Ireland Calling by John Spain
Ireland’s New Year’s resolution should be to pay no more bank debt, further crippling the Irish people
Posted on Thursday, January 10, 2013 at 08:27 AM
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|The downfall of Anglo Irish Bank, among other institutions, |
continues to devastate the Irish taxpayer.
But on the basis that the fewer you make, the more you are likely to keep, we will suggest just one resolution for 2013. When it gets down to it, it's the only one that matters.
That resolution is as follows: In 2013 Ireland will tell Europe and the IMF that we are refusing to pay any more of the bank debt that is crippling the Irish economy and beggaring the Irish people.
Rejecting the bank debt will not mean we are home free. Far from it.
More than half of the huge national debt we have built up in recent years is due to the massive budget deficits we have been running, mainly since our economy went bust. We should tell Europe and the IMF that we will be paying that back (minus the part that relates to bank debt). That is our responsibility and we are working on reducing our budget deficits.
But what is not our responsibility is the tens of billions in bank debt (around €90 billion depending on how you count it) that has been and is being dumped on to the Irish taxpayer. This year we should tell the IMF and Europe that our 2013 resolution is not to pay any more of it back.
We will have our chance to begin this process pretty soon. The next bit of the bank debt mountain we are supposed to be dealing with is a €3 billion promissory note payment that is due in March.
Depending on which minister you listen to, we either will refuse to make the payment or we are going to insist on a deal from Europe so that we won't have to make the payment. These public rumblings by ministers are being made for Europe's benefit, but the reality is that we do not know if Europe is going to let us off the hook and we are rapidly running out of time.
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There is a much bigger scenario at play here, relating to the overall bank debt mountain. But before we deal with that let's look at the promissory note issue for a moment.
The game of chicken the government is playing on the promissory note payment due in March is missing the point. That is just this year's payment on the total €31 billion promissory note debt which we are paying back at €3 billion a year over ten years.
By coincidence, the amount saved on the deficit in December's budget was just over €3 billion and the fallout from that will be incredibly difficult here this year, involving all kinds of cutbacks, extra taxes, the new property tax and so on. Yet we are supposed to be handing over this amount (€3 billion) in repayments every year for 10 years because of this promissory note.
Bear in mind that the €31 billion promissory note only deals with the debts of two of the smaller banks here, the now closed Anglo Irish and Irish Nationwide rogue banks.
The bigger scenario -- the one that is being forgotten in the argument about the promissory note -- is all the rest of the bank debt. The promissory note is only one-third of the total bank debt mountain we were left, with and interest payments on that have to be included in our budget calculations every year.
It's worth remembering how the promissory note -- basically an IOU given by the then Minister for Finance Brian Lenihan on behalf of the last government -- came into being in the first place.
In 2009 as the property crisis gathered pace, Lenihan shoved a few billion into the two rogue banks to stop them collapsing. This was a consequence of the government undertaking given in September 2008 to guarantee the debts of all the Irish banks.
By the end of 2009, the scale of the black hole in Anglo and Nationwide -- two of the most irresponsible players in the Irish property boom -- was becoming apparent. They needed another €30 billion to be able to repay their lenders and bondholders.
Lenihan was nervous about public reaction if he borrowed this amount upfront. So instead he used promissory notes -- basically IOUs that promise the government will pay the money in the future -- which the two banks then used to raise cash to keep paying back their bondholders as bonds and loans from German and French banks matured.
So the taxpayer here was immediately on the hook for the huge debts of Anglo Irish and Irish Nationwide. But the bigger picture was much worse than that because the bank guarantee had also made the Irish taxpayer responsible for meeting the debts of the other banks as well, including the two biggest banks, Bank of Ireland and Allied Irish Banks.
All of this effectively made the Irish state bankrupt and forced us into the IMF-EU bailout program. A very large part of the money that we get under that program goes not to bridge the huge budget deficit that emerged after the crash, but to enable us to repay all the money the Irish banks borrowed during the boom to fund the property bubble.
There are several points that need to be made in relation to this. First off, when the Irish government ministers gave the state guarantee on all Irish bank debt on that infamous night back in September 2008, the banks either misled them about the depth of the black hole, or just did not know how deep it was themselves.
Which it was does not really mater. The fact is that the government gave a guarantee based on either false information or seriously inaccurate predictions about the value of property portfolios.
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For that reason alone, the validity of that guarantee is open to question. It is also doubtful legally whether any government has the to right to issue a guarantee which can bankrupt the state, which is what happened in our case.
And for that reason alone, the blanket state guarantee given on Irish bank debt ought to be repudiated, as well as everything that flowed from it.
What happened in 2010 was that the Irish government was pressurized by the European Central Bank (ECB) into continuing to pay off all the foreign investors who had put their money into Irish banks to get the higher returns that were on offer here during the boom. So these investors, who essentially gambled and lost, got everything back.
The reason given was that a failure to pay these international investors -- mainly French and German banks and bondholders -- would have started a banking crisis across Europe. Europe told Ireland that it had to keep on paying up as the bonds matured to avoid this. To force us to comply, threats were made to cut off Ireland's funding from the EU.
Eventually, the load of banking debt became too much, we went bankrupt and were forced into the EU/IMF bailout program. By now most of the investors who put money into the Irish banks have been paid back, but the money to do so has effectively come from the bailout. And that has to be paid back.
What was a banking debt problem has been transformed into a sovereign (or state) debt. And the one left carrying the can for this is the ordinary Irish taxpayer.
The amounts involved are far greater than a country the size of Ireland can manage. The overall €90 billion bank debt mountain alone is too much, even without adding in all the rest of the debt due to overspending and budget deficits.
The outcry caused by shaving the deficit by €3.5 billion in December and the huge concern over the €3 billion promissory note payment on Anglo bank debt we are due to make in March shows the scale of the problem. Even if we wanted to, we cannot cope with our total debt, which is probably north of €200 billion.
So what do we do? First off, we stop pretending that we are "on the road to recovery.” The government is clutching at straws in the wind as it maintains its brainless positivity.
According to the latest figures, there has been a slight fall in the number out of work here (although it's still above 14.5 percent) and that has been seized on as "good news.” But there has also been a fall in the number of those at work, which seems impossible if the number out of work is falling.
The contradiction is explained by mass emigration ... that's what our "good news" is based on.
Similarly, tax returns here rose slightly in the last set of figures, but that could go the other way in the next set of figures depending on global trade.
These "signs of recovery" are uncertain. The more important point is that they are largely irrelevant in comparison with the scale of our debt problem. And even if we do achieve a fragile and very gradual recovery here over the next decade or two, the benefits from that will all be consumed by our debt problem.
Is that fair? Obviously not. Even if we could pay back our bank debt mountain, we should not do so because it is morally unjust and would condemn the Irish people to misery for decades to come.
The ECB and the Eurocrats who blackmailed Ireland into repaying all the bondholders -- even including most of those who were unguaranteed -- now have to step up and shoulder responsibility for their actions. We don't know exactly what went on between the ECB and Ireland because the papers have not been released, but we have a pretty good idea.
Across Europe there is now a growing view that the ECB trick of forcing countries to turn bank debt into sovereign debt is not acceptable. The new financial structure recently put in place in Europe -- the European Stability Mechanism (ESM) -- is partially an acceptance of that view.
Under the ESM, several things need to happen. The €90 billion bank debt mountain that now overshadows Ireland has to be transferred to the ESM and the ECB. In return the ESM and the ECB can take ownership of the Irish banks from the Irish state and can then use whatever profits the banks make to work down the debt over a very long time frame, 40 or 50 years.
That would lift the bank debt burden off the Irish taxpayer, who had nothing to do with it in the first place. It would mean that we could concentrate on paying down the bill for our budget deficits which is a huge challenge in itself. It would mean that at last there was some real hope for our future.
So our New Year Resolution for 2013 must be that we will not pay back any more of the bank debt.
Happy New Year, Europe!
See more: Irish Economy