“We will not have “defaulter” written on our foreheads. We will pay our way. We have never looked for a debt write-down, although we want an extension of flexibility from these facilities to help our taxpayers and in dealing with our deficit, and to help repay our debts in a more realistic fashion. It is in that regard that intensive discussions are now taking place” An Taoiseach Enda Kenny speaking in the Dail on 24th January 2012
A “no” vote in the forthcoming referendum on 31st May is being advocated on here for three main reasons – see here – but the primary reason is to help renegotiate Ireland’s debt which will stand at close to €200bn next year. So far we have racked up €64bn in bailing out the banks. Linking this referendum with the national debt and referring to the Fiscal Compact as the “Bank Debt Treaty” has generated some puzzlement, because on the face of it, there is nothing in the Treaty that you can immediately associate with renegotiating the bank debt. At the same time, there are important advantages in voting “yes” – more certain access to the ESM fund and investment confidence, being the main two. So it’s time to justify the advocacy of a “no” vote in a more detailed way, and that is what this blogpost sets out to do.
Facts and history
In 2007, Ireland had a so-called General Government debt of €47bn which represented 25% of GDP of €190bn. In 2013, the latest projection from the Department of Finance is that we will owe €190bn which will be 121% of GDP. Our debts have ballooned for two main reasons – when the financial crisis unfolded our tax take collapsed but our outgoings remained constant so we borrowed to fill the gap, and secondly we bailed out the Irish banks. To date we have sunk €63bn into the banks, comprising €32bn in cash from the National Pension Reserve Fund, from our tax receipts and from our first bailout and €31bn in promissory notes. What is at issue is the extant funding of the promissory notes of €25bn-plus – we paid a total of €6bn off the notes in March 2011 and March 2012 – and less than €10bn of bondholders in IBRC and AIB. Overall in terms of bank debt that is still to be funded, we’re talking about debt which represents about 20% of our GDP. Of course if we borrow to pay for this part of the bailout, we will also need pay interest on the borrowings.
Ireland competes for investment with other EU countries, particularly so-called Accession countries, and we have already witnessed the high-profile departure of much of Dell’s operations to Lodz in Poland. These are the debt levels of EU countries at the end of 2011, and make no mistake about it, we compete with these countries for investment. Over dinner tables in Warsaw today, they are wondering how they can access a higher portion of EU foreign direct investment. Starting out with a 56% debt:GDP,Poland and countries like Poland have the potential to invest in ways not available to Ireland which is collapsing under the weight of 120% debt:GDP
“Renegotiating our bank debt”
Here are what are believed on here to be the bases for a negotiation.
Ethics – this is the popular and populist one and it goes like this : the banks privatised their gains during the 2000s and socialised their losses when they hit the buffers in 2008. That’s SO unfair on society. Not only that, but the beneficiaries of our bailed-banks have been furriners, generally portrayed as Brits, Krauts and Frogs who lent profligately to our banks in the 2000s and are now getting repaid in full at citizens’ expense. Again that is SO unfair. And whilst other countries have had to step in to help their banks, in Ireland’s case the cost will be 40% of GDP which is well beyond what any country is contributing. SO unfair. On the other hand, non-Irish eyes might observe that in September 2008, Ireland offered a guarantee to its banks which was not welcomed internationally, and indeed for a while we were Jack the Lad telling depositors in London and elsewhere that their money was safer in Irish banks. Non-Irish eyes might also observe that it was our lawfully elected national parliament that voted for the guarantee, so our representatives acting on a mandate given to them by us voted for a measure which is now disastrous. And the ECB and our partners in the EU listen to our whining and say “too bad, we’re sorry for you, but you made your own bed”.
Economics – there is a reason why the Maastricht Treaty tried to set limits on countries running up huge debts. As the debts balloon, the chances of default and contagion worsen.Maastricht set the debt limit at 60% of GDP. Economists believe that debt:GDP levels of over 80% eat into future economic development and over 100% we are in the “Red Zone”. Ireland’s debt:GDP is forecast to peak next year at just under 121%. So shouldn’t we be able to tell our creditors that our debts are too high and we are going to default and arrange an orderly default. You’d think, but our creditors in the EU might point to Greece,Portugal and Italy which have or will have debt:GDP greater than Ireland’s, and we know that our EU partners are not moved to assist these other countries. So why would we think they would move to assist us?
Default – Inevitable forced default has not been accepted by our partners, or if it has they’re not saying – nearer to home, our own Government TDs are acknowledging that a default, a soft or agreed default hopefully, is in prospect. What about unilateral default though? We know from An Taoiseach that such a threat – and it would be a threat – has not been made. This is the red line position in any negotiation, it is the position that gives negotiations traction and regardless of the consequences, it is the only red line position we have.
Collateral – this topic deserves special attention, particularly after the manoeuvrings of the ECB in March 2012. Our debt comprises sovereign debt – bonds, treasury notes and state savings – and non-sovereign debt – promissory notes and the remaining debts of banks owed to their creditors, including bondholders. Sovereign debt is underwritten by the nation. Promissory notes were sheets of paper on which Minister Lenihan wrote “I-O-U” So dodgy are these sheets of paper that the governor of the Central Bank of Ireland apparently sought so-called “letters of comfort” in which Minister Lenihan wrote “I really REALLY promise to honour these promissory notes”. Can Ireland tear up these IOUs? The position on here is that we can, though there may be consequences. We do know that the ECB is anxious about the collateral underpinning the promissory notes because in March 2012, Minister Noonan said “you could take it that the ECB were never particularly happy with the collateral provided by the promissory notes and would like stronger collateral”. Oddly enough that theme disappeared from the media when it was leapt on, on here. That may be misplaced vanity, but the fact remains that the ECB is not 100% happy with the collateral, and the view on here is that this is the weakest point in our campaign to get a debt reduction, and as the weakest point, we need to devote our resources to pummelling the living daylights out of it.
How do we know this Government couldn’t negotiate its way out of paper bag?
We don’t! With respect to Minister for Finance, Michael Noonan, we know he is a hugely experienced politician that has a lifetime of success and failure under his belt, and we would naturally assume he has good negotiation skills – if politics is indeed the “art of the possible” then we should be able to take it as read that a veteran politician is a skilled negotiator.
But here’s why I think he and his team are out of their depth in these negotiations. Even taking into account the lousy financial condition of the country which places us at a disadvantage in negotiations, it is truly baffling as to how we arrived at such poor outcomes over the past year as these following:
(1) In March 2011 just after coming to power, Enda Kenny set about renegotiating the interest rate on Ireland’s bailout funding. He was sent away with a flea in his ear by France’s Nicolas Sarkozy after reportedly “grandstanding” at what become known as “the Gallic Spat”. Meanwhile at the same meeting,Greece was granted a 1% reduction in its interest rate.Portugal wasn’t yet in a bailout programme (see below)
(2) In July 2011 at the EU summit, Ireland came away with a reduction in interest rates that will save this country some €10bn in repayments on the bailout programme. Well done to Ireland’s negotiating team, except no-one believes the reduction was conceded except to save Greece, and Ireland merely benefited on the shirt-tails of Greece. But at this stage,Portugal was also in a bailout programme and Portugal also benefited from the interest rate reduction. But the difference was that Ireland had to give a commitment on our corporate tax arrangements in return for the interest rate reduction,Portugal didn’t. And by the way, the interest rate reduction applied going forward from July 2011, we lost north of €10m as a result of Enda Kenny failing to get the same interest rate reduction as Greece did in March 2011.
(3) The Anglo promissory note “deal” in March 2012. Recall that negotiations on the promissory notes were ongoing since at least last September 2011. At the 11th hour in March 2012, Minister Noonan announced a “deal” to the Dail, and then scampered for three weeks without offering any elaboration. Notwithstanding the fact that Bank of Ireland has yet to schedule an EGM to put the “deal” to its shareholders and notwithstanding the apparent error in Minister Noonan’s calculations in his announcement in March – which will be the subject of a blogpost on here next week – it was quickly established that the ECB had done no deal with Minister Noonan, and all that happened is the Government raided NAMA’s piggy-bank to repay the notes in full and on schedule.
(4) Ireland needs to contribute to the ESM fund even if we remain in a bailout programme. That’s a serious change to the arrangements under the existing EFSF programme – you’ll recall that we paid €346m over to Greece in 2010 for its bailout but our contributions were suspended after we needed our own bailout. However with the ESM, we are required to pony up €1.27bn in cash in the next two years to the ESM’s initial €80bn firepower plus we may be called on to contribute an additional €9.9bn to bring our overall contribution to €11.145bn. And should Spain or Italy need bailout funding then that €11.145bn of funding will be more than a theoretical concept! And Minister Noonan signed up to that Treaty!
(5) Despite the fact that there is a substantial probability of this country needing a second bailout, we have signed a Treaty which doesn’t set out the pricing of a bailout. All it says is the ESM will charge a rate which covers its financial and operating costs and “an appropriate margin”. If the aim was for Ireland to have access to cheap funding, why did we allow the term “an appropriate margin” to be written into the ESM Treaty. We can hope the “appropriate margin” is nil or insignificant but what if the powers that be in Europe decide the ESM should be a deterrent to countries getting into difficulty in the first place and it charges a healthy deterrent premium?
(6) Despite the fact that there is a substantial probability of this country needing a second bailout and that membership of the ESM will deter the bond markets from charging a premium, Minister Noonan signed a revised ESM Treaty and Fiscal Compact in February 2012 which makes access to the ESM funding conditional on ratification of the Fiscal Compact. What class of eejitry is this? Perhaps it isn’t classified yet, but it certainly exposes poor negotiation skills on Ireland’s part.
How does a “No” vote improve our prospects for getting a write-down on the bank debt?
A “no” vote on 31st May 2012 is the first step. The second step will be the default on bank bonds, and the Government will have a perfect opportunity on 26th June 2012 to default on a perfect bond – an unsecured unguaranteed senior bond at what was Michael Fingleton’s Irish Nationwide Building Society (INBS). The details of the two bonds that fall due on 26th June, 2012 are
XS0306307694 Issued 26th June 2007 €598,100,000 outstanding
XS0306306613 Issued 26th June 2007 GBP 28,800,000 (€23,240,801) outstanding
INBS has received a bailout of €5.4bn – €0.1bn in cash and €5.3bn in promissory notes – to date and the betting on here is that it will need more.
On 27th June, if the bondholders haven’t been repaid in full, then chances are they will launch legal action in Dublin’s High Court to pursue the debt owed. The Government at this point will need renege on the promissory notes and threaten to wind-up IBRC, the new bank that emerged from the merger of INBS with Anglo.
At which point, the ECB would be directly involved because if IBRC is wound up MINUS the promissory notes, then the ECB will shoulder an enormous loss in respect of the nearly €40bn of loans it has given to IBRC.
A “yes” vote on 31st May shows that the nation continues to provide support to a government which is campaigning for a “yes” vote, a government which swept to power last year with a mandate based on the belief that it would seek, and get, a write-down in bank debt, a Government which has admitted it has not sought a write-down in debt. If there is a “no” vote, the Government can legitimately say that the prospects are that we will have a hard default at the end of 2013 if we don’t have access to the ESM, and the Government can legitimately say, with the support of the nation, that it is better to default now on debt at one of the most insolvent banks in the world, than to have a hard default on sovereign debt in 2014. Better to default when we are still on our feet now, than in 2014 when we will be on our knees without access to the ESM. A “no” vote will set this course in train and with a credible threat, the ECB will negotiate.
But is it really acceptable for us to threaten the ECB which is providing €131bn of funding to our banks?
Well, we wouldn’t be having a monopoly on threats. Remember the ECB threatening Ireland last year in these terms : “In the meantime, we may have to come to the conclusion that it doesn’t really make sense for the ECB to keep putting €100 billion into Irish banks. What we are doing is actually illegal, but we have being doing it because we want to help Ireland. Maybe we might come to the conclusion that we should stop”
Unfortunately for the ECB, events have moved on. Whereas Ireland was in November 2010 the recipient of an estimated one quarter of the ECB’s total lending which was completely out of proportion to our economy which is only 2% of the EuroZone’s, these days, Irish banks have €131bn of support from the ECB, €87bn from the ECB directly and €44bn from the Central Bank of Ireland. The ECB has a balance sheet of €3tn these days, so our demands on lending are much more in line with the size of our economy, and remember the ECB has been shoving trillions out the door in longer term lending to other EU banks, just over €1tn in two operations in December 2011 and February 2012 alone.
So the ECB might try to threaten us again, but with the rest of Europe teetering and the probability that the ECB would only get a fraction of its lending back if it pulled the plug which might be unlawful anyway, should we really be concerned?
Hmm, where do I get a second opinion?
Economists? No, or at least not based on their expertise in economics. Economists will be able to tell you about Ireland’s debt:GDP, what it means for the country now and in future. They may have an historical perspective which will explain how other countries have dealt with elevated debt levels and Deputy Stephen Donnelly frequently refers to research which shows our debt levels are unsustainable by historical standards and we are heading for default. Economists should be able to tell you how Ireland will perform relative to lower debt competitors in the decade ahead.
Laywers? Are more relevant to this issue because on 27th June 2012 if we don’t repay €600m to unsecured, unguaranteed bondholders at INBS, you can bet your bottom cent that the bondholders will initiate legal action to recover the full par value of the bond. And it will be the courts that determine if their case succeeds. But even lawyers can have divergent views – after all that’s why we get court cases.
Negotiators? Yes, but alas we’re ALL negotiators. What you need are the negotiators who are actually negotiating with the ECB and they’re not likely to be formally introduced. We can ask their masters, the politicians. We could insist that our politicians haul the negotiators before an Oireachtas committee and demand to know why they have been so unsuccessful, so far. But I don’t think that will happen before May 31st.
You. Weigh up what is argued for above, challenge politicians supporting a “yes” vote and review the history of our negotiations yourself. But remember the prize of getting a debt write-down is huge, we can always vote “yes” in a second referendum and if we have any measure of success, you might just about feel that you are living in a decent society, not burdened with other people’s debts.
NAMA Wine Lake 
@NWl
second paragraph billion(b) not million(m) ?
@SFCA, many thanks, corrected!
@NWL
You’re welcome,that’s a great piece.
However I am not sure I share much enthusiasm for the prospect of negotiating re bank debt (at least the promissory notes).We can’t just have men of power writing dodgy iou’s willy-nilly all over Europe now can we?
Here’s a poem for abstract “yes” voters
http://wp.me/s28tG9-support
Great post, and great website, thanks!
For other opinions, as well as potential political impacts, you may also try political scientists, political sociologists, International relations scholars, historians :))
@NWL
Another great read and case well made.
Ignoring timing differences, the State has pumped €64 billion into the banks while receiving a rescue package worth €67.5 billion from the EU/IMF/ECB. On this basis, it could be argued that all but €3.5 billion of the cash raised in the first bailout has effectively ended up in the busted banks. Given the fragile state of the banks, similar allocations could apply to any second bailout supported by the ESM.
So, it is argued that the underlying purpose of bailouts is to rescue damaged banks, overexposed borrowers and foreign bondholders rather than stimulate the economy, create jobs etc. How can the Stability treaty and ESM alter this approach whilst simultaneously demanding massive reductions in sovereign debt and the exchequer deficit?
They cannot, so what is the point in voting Yes other than to embed a flawed approach into our laws and constitution? Instead, stop paying the remaining bank bondholders (as NWL suggests) and tell the CBI/ECB that the Irish people, by voting NO in a referendum, have in effect unilaterally decided to suspend repayment of the promissory notes and to focus its resources on reviving the economy with support from ESM 2.0, IMF etc.
@NWL
“…but the primary reason is to help renegotiate Ireland’s debt which will stand at close to €200m next year…..”
Good Morning NWL,
May I ask you please to detail the major components of the debt projection which you set out, as noted preceding.
Thank you,
Sincerely,
Eric Doyle-Higgins.
@Eric,
Please note the correction above – the €200m should read €200bn.
I’m not sure what you mean by components. Bank debt versus non-bank debt? That will be difficult to assess – the extant promissory notes are included in the debt, so also is the €20-25bn from the Troika which has been used to recapitalise the banks so far and which we need to start paying back in 2015, and some of the borrowing from 2009 to September 2010 on the bond market will have been to help capitalise the banks, but other borrowing will have been to cover the deficit. I would approximate about 30% of the “close to €200bn”
The €63bn needed for the bank bailout has had a number of sources which included the NPRF, current tax receipts and loans.
Hi NWL,
As an economic neophyte, I’m a bit confused here. You say that “we have sunk €63bn into the banks, comprising €32bn in cash from the National Pension Reserve Fund, from our tax receipts and from our first bailout and €31bn in promissory notes.” But you later say that ” Irish banks have €131bn of support from the ECB, €87bn from the ECB directly and €44bn from the Central Bank of Ireland.” Doesn’t this make our total bank debt €195 billion, seeing as we essentially own all the banks bar BoI? Doesn’t the ECB have to be paid back as well? Or have I gotten this wrong?
@Jonathan,
What you describe is accurate, but there are different types of debt
The ECB provides lending to Irish banks based on collateral, so Irish banks pledge packages of loans for example to the ECB and the ECB then advances real cash on the basis of that collateral. And in total there is €87bn of such lending to all banks located in Ireland, of which €67bn in March 2012 was to the state-guaranteed banks.
https://namawinelake.wordpress.com/2012/05/11/reliance-on-central-bank-funding-by-irish-banks-stays-flat-in-april-2012/
So the ECB lending to the banks is backed up by collateral over which the ECB would have a claim if the banks defaulted.
On the other hand, the €31bn in promissory notes is not backed up by collateral save that piece of paper signed by Brian Lenihan which is shown above.
Thanks for clarifying that. A thought occurs, though: is it not likely that any collateral pledged to the ECB by Irish banks is likely to be largely worthless? Isn’t that what they refer to as ‘cash for trash’? I mean, if their collateral was worth anything, why would they have difficulties getting money from other sources? And if the collateral is (largely) worthless, would the Irish state be on the hook for the balance if the banks defaulted?
@Jonathan, the ECB has a manual of how it assesses quality of collateral. This is a version, I’m not sure if it is the latest,
http://www.ecb.int/paym/coll/assets/html/dla/EA/ea_upd_100531.txt
but the point is that the ECB takes the book values of certain classes of assets, discounts them just in case there are further losses and then lends on the remainder, so if AIB has certain loans worth 100, the ECB may only lend on 70.
Can’t see how the Irish state would be on the hook, I believe the guarantee to Bank of Ireland, AIB/EBS and Permanent TSB to cover deposits only.
Thanks again for clarifying that. For a non-economist with chronic fatigue problems, navigating these matters (and trying to separate the facts from the assumptions and waffle) can be exhausting!
@ NWL
What do you make of the idea put forward by Colm McCarthy today. I hope I’m not misrepresenting his position but it seems he suggests that the powers that be want Greece out and would not hestitate to kick us out if they could get the political cover (eg no vote). If you’re pro euro (are you by the way) then the ‘good boy’/wait for the ESM to bail out the Spanish banks could well be the only course of action available.
@John,
Colm McCarthy’s article in today’s Sunday Independent is available here
http://www.independent.ie/opinion/analysis/theres-little-point-voting-no-it-will-be-ignored-3112646.html
in which he writes
“Our European ‘partners’, whose hostility to this country has been amply demonstrated, will welcome an excuse to exclude Ireland from whatever bank rescue deal that must be stitched together for Spain. A ‘No’ vote would provide excellent cover, and it is politically naive to presume that any chinks in the Irish armour will not be exploited. ”
As straight talking economists go, you’ll find it hard to find a better one than Colm McCarthy who often takes contrarian lines against Establishment views.
But today, he is forming a political judgment, and he may be right, but I don’t think he is. And even if he is, and we find that Spain gets some great concession on its bank debt that Ireland missed out on for voting “no”, then if the concession was great enough, no doubt we would have a second referendum and vote “yes”
By the way, yes the position on here is pro-euro, but when we signed up to the euro, we did not agree to attach banks to the sovereign. And although the ECB’s primary role with monetary policy is to keep inflation below but close to 2%, should the majority decide we temporarily need higher inflation, then that should be open to change.
@NWL
You make the comment above..”On the other hand, the €31bn in promissory notes is not backed up by collateral save that piece of paper signed by Brian Lenihan which is shown above.”
First, I think the possible wording of the redacted bit was discussed here or on ie.ie but can’t recall, can you?
Second, the redaction is a little curious – it likely contains an indication of the srtength of commitment. Unless it says “do naff-all to”, “have a whip-round in the pub to”, or “ask the condidence fairy to” or the like, then what was the rationale for redacting?
Third, fundamentally, what is the difference between a promissory note and a letter of comfort? Is it not essentially the same commitment through circularity?
Fourth, the promissory note themselves are also collateral surely. A defaut of the pro notes is a default by the sovereign – just because the squid won’t be directly paying out or collecting on a cds contract as a result doesn’t alter that fact.
Fifth. I note the ESM or EFSF takeover of the note has moved on to chasing a re-cap of banks directly. That numbers game continuies to be problematic for IBRC, never mind the German politics.
@Grumpy,
1. No I can’t recall a discussion of the redacted bits on here – this was the flagship “letter of comfort” blogpost. Most of the commenting is from UK bondholders including MP John Hemming.
https://namawinelake.wordpress.com/2011/07/19/how-much-additional-state-funding-will-anglo-need/
2. Pass
3. Put aside the fact that David Hall expects to have a hearing in July or latest, October 2012 in which he will be challenging the constitutionality of the promissory notes, and what you have are memos from the Minister of Finance giving an undertaking that should be capable of being reversed with another memo or if needs be, legislation. No default, no CDS claims, just bad odour with the ECB.
4. The ECB disagrees with you according to Minister Noonan whose comments in March 2012 are reported above.
5. You’ve lost me, I don’t understand what you mean.
On the fourth point, are you referring to this:
“Irish Finance Minister Michael Noonan said the European Central Bank is “not enamored” by the structure of about 30 billion euros ($39 billion) of promissory notes used by the state to bail out Anglo Irish Bank Corp.
“You could take it that the ECB were never particularly happy with the collateral provided by the promissory notes and would like stronger collateral,” Noonan said in an interview with Irish state-owned broadcaster RTE Radio. Noonan spoke from Paris after meeting his French counterpart Francois Baroin. ”
If so, I took that article not to mean that they then by extension thought that the letters of comfort were contrastingly spiffing collateral, rather that replacing the pro notes with a Gilt and preferably a tap at that, would suit their collateral ranking structure more appropriately.
On your reply to 3. I don’t follow. Are you saying that the view is that the is not a default on a sovereign liability, undertaking, signature etc unless there is a foreign bondholder or a cds contract involved? I would have thought that the Germans (beyond buba) would be a bit miffed too if the pro notes turned into permanent printing without broard agreement.
on 2. Ok but I find tit curious, but then again I find paragraph 1.28 of CP not invisible so its probably of no significance.
Fith point is just a general observation about two ministers announcing the inevitability of rescue fund banking licences and dirct recaps today.
@Grumpy
“I took that article not to mean that they then by extension thought that the letters of comfort were contrastingly spiffing collateral, rather that replacing the pro notes with a Gilt and preferably a tap at that, would suit their collateral ranking structure more appropriately”
You’ve lost me a little again, but what I meant is that the ECB was unhappy with the solidness of the promissory notes and wanted to strengthen the collateral behind the promissory notes which after all are being used to access €30bn-odd of cash from the ECB via the Central Bank.
On the third point, yes you understand me correctly, a memo of the type shown at the top of this blogpost is not the same as a sovereign bond.
You’ve still lost me on the 5th point, I heard Minister Noonan on RTE Radio’s This Week programme and all I heard was an aspiration, not an announcement. And we’ve heard many aspirations in recent times, technical papers being written by the Troika, a renegotiation of the promissory note structure, burden sharing on senior unsecured unguaranteed bonds at INBS and Anglo. Aspirations.
Not the same, agreed, but it is still a sovereign obligation to part with money. Doesn’t that make it essentially just as much a default if you default on that obligation?
In referring just to the letter of comfort, are you making the assumption the pro note doesn’t constitute an obligation?
@Grumpy, we know that governor of the Central Bank of Ireland, Patrick Honohan sought “letters of comfort” from then-Minister for Finance, the later Brian Lenihan. We might deduce from this that the original promissory notes were not sufficient in the eyes of the central bank to constitute a sovereign obligation.
From Minister Noonan’s comments, we might deduce that the ECB remains unhappy with the promissory notes even if supported by “letters of comfort”
As suggested above, this point should have the living daylights pummelled out of it by our negotiators.
Nil, I’m on your side but I think this:
“We might deduce from this that the original promissory notes were not sufficient in the eyes of the central bank to constitute a sovereign obligation.”
does not follow.
It might be more useful to go public with the evodence to demonstrate to the world that the pro note obligation resulted from duress and was issued under threat from the ECB or whoever.
@namawinelake
Good Evening All,
Thank you for your response above. I suggest we can agree upon it that “Ireland’s debt” comprises the following:
a) Sovereign bonds issued on our behalf by the National Treasury Management Agency, currently about €87B;
b) Monies advanced by Ajai and the guys, currently about €23B, I think.
On such an appraisal, “Ireland’s debt” totals about €110B, that is, this is the sum for which the Government of Ireland is “on the hook”. In the year 2011, Gross National Product, GNP, totalled about €124B. Accordingly, our debt : GNP ratio is c.89%. In the same year, debt service costs totalled c.€5.2B, about 4.2% of GNP.
However, if we re-calculate excluding the monies noted .b) above, for reasons which will become plain presently, then the revised Debt : GNP ratio is about 70%. Making a pro-rata assumption, which may be marginally incorrect, servicing costs as to this core National Debt total for the year ending 2011 is c.€4B or c.3.2% of GNP.
Gross Domestic Product, GDP, is an inappropriate metric for assessing the performance of Ireland’s Economy. However our partner States insist upon use of the same, including as to the application of the proposed Fiscal Compact. GDP for the year ended 2011 arose in the sum of c.€156B. Reworking the ratios preceding, we arrive at a debt : GDP ratio of 56% an debt servicing costs of c.2.6%.
The Fiscal Compact comprises five key elements:
A. the mutualisation of enforcement action amongst ratifying states;
B. the limitation of the underlying fiscal deficit to 0.5% of GDP;
C. the limitation of the overall fiscal deficit to 3.0% of GDP;
D. the limitation of the debt : GDP ratio to 60%;
E. rectification of any debt : GDP excess within a period of twenty years from inception.
Currently, we are all but in compliance with the (C – B) limitation, since our debt servicing costs, excluding banking-related finance costs, are of the order of 2.6% of GDP. Similarly and since our banking-refinancing exclusive National Debt is c.56% of GDP, we currently comply with limitation D.
However, we are in difficulty as to limitation B. For the year ended 2011, our Fiscal Deficit was of the order of €21.7B including debt servicing costs €5.2B aforementioned. Stripping out the latter, since it is subject to the (C – B) limitation aforementioned, our core non-compliance with the proposed Fiscal Compact is about €16.5B minus about one half of one percent of GDP or about €15.8B. This is the problem which we must solve if we are to come within the terms of the Fiscal Compact.
Mindful of the preceding discussion it is perhaps necessary to emphasise that of this €15.8B total, nothing, repeat nothing of the same is generated from refinancing our financial institutions. In fact, depending upon how the current year turns out, our banks may make a small positive contribution to the Exchequer. This matter is clouded by uncertainty concerning AIB Bank’s ability to meet its support charge obligations as recently pointed out elsewhere within NWL.
It is certainly fair to suggest that the current “overleveraged” position of our two pillar banks comprises a hindrance upon economic progress, but in terms of their insolvency, they have done their worst to our Exchequer and we must now look elsewhere for the cause of our Fiscal Deficit.
Our Public Finances are subject to three distortions currently. Firstly, civil and public service pay is running c.50% above private sector averages. Secondly, working life social protection payments are running well in excess of those prevailing elsewhere within the Union. Thirdly and again comparing us with our partner Union States, we are under-taxed.
If we were to cut both civil and public service pay and pensions and working life social protection payments by about one third then that would come close to resolving our existing deficit. However, the resulting loss of both direct and indirect tax receipts would require that we increase taxes to make good on the resulting additional short-fall, about €8B. The Universal Social Charge is a blunt knife, indifferent to reliefs, credits, adjustments, fiddles, manipulations, how’s your father schemes et al. If we were to increase it by 7% across the board we would raise about €5.6B, or about €2,600 per annum per income tax payer. A residential property tax levied at a rate of about €8.60 per square metre, would raise c.€2.4B. But of course the question of the precise rate to be used should be a matter for our local politicians. Only they could determine whether homes in their area would carry more or less than the average €1,200 burden.
To this shocking reality catalogue we must add two further ingredients. Firstly and currently, the Irish Government can borrow in the markets, no bother. Snag is, the cost would be no less than about 7.7% as of last week. Secondly, at the end of this year, through spending and not including debt service costs, the Irish Government will have added no less than about €16B to the amount of our National Debt. Applying the former to the latter we can observe that for each year through which we delay taking the necessary rectifying action, we increase the cost of debt servicing by about €1.3B.
Many of the opponents of rational thinking in the matter of our Public Finances suggest that if we can apply the prescription of St. Augustine, purity of course but, Lord, not today, we could grow our way out of these realities. Not so.
During 2010, net of multinational transfer pricing our exports grew by 11.12%. During 2011 they grew by 2.31%. During 2011, in the overall, our economy contracted by 3.5%. What these figures tell is that firstly, our export growth is on the point of stall reflecting both trends in world trade and the changing composition of certain of our exporting sectors and then secondly, that our domestic economy, largely driven by Public Expenditure, is shrinking. This latter is directly attributable to necessary retrenchment on the part of Government. In other words, we are already growing to the greatest extent possible and yet our kernel problem remains.
But I did promise to come back to Ajai’s €23B, .b). above. Actually, as Eurostat counts it, it is about €49B, that is, including c.€26B of the infernal promissory notes. Co-incidentally, this is the total, more or less, which we have injected into our wonderful financial institutions. To arrive at the corresponding total for actual cash outlay we have to eliminate the amount of the promissory notes and then add back the result of flushing out the National Pensions Reserve Fund together with the clearing out of various other minor canyons in the Public Purse, undertaken mainly during 2009. The result is the same, €49B.
For us, the good news is that Belgium, France, Italy, Cyprus and Spain have now joined Greece, Portugal and ourselves as being unable to avoid the banking elephants in their National Livingrooms. These various liabilities criss-cross the German banking system. Paraphrasing the Sage of Omaha, the tide is going out and we will soon know who’s been swimming naked. Angela must soon pony up to it that she authorise the rescue which ought to have been carried out when the late Brian Lenhian made his fateful telephone calls in September 2008.
The necessary rescue mechanism is to hand. The European Central Bank must now take responsibility for recapitalising Europe’s banking system, lock, stock and barrel, by making the necessary electronic entries in its supervisory systems, both at Dame Street and in its other branch offices throughout the Union. That done, we can forget about the €49B portion of the National Debt, .b). above. And we can forget about servicing it.
Thing is, as I hope I have made plain, absent rectifying action besides, we will still be left with a deteriorating position in our Public Finances. Politically, the temptation must be to leave sleeping dogs lie, to contend that “growth” will lift us all out of penury and back to the glory days of the Celtic Tiger, to leave things untouched until the next General Election.
Let us now go a little further into this growth thingmy. Whether measured in terms of GNP or GDP, Ireland’s economic performance in the decade to 2007 was categorised as truly stellar. What we now know is that the entire circus comprises a property-based pyramid selling scheme, driven by cheap credit created at nil cost by over-ambitious bankers, freed from the regulatory and supervisory constraints imposed in the aftermath of the Great Depression.
Just to be clear on this point, in exactly the same way as the European Central Bank will presently reset the clock of bank debt, private bankers not subjected to appropriate regulation and supervision, can achieve a similar end. They can create money. And they did.
In the concluding years of the last century and having warmed to this task, the next phase in their operations comprised the offering of loans on a grand scale. For a time none of us were untouched by their advances. “Fancy another credit card, a new car, a new house, a second house…….”. We all received the junk mail. In more discrete ways, bank customers with more standing were offered very liberal facilities. More ambitious customers who managed to stay ahead of their bankers by actually making applications, found an atypical welcome for anything they had in mind. Some were enticed to expand upon their applications. Banks went mad.
We know all about the property bubble that emerged out of this maelstrom of credit. What is not so well recognised is that such banking practices had the effect of pre-empting “investment” in all sorts of areas not always justified by the realities of market demand. There would always be room for one more barber’s shop or breakfast-roll stand. Such freely-available finance allowed, indeed all but demanded, the creation of a stream of credit which was altogether out of line with underlying demand. Credit was a solution in need of problems. Or so the banks believed.
So it is that today, we can walk through any main street in Ireland – and in other member states of the Union – and see the shuttered facades, monuments to the thrashed hopes of their progenitors. Firms which expanded to meet nebulous demand, pledged their own capital along with that of their banks, and pledged more and then more until and finally like a wrestler crying “uncle” upon crossing the pain threshold, their enterprise could endure no more and yet another failure was added to the data of economic collapse.
Credit is, or should be, like any other scarce resource. By operation of free market forces it should go to those capable of making the most efficient use of it. Whether it is rationed by means of manipulation of interest rates or active management of the money supply or both, it is the job of central banks to ensure that a judicious amount of pressure is maintained, testing those who would harness credit in aid of their particular business idea.
There will always be failures of course but in a well-managed credit market, successes will outweigh failures and little by little, as investment offers demand and demand underwrites investment, the economic wheel will turn a little faster and then a little more until, over time and with cyclical inevitability, progress will ease only to revive once more when necessary adjustments are made.
Our situation, that of the entire Union, not just the Eurozone, is that having mounted a roller-coaster, we are now on the down rake and will know better the next time to be content with a carousel.
What emerged in Europe has been perpetrated on a global scale. Many learned commentators are perplexed as to how the current mountain of debt arose and others struggle to try to envisage the consequences of its unwinding. One unpleasant assessment which is gaining ground to some extent is that this unwinding will hobble economic growth throughout the world.
What is becoming apparent is that the intervals between corrections are becoming shorter. Some learned commentators postulate that we are witnessing the final such interval and that unless we manage to reform our financial services industries, we will enter upon a volatile phase during which we endure financial markets vacillation with the power to destroy whole societies.
Some commentators suggest the only way to arrest this prospect is to exert absolute control upon the money supply, more particularly upon all creators of money, essentially, governments and fractional bankers. Both, they say, must learn to moderate expectations. Calculated to arrest this financial “disease” such a prescription will greatly limit the prospects for growth.
While bankers need merely modify the level of their trade, politicians must learn to re-calibrate downwards the quantum of promise which they may viably put before their electorates.
This is the true significance of the Fiscal Compact, for as we can see, in our own case, once the ECB does its business in acting as lender of last resort, it is thereafter over to our politicians, as Barack Obama put it in not dissimilar circumstances “to eat their greens”. Public expenditure must be cut and taxes must be raised.
As it happens, I suggest Ireland is less than unfavourably positioned to adjust to the new regime. The initiating observations herein made reference to ethics. I know of no superior consideration in any well-ordered society than that we should, all of us, share equally in the protections which the State can offer.
There is a direct relationship between the cost of government and our propensity to achieve economic success internationally. Currently the cost of our government is out of all proportion to the ability of our private sector to meet the bill. We have 20% of our workers unemployed precisely because we have given 20% of our workers an unmerited 50% premium for their services. Moderate the latter and it will presently become easier for the former to find work.
Similarly, it is utterly wasteful to pay people an inadequate stipend on the strict condition that they should sit in idleness from one end of the week to the other. Moreover, it is entirely inappropriate that those working in return for average earnings, should receive less than those who are “unemployed”. We all have eyes to see that while there are many who suffer privation at the moment, there are too many members of the League of the I’m Entitled who, it seems, can glean benefits from our system of social protection, the very existence of which are unknown to most thrifty and hardworking citizens.
There is always an useful case to be made, in times of crisis, to borrow a little – or even a lot – to tide one over to a better future. Indeed the Fiscal Compact makes explicit provision for such eventualities. However, our circumstances are such that through the twin screws of unwarranted co-called benchmarking and ill-considered increases in working life social protection payments, we are driven upon the rocks.
We have no choice but to reverse engines – both screws – and then to plot a viable alternative course. Every day’s delay makes the process of rectification both more difficulty to achieve and more painful to endure. There is no case for further delay, unless you count Taoiseach Cowen’s misbegotten Croke Park fiasco.
Our strength is that if we make the necessary changes, equitably sharing the actual capacity of our Public Purse, there is no reason why we cannot render the State itself an engine for growth and a haven for all its citizens.
With our reputation as borrowers of integrity intact, we can expect to be able to enlist the participation of the Capital Markets in further improving our infrastructure. With our business-friendly disposition, there is no reason not to expect an above-average share of global foreign direct investment. With our own innate entrepreneurial spirit, there is every reason to expect that once the market clears the ill-conceived ventures of old, many new viable indigenous concerns will arise and many which are economically anaesthetised currently will wake up to the reformed environment.
Which brings us back to the Fiscal Compact once more; whether we act upon the provisions of the Pact or merely upon the precepts of good financial management, matters little. One way or the other, our current financial circus is going down. In joining in the Fiscal Compact we have an opportunity to put ourselves on the side of the angels internationally. The likely headline on Bloomberg “Irish People give popular endorsement to the Euro treaty” will, of itself be worth many jobs and amply reduced interest payments.
There is no reason to vote “No” and every reason to renew our consent to be governed subject to a rational economic prescription by voting “Yes”.
Sincerely,
Eric.
@Eric, I’ll have a chance to read your comment in full tomorrow but on the national debt at present, it comprises promissory notes (not quite clear because of the way interest is calculated but at a minimum €25bn), bonds (€80bn), troika/bilateral (€45bn) and of course we are set to draw down the remainder of the €22.5bn from the troika/bilaterals by the end of 2013 (thereby making our Troika debt equal to €67.5bn)
Here are the figures from the NTMA
http://ntma.ie/GovernmentDebt/maturityProfile.php
So I think we will have some disagreement about our level of debt. It will be 120.3% in 2013 according to the Dept of Finance in their Stability Programme Update a few weeks back. And next year our GDP should be around €160bn.
But on your concluding point
“There is no reason to vote “No” and every reason to renew our consent to be governed subject to a rational economic prescription by voting “Yes”.”
We may need disagree here also and the summary argument on here is
Vote no on 31st May which the Govt says means no access to ESM in 2014
If no access to ESM in 2014 then default beckons
If default beckons in 2014, then we would need to be total idiots to pay the €640m to INBS unsecured unguaranted bondholders on 26th June 2012
And that sets a train in motion which will lead to a write-down on this bank debt
And of course, logic and tradition would dictate that we can have another referendum in 2013 if we still want access to the ESM
Good Evening Again All,
The NTMA advises sovereign bonds of c.€83B as at December 2011. Since that time, they transmogrified – or are transmogrifying – c.€3B of the promissory notes within the same category. They admit to further obligations c.€49B as at the beginning of May 2012 but I cannot make that work absent erroneous inclusion of the €3B aforementioned, or perhaps it is still in the course of transmogrification.
Since the promissory notes were not formally created at the behest of Dáil Éireann, they are not part of Sovereign Debt. The argument, which also attaches to the NAMA bonds in the estimation of some, is that they comprise, regardless of formalities, a MORAL obligation if you don’t mind.
If we wish to properly quantify National Debt we might care to take into account, for example, undrawn State pension obligations and undrawn civil and public service pensions which, depending upon the assumptions made, add up to c.€330B.
While we certainly need to address the State’s pension liabilities, una tempor laboris. What we need is a workmanlike statement of the State’s debt obligations, that which puts an interest bill before Dáil Éireann every now and again.
In that regard, the promissory notes offer an interest burden, yes, but subject to a margin of 1%, the cost otherwise goes into the local branch of the European Central Bank, Dame Street, Dublin 2 and thence to the Exchequer. On the other hand, monies borrowed courtesy of Ajai and the guys, that is money gone missing and decidedly proper for inclusion in our National Debt reckoning.
Sad to say, I no longer attach any credence to our Department of Finance. It was instrumental in putting us in the manure business and so far has done very little to get us out of it. GDP at €160B ? Perhaps, but the real benefit of the same will depend upon Net Factor Income With The Rest Of the World, dividend payments very largely to our multinational friends, that is. There is nothing wrong with any of that and we should be damn glad to have every last one of ‘em amongst us. But in the real world, we should count only GNP, no matter that we can use GDP to pull a snow job on the dolts in Brussels, beside whom our Department of Finance bods sometimes look good.
Default in 2014; In all probability, the Euro will not last that long in which case we can apply the necessary prescription as I proposed, using our Airgead Nua. Frankly I would not worry too much about next year.
Paying bondholders and so forth. Yes, that is a difficult question and I have no easier answer than anybody else. It would certainly be nice to know who it is we are burning and yet it does not seem possible to ascertain their identity currently. But we have put €49B of our hard-earned into this caper thus far and there is much to recommend the reaction of “in for a penny, in for a Euro”. As I say, it will be of vital importance to us before too long to have preserved our reputation as a worthy debtor. Look at Greece, Argentina or Mexico. Once you step astride the default treadmill, it tends to follow you for generations. In the overall context – and I concede it may not be a view that would be fully subscribed in the Accident and Emergency Department of your typical Irish hospital this evening – €640m is not so much. I would not spoil the ship for a ha’p’worth of tar at this point though I have to ask whether it might be possible to buy this bond at a discount.
Only a gobdaw or a self-centred politician (perhaps a combination of attributes is the more likely discovery) can suggest at this point that there is anything useful about access to borrowings from any fund, ESM or otherwise. Why in the dickens should we carry on borrowing money to keep our civil and public servants and the ne’er-do-wells amongst us in disproportionate comfort ? Moreover, why should we borrow money when in some key respects we are undertaxed. That would be pure foolishness. We need to rectify our public finances. Nobody is going to do it for us.
With best regards, as ever,
Sincerely,
Eric.
You are correct NWL. This is a referendum about our bank debt, but it has a much wider political agenda.
We are to be subjected to a referendum that has a “blackmail” clause inserted to concentrate our minds. It begs the question why did our euro-political masters feel that necessary? The answer is that our European masters have much greater plans for us, and to implement them requires that we pass this referendum in order to relinquish whatever remains of our sovereignty.
We are watching the federalisation of Europe by stealth. To appreciate the political enormity of what is happening in Europe now, you have to relate it the history of the formation of the U.S. in 1789.
In 1776, the colonies there declared independence from Great Britain. There was no United States of America. There were independent states that had treaties with each other, (the Articles of Confederation) – very similar to the Maastricht Treaty that created the European Union and the euro currency.
Many of the independent states had big debt problems. It wasn’t until 13 years later, in 1789, that those states started to form a central government – largely because of the debt problems. There was a constitutional convention; a country was formed and a president chosen. A treasury followed along with imposed central taxation, giving the new country the ability to produce revenue and restructure the mountains of debts.
With this came the ability to have Federal taxation, to issue bonds and to borrow. Today, Europe does not have an ability to borrow. It doesn’t have central taxation, and it doesn’t have a treasury. It is a collection of countries operating for their own individual needs with an undercapitalised central bank.
It’s decision time. Not for us – for the euro and for the United States of Europe. And nobody in this government is capable of playing poker at this casino table with Big Angie, Papa the Greek and Francois the Frog.
We are told that it is important that we say “Yes” in order to ensure availability of funding post 2013. The reality is there for all to see. It is that the euro will be saved at all cost and we are going to be part of a European federation. We are already bought and paid for due to a mistake made on a September night in 2008.
On that night, the Irish government took responsibility for almost all of the Irish bank debt. The State never did have enough euros to service the debt. So it has a problem.
The assumption of that bank debt is the big difference between Ireland and the rest of the PIIGS. In the case of Italy and Spain, most of the debt is still held by the bondholders and the banks, and hasn’t (yet) been taken on by the government. They can’t be handled in the same way as Ireland. There is no clarity or control in relation to their debts. We are sitting ducks.
Ireland can’t print money. It can’t depreciate its currency. We are in a self-reinforcing economic decline. The deleveraging is only just beginning, and we already have a true 20% plus unemployment rate if it wasn’t for emigration.
In contrast, there is no enforceability on Spanish and Italian debt – although I am sure that the Germans wish there was. When the debt is Sovereign, as in the case of Ireland, it can be enforced. The Sovereign has the ability to enforce laws. How does Germany actually force Italian banks to pay? It can’t.
There is no provision in the Maastricht Treaty for the breakup of the monetary union. No rules. No strategy. If Greece leaves the euro and wants to pay off its debts (or not) in drachma, how does that happen? How will it work? Who will take the hit and for how much? Should Italy or Spain decide they want to exit the euro, they can pay their debts back in pesetas or lire, even though contracts were written in euro. That’s similar to what Argentina, Brazil and Mexico did. History once again will repeat itself. There is no one formula for solving the euro problem overall. Further eroding our sovereignty won’t solve our problem.
Whatever we decide at the end of the month, what will happen will be a tsunami of quantative easing. Money will be printed, much to Germany’s chagrin. But they want a united Europe and a German empire more than they want a failure of the euro. We will still have the “austerity” agenda and the prospect of significantly higher taxes, as well as worsening conditions in Europe to contend with all through 2013.
The referendum is a distraction. We are deliberately befuddled by minutiae. The agenda is political and we are being treated like mushrooms by the eurocrats and our politicians as our sovereignty is eroded.
Actually, I should leave our politicians out of that last comment, because they don’t even know what building they are in, never mind what the real agenda is.
P.S. At a guess, the redaction looks to be four words “source sufficient funds to” etc. (I’m certain about the “to” though) ;-)
@who_shot_the_tiger,
Good Morning WSTT,
Please allow me to say that whereas much of your analysis is correct, it understates the significance of the referendum to describe it as a distraction.
On the contrary, it is a stepping stone along the road to the unity which your analysis otherwise foresees.
Properly implemented, the Fiscal Compact will enable the EZ to retain an effective single currency and will remove the remaining political barriers to the implementation of a fiscal union.
You are not well disposed to any pending unification of Europe ? Me too. However, I have lived through about two thirds of the Ireland which deValera created and, as idealistic and proud and self-sufficient and all the rest of the palaaver that it was, it never provided full employment for Her People. She sent people to cry into their beers on Saint Patrick’s day throughout the seven continents. That was no good.
Far better to be a partner amongst equals in an Europe which is barely of sufficient scale in terms of population, resources and power to survive the coming global changes, doubly so since these are the people, excepting only our fellow former British colonies, who understand us best and have most in common with us.
Doubtless you have been to Paris or London or Milan or Rome or Berlin. When you walk amongst the people there, do you feel a rank outsider ? Or can you be confident that provided you can speak with them, they will reveal a mirror image of your own cares and ambitions ?
Walk down the quayside of Pisa and the, in your mind’s eye, traverse the Liffey’s south quays from Westmoreland Street to Winetavern Street. We share a common artistic outlook which was forged in days when the fastest way to convey a message was on horseback.
Mind you, it would serve us all better if our politicians were a great deal more honest and open about what is in prospect for us.
Slowly and with little pangs of regret, I face up to the prospect of European unification and, provided we get the democratic structures right, I believe it will be a force for good in the World and for our children.
Sincerely,
Eric.
@Eric. Thank you Eric. Once again, you give wonderful creative insights. I like your reference to De Valera’s Ireland!
As they say, it’s funny that you should mention it, but I think that language is the factor that separates people more than any other. The USA achieved its union with the help of a common language. In Canada, it distinguishes the French Canadians from the rest of its population and is the cause of some dissension.
Leaving aside the cultural issues, I have to say that I feel that it is the biggest problem to creating a unified Europe over the long term. I feel more kinship with our nearest neighbour and with the USA than I do with the European mainland. In Mary Harney’s words (and I’m no fan), I’m more Boston than Berlin.
Having said that, I realise that we are on a path that has only one ending. We are being herded there by our very own “Judas cows”, who will receive their bucket of feed when they deliver us to our pre-destined fate.
I admire the artistic, architectural, cultural and scientific achievements of our mainland european neighbours over the centuries. I especially admire the Hellenic contribution to democracy. And that is how I regard them – as neighbours and partners. Some of them (particularly Germany and France) have other aspirations, see us as subservient and have plans that do not sit well with partnership. Like many of our people, instead of staying and succumbing, I look west or to the Southern hemisphere for my own destiny.
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