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Colm McCarthy on EU debt deal »

When it comes to EU debt deals, always (always) look a gift horse in the mouth

July 1, 2012 by namawinelake

Our Finnish friend Olli Rehn impressed nations all over Europe with his Zen-like sayings – remember “better not paint the devil to the wall unless you can wash it off from there” and “salmon is such a noble fish that it is worth fishing even if you don’t finally catch one”. Here in Ireland, we have quite a few sayings of our own. “Don’t look a gift-horse in the mouth” is one and literally means that if some kind donor turns up on your doorstep offering you a horse for free, the last thing you should do is prise open its jaw and examine its teeth, traditionally a way to assess the overall health of a horse. Because if you do, at the very least you might sour the kindness and you might even offend the donor so much that he takes his horse back, and never display kindness to you again.

This saying – “don’t look a gift horse in the mouth” – must be at the root of the complete failure of our media to scrutinise the deal done in the wee hours of Friday morning in Brussels at the EU summit. An Taoiseach Enda Kenny emerged from the meeting giving a thumbs up and his Tanaiste did a lap of honour through the media. We have grown cynical to claims made in the aftermath of such summits – and we are now on our 20th – but at least in this case, we could see in black-and-white in the summit communiqué thatIreland was specifically mentioned. And that mention gave cover of sorts to An Taoiseach and he wasn’t pressed on exactly what deal had been done, and specifically what it meant for Ireland.

Three days later and I am still scratching my head to see any benefit for Ireland. What does an expression like “separate bank debt from sovereign debt” even mean? This isn’t sarcasm or cuteness, I honestly am lost.

To recap, Ireland will have national debt of around €190bn in 2013. So far we have incurred €63bn to bail-out out the banks with cash, loans and promissory notes. We also have guaranteed NAMA’s bonds and we know that NAMA has paid €5bn of state aid to the banks in acquiring its loans so far, but this state aid is not accounted for as part of our national debt, though if by 2020 NAMA hasn’t seen a recovery in prices, then those billions will be footed by the Irish state – yes, we’re supposed to be able to levy the banks but we own Anglo, INBS and most of AIB and EBS and still have 15% of BofI. So ignore NAMA’s state aid for the time being. Otherwise we have incurred €63bn in bailing out the banks. So what does “separating bank debt from sovereign debt” mean?

There seems to be a vague suggestion that bank debt will be transferred to the shoulders of the European Stability Mechanism (ESM) but how would that work? The ESM gets capital of €80bn from 17 countries and borrows up to €500bn on the strength of that capital, and ultimately the 17 countries might be called upon to put €700bn of capital in the ESM. So the ESM might refund Ireland€63bn, thereby cancelling the entire cost of our bailout. But this is largely dead money. Which means the ESM will not get it back, which means the ESM will have a loss of €63bn. Who is paying for that? Remember the ESM borrows money from the markets but that has to be paid back. Do the 17 countries that put in capital into the ESM pay? If so, someone might want to tell the Germans who foot 27% of the ESM, because they are not aware of any commitment to pick up the tab for bank losses elsewhere in Europe.

Here’s what I think “separating bank debt from sovereign debt” means.

A bank, for example a Spanish bank, decides that it has incurred €50bn of losses on its property loans. The bank has a viable business for the future, but it needs an injection of capital now to cover the losses. The ESM might provide €50bn of capital to the bank in return for 99% ownership of the shares. The bank then recovers, makes profits and the ESM sells its shareholding for €55bn in a couple of years. The ESM uses the €55bn to repay its lenders with interest. Everyone’s happy.

Except, I would have said the above example is rare. How many Anglos are there in the Spanish banking system which will never be viable or able to repay a capital injection? Who knows, but we do know that in Ireland, most of the €63bn is dead money. And if lost causes will not be covered by whatever has been agreed, does that mean Ireland will not benefit but may, in contrast to the promise of Friday’s developments, find itself on the hook for potential losses in Spanish banks which the ESM presently deems viable?

It might behove our media to think of our bank debt like any other debt. This debt is presently on the nation’s shoulders and its repayment is dictated by very specific loan terms. So if there is any write-down or relief on this debt, it follows that there is an equal and opposite sacrifice on the part of our creditors. And a very good check of the overall soundness of a debt deal would be to contact our creditors and confirm with them that they have indeed made a sacrifice. Because sadly, in this case, for Ireland, I think we’ll find that no such commitment has been made.

Funnily enough, there is a lesser-heard saying “always look a gift horse in the mouth” which derives from the Trojans experience with the Greeks in the Trojan war, where the crafty Greeks feigned a withdrawal from the battlefield leaving a giant wooden horse behind as an apparent token of the respect they held for fellow fighters. The giant horse was brought inside castle walls, and in the dead of night, the Greeks concealed inside the horse emerged and slaughtered the vulnerable Trojans. You all know that story, so why do we suspend scrutiny when Enda Kenny claims a game changing victory?

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Posted in Banks, Greece, IMF, Irish economy, Politics | 13 Comments

13 Responses

  1. on July 1, 2012 at 11:24 am anders

    So essentially Ireland went into debt on their own banks, and will now additionally be on the hook for the Spanish. Is it overly simplistic to put it like that?


  2. on July 1, 2012 at 11:43 am Brian Flanagan

    A really great review – beware of bankers/Germans/politicians bearing gifts.

    A man trying to sell a blind horse always praises its feet. (German proverb)


  3. on July 1, 2012 at 12:00 pm What Goes Up...

    Stop asking pesky questions and please admire the emperor’s new clothes.

    Mission Accomplished!
    http://www.japlandic.com/2012/06/mission-accomplished.html

    This is nothing more than the same failed EU news management efforts of old that have finally co-coincided with a massive financial scandal (LIBOR) which see both parties getting what they want – talking one up, and thus not leaving space to talk of the other.

    Everyone gets to head off for the summer and the scandal become something “we must move on from” and the promises become something to simply forget or become overshadowed by a new (China) crisis in September.

    Rinse. Repeat.


  4. on July 1, 2012 at 1:40 pm Gadge

    Excellent post. I was beginning to despair after reading the vainglorious coverage in the Irish TImes and Enda’s quote that the other EU leaders had learnt he is not a person to be tangled with.

    PS Bloomberg is suggesting that Germany might make availability of ESM funds conditional on individual countries signing up to a financial transaction tax. If this is so, the Government will have some serious thinking to do as to whether the benefit to IFSC of avoiding such a tax is worth the loss of the benefit of ESM assistance with banks (whatever that might involve)


  5. on July 1, 2012 at 1:52 pm seo

    If NWL is somewhat confused, then God help the rest of us.
    But we’d be giving too much credit, to say that this (break-through) is designed to be confusing – more likely that it is poorly understood by its “designers”.

    “The scourge of the 21st Century, is poor information” – too many people elevated to positions of decision, while incompetent in those fields.

    Is it not enough that Enda Kenny can parse A as B through to Z? Likewise for Hollande and the other Masters of our collective destiny.

    The confusion might be arising, because we “don’t trust their judgement enough”.

    Perhaps the Irish Media, has enough of an understanding – as far as they are concerned, they have. And surely the electorate that rely on mainstream media alone, are happy enough, that that is the reality.

    Is it possible at all, that myself, Merkel, NWL, GTCost and others, are simply on the intellectual “periphery” – as if our logic is the only true path? Delusional fascists, requiring straight lines and polished shoes, while circles and runners are now the desire of the European masses.

    If the masses want a prolonged crisis through indifference, then that is the other ugly head of democracy – they will have it!


  6. on July 1, 2012 at 2:23 pm Sporthog

    I don’t mean to be picky, however I understood that by looking at its teeth, the age of a horse was discerned and not its health.

    Anyway back to business. One point struck me as I read your topic is perhaps after the banks have been recapitalised and sorted out they themselves will have to pay down the ESM via repatriations every year for 50 odd years or so. A bit like Germany after the various world wars etc.

    Perhaps corporate taxation rates for naughty banks will be increased until all the money is paid back?


  7. on July 1, 2012 at 2:31 pm sf ca writer

    An American saying:
    “keep ’em in the dark and feed ’em shit”
    Welcome to the Federation of Mushrooms, if they wanted you to understand they would have made it so.


  8. on July 1, 2012 at 3:53 pm barry

    Quite, whatever way you do it the sums don’t add up, except if you’re the EU, when you just shuffle the numbers around. Does the EU think the markets can’t add??


  9. on July 1, 2012 at 8:08 pm Howya

    NWL – excellent post. As for the phrase “separating bank debt from sovereign debt” – I suspect (no hard evidence) that the irish solution will be to remove the bank bailout from the soveriegn balance sheet so that we can return to the bond markets more quickly. How the troika will do this is not clear but an accounting sleight of hand may well be the answer (of course the debt still has to be repaid).


    • on July 1, 2012 at 10:55 pm Kieran Sullivan

      Agreed. Given that Irish citizens will repay unsecured investors while the country dies on its feet, then I can’t see bond markets NOT lending to us. If i had a few billion to spare, I’d lend to Enda at 4% me self.


  10. on July 2, 2012 at 4:44 am Camella Cummins

    The answer to your question may be that people need hope and will grasp at any solution ,However,was not borrowing money all over the place that got us into this mess in the first instance?


  11. on July 2, 2012 at 1:51 pm Good news for Ireland at the latest EU summit. - Page 220

    […] […]


  12. on July 2, 2012 at 2:09 pm Declan

    (Not) looking a gift horse in the mouth comes doesn’t derive from the Trojan wars. It’s a reference to being able to tell a horse’s age from its teeth. If somebody presents you with a free horse, don’t insult the giver by assessing the quality. Of course not far down the road you might discover that your new horse isn’t what you first thought.

    Thankfully Ireland’s current government doesn’t have a track record of getting excitable, promising change and then not delivering…..oh wait.



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