This is an extended version of a column published in the irish examiner. The Irish government find themselves on the horns of a dilemma. They, quite properly, seek a write down, from somebody, anybody, of a large part of the banking debt, which has accumulated. At the same time they wish to convince the markets that everything is ticketyboo and, and that any day now we will return to normal funding of the ongoing government deficits via the private debt markets. These two issues cannot be reconciled. What the government are saying is in fact the Irish debt is Schrödinger’s debt. It is both sustainable and unsustainable. In this thought experiment we the people who pay the debts are left in the dark. Economically, we are Wigner’s Friends. It is manageable debt if you are trying to persuade bond investors to buy into the idea that having failed over decades to run the country as a a going concern we have now mended the error of our ways and will be prudent. It is unsustainable if you are in talks with Troika officials and you need them to persuade their government that we are at the brink of penury and revolution. That these meetings take place in a peaceful prosperous country where nary a revolt is on the horizon is unfortunate…
In June of this year the government announced to great fanfare that a decision had been taken, in principle, which would greatly alleviate the Irish debt position. This was, we were told, “seismic”. It came from the 29 June meeting where the phrase “similar cases will be treated equally” was used in relation to ESM dealing with Bank debt. Thus far the evidence is that if it has been a seismic experience It is more an event of Richter scale 2 than of Richter scale of 10. The earthquake off Mayo in early June was scale 4, and nobody really noticed.
Throughout the summer it has been clear that the event that preoccupies the European government is when, rather than if, Spain will be forced into seeking a bailout. As the fourth-largest economy in the Eurozone it is too big to ignore. We on the other hand can be very safely ignored. We have shown over the last four years that we are perfectly willing to acquiesce to every requirement that emanates from the center of Europe, no matter how deleterious this may be to the long-term health of the Irish economy. The Irish negotiating position has been to lie around with a pathetic look on its face hoping someone will take pity on us while we continue to annoy them with various quaint local customs such as having a low rate of corporation tax, paying ourselves over the Euro area median salaries in all sectors, and generally not being good germanofinns.
I have characterized this numerous times as sending out nice well meaning Irish fellas to negotiate with the heirs of Bismarck (who suggested swapping the Irish and Dutch populations, enabling the Dutch to feed the world while we would drown in short order) and Richelieu. Throw in the Finns, a dour doughty lot who don’t back down (they took on the Red army in 1939 and beat them to a standstill, with the world record sniper being Finnish with over 500 confirmed kills) and we are hopelessly outclassed.
At the end of 2012 the national treasury management agency estimated that our national debt will stand at €187 billion. This is 117% of GDP, Just behind Greece and Italy/Potugal. If we accept that there is a large chunk of GDP, which cannot easily be taxed, then the appropriate metric becomes GNP, and the figure then makes Ireland look much closer to Greece than it does to Italy. Of course, the wedge between GDP and GNP is one that we have allowed to grow as a consequence of our reliance on high money low job FDI, and that policy choice of acting as a tax arbitrage location is one that is hard to explain as being a core tenet of economic growth to a German, a Finn or a Dutch official or minister. And lets not even go near the French…
Of our debt two thirds has been accumulated in the old-fashioned budget deficit way. While the debt exploded after 2009 this is not all bank debt. A large part is down to the hole in government spending that had opened up through overreliance on bubble taxes. And it will have to be paid down in the old fashioned way – by reducing spending and increasing taxes. Indeed the deputy governor of the central bank has gone so far as to suggest that we run surpluses to pay down the nominal debt rather than letting it erode through time and inflation. He doesn’t see growth roaring ahead. How this will happen is unclear as every single special interest group are NIMPPs – Not In My Pay Packet. Absent a banking debt mountain we still have a problem. That said, the willing lunacy of the bank guarantee and the Anglo bailout tipped the country from a fiscal problem to a fiscal basket case.
We have poured in in excess of €60 billion into the banking system. We have put in approximately €20 billion into the main banks, which equity is now valued at approximately €8b. The statements recently from Finland , Austria, Netherlands and Germany (FANGs we may call them) makes it very clear that the creditor nations are willing to contemplate the GSM only taking further equity stakes. In other words legacy bank debt is not going to be on the table. We are therefore stuck with this ownership, stuck with the money sunk into the banks, and unlikely to see a rapid return on this money. The largest part of the banking debt that can be put into play relates to the IBRC promissory notes. Every year, on 31 March, the Irish government pay €3.1 billion to IBRC, who pay this onto the central bank, Which then destroys the money . I have consistently been of the opinion that this is political, economic, and indeed in the context of swinging budget adjustments moral lunacy. Successive Irish governments have taken the approach of Mr Micawber, that something will turn up, in relation to this Schrödinger’s debt. Something has turned up, but it’s not a something to our liking. At very best it is likely that this promissory note (which is not government debt, as if it were a government debt then Anglo could have gone to the European Central bank and obtained liquidity rather than having to go through the Irish Central bank) will be replaced by longer dated government debt. This will reduce the annual outflow, but will not reduce the stock of debt. A year ago I suggested that on the return of the Dail the Taoiseach should have stated that we were no longer going to pay this debt. I stand by this. If the Irish government were to tear up the promissory note, is my view that nothing will happen. At least, nothing bad will happen. Both Anglo Irish bank and Irish nationwide building society would become immediately insolvent. This would then force them to be wound up. The central bank of Ireland would either have to sue the government for the repayment of the promissory note or have to accept the loss of it. The consequence of this would be that the €30 billion would remain as created money.
The argument against tearing up the promissory note runs that upon this happening the ECB would cut off all funding to Irish banks. The latest data suggest approximately €60 billion in ECB funding is made available to the Irish covered banks, and some €80 billion to all credit institutions in Ireland. This argument is bunkum. What the ECB would be doing in that context would be punishing a well performing (within the troika program) peripheral country for taking immediate steps to ensure that its sovereign debt is sustainable. It would become clear that no matter what their government did it would not satisfy the monetary uber-Hawks of Frankfurt. It would crystallize the fear that many on the periphery of Europe have, that in the eyes of the core (in reality in the eyes of a toxic blend of populist politicians and frightened faceless bankers in thrall to the ghost of a memory of a supposed consequence of a monetary event in the 1920s) the periphery is dammed if it does and dammed if it doesn’t. I do not believe that the ECB is a suicide cult, which is what it would have to be if it were to in effect force Ireland out of the euro. That is what logical endpoint of cutting off liquidity would be, and no organization willingly engages in an action which will result in its own demise. .