable immediately. And there are over €12 billion in Anglo bonds out there.
So what, you say, give a big haircut to the lot of them! Well, okay, but that would undermine confidence in the other Irish banks and their bondholders would soon be lining up to get their cash as well.
The government could have tried to ring fence this one Anglo bond, of course, and say that all other bonds would be paid in full. But how much credibility would that have?
Markets make up their own minds and are currently very slow to believe what governments say. At the very least a default on the Anglo bond that matured last week would have completely messed up Ireland's plans to get back into the money markets in the next couple of years to access normal funds to replace the bailout.
It would also have led to a hike in the interest rate both for our sovereign debt and all the rest of our bank debt. In the end that would have cost us a lot more than the €700 million we paid back last week. It would certainly have delayed the time when we can get out of the bailout and back to normal financing of the state.
All of that makes sense. It's what most (but not all) the economists and experts here think.
Yet there is still a lingering feeling that we are being taken for a ride. That we need to start kicking back to see what will happen.
There is, however, a problem with that. It's the doomsday scenario.
The EU has hinted that if we default on any of our debts, they will stop the bailout immediately. That could be a bluff, but we can't be sure.
If it did happen, Greece wouldn't be the only place with riots in the streets. In an instant, the pay of everyone who works for the state and all welfare payments would be cut in half.
Many schools and hospitals would close, among other state services. The state here would implode.
So the lesson is clear. We have to work steadily over the next few years to eliminate our budget deficit in an orderly fashion.
If we have to fund all state pay and state services from tax, then revenue and tax must be in balance.
When we get to that point, we can then default on bonds if we want, without threatening the future of the state. Until then, we are stuck.
We can use the Greek comparison to pressure the EU and the IMF for a better deal, for much lower interest
rates on our bailout money and for longer repayment terms.
A debt reduction deal was given to Greece because they simply couldn't pay. We still can, so far.
That's the reality, no matter how unfair, painful and sickening it is.