This weekend I read the Sunday Business Post with some eagerness. Here would be the answers I required, that many require, about the bailouts, both the banking one and the ECB/IMF one – which aren’t quite the same thing as is all too apparent, and what is and isn’t possible.
Let’s start with the analysis.
In a piece that considers whether we can renegotiate the EU/IMF deal and aspects of same the SBP argues that while renegotiation would be ‘difficult’ [interesting that it doesn’t rule it out entirely], it does accept that ‘there is room for manoeuvre’ not least because already ‘A EU wide debt restructuring is under tentative discussion’. And it goes further, it suggests that ‘there is a range of ways in which this could be structured, but our best hopes are mechanisms which in some way lower the level of debt that we (and other peripheral economies) take on’. Their ultimate conclusion being that to the question whether the deal can be renegotiated the answer is ‘yes, in part’.
Similarly they are cautious, but not as much as might be expected, as regards burning the bondholders, where they suggest that ‘it will be tough for any new government to win agreement on this. It could however be a bargaining chip in any talks to seek concession elsewhere’.
And on the issue of an improved interest rate on the EU/IMF deal they argue that ‘there is a chance of some relief here, though now much is not clear’.
But this is where reality, as distinct from what other want us to do, intrudes.
We won’t be done any favours. The only thing which will change Europe’s mind is if they believe that IReland – and other peripheral states – are being lumbered with so much debt that the bailout will not work.
How much is too much debt?
EU commission calculations which show the debt-to-GDP ratio rising to 120 per cent of GDP, suggest that the commission fears that, for us this could be the case.
That’s typically cautious, but the message is unmistakeable. Our real financial situation, predicated by the bailout, is now such that we cannot service the debt.
And then on to the editorial. It argues that:
There is no point pretending that we can act unilaterally here. The ECB, is… providing some €100 bn in funding to our banking system, and the EU/IMF cash is needed to keep the country going.
But, for there is a but.
The new government can, however, legitimately say; yes, we abide by the commitment in the plan to provide cash from the NPRF to recapitalise the banking sector, but we want this plan to be implemented in tandem with a restructuring of the sector.
And more crucially…
We also need to find a way to draw a line under the state’s exposure because, if this does not happen, the level of debt being taken on by the taxpayer will be unsustainable.
But others in the paper argue it is already unsustainable [indeed doesn’t the analysis above that mentions the Commissions calculations seem to indicate that as well?]. Indeed further on the editorial itself tilts towards this position when it says:
The central issue is whether changes can be made to lighten the debt burden we will face in future.
And then it says that:
The taxpayer should not have to shoulder all the losses – particularly from Anglo and Irish Nationwide – while senior debt-holders get off scot-free.
If the EU insists that these bondholders must be repaid in full, then it must help in doing so, or provide significant relief elsewhere in the programme terms.
And it gets better…
While we are entering the realms of semantics here, this in itself is not a renegotiation of the deal.
This isn’t just semantics. This is vital to the continuation of this state and the nature of the society that emerges. And yet paradoxically it is semantics. The SBP gravely says that:
We are in no position to repudiate the deal – but neither can we pretend that Ireland can continue to absorb endless losses emerging from its banking system.
What it itself argues for, the implicit burning of some aspect of the senior debt-holders, a ‘significant relief’ in the programme terms, a ‘lightened debt burden’, a drawing of a line ‘under the states exposure’ is in every respect something that demands, if not a repudiation, a renegotiation of the deal.
And this implicitly contradictory stance is at the heart of much of the discourse prevalent at the moment on this matter.
Contradictory not in the way that that sentence above posits repudiation against absorption of loss, but rather that it runs up to repudiation without quite getting there.
And contradictory too because from reading everything else in the SBP it is clear that Ireland cannot absorb the current level of loss.
David McWilliams notes as much when he counterposes Aland Dukes ‘blithely plucking a figure of €100bn which he says is needed to keep the banking system afloat…. we should not pay another cent to this banking system. We simply do not have the money’.
And he notes further that:
Who thinks it is clever that Ireland should spend €100bn buying a load of toxic bank rubbish when we only earn €31.7 bn (ie Ireland’s total tax take from all sources in 2010).
Tom McGurk makes much the same point…
Given that we still do not know where the debt ceiling is, the notion that somehow a workforce of one and half million people can clear all our debts within the foreseeable future is becoming increasingly absurd.
And he says a bit more:
The long term implications of years of austerity and enforced emigration threatens to devastate the country, because, in real terms what the bailout is offering amounts to no more than a slow bleeding to death – and every possibility that, further down the line we may end up having to default anyway.
And McWilliams goes further again:
Of course we are going to burn the bondholders. Of course, we are going to wind up the banks. Of course the ECB will have to take a big loss on the Irish assets it has taken on its books.
And the SBP editorial itself also veers close to this line when it notes that ‘It would now be wise for the new government not to be rushed into spending another whack of taxpayers’ money… before we put more money in, we need to know the destination at which we want to arrive’.
It’s that distance between those two elements that the SBP tries to argue is a situation we are about to face into, rather than one we are already in, which the orthodoxy has sought to position itself as a sort of last gasp stand.
And as McWilliams notes there’s a characteristic of the orthodoxy, and has been through this crisis. A sort of exaggerated politeness, or deference to power. As he says, ‘the Irish establishment has got to stop looking for the proof that spending €100bn on toxic banks is the right thing to do’. We’ve seen that mindset again and again, where despite the nature of the crisis, the lack of a clear ‘debt ceiling’ as McGurk puts it, at any point, the orthodoxy has time and again been utterly convinced of the correctness of its own decisions and unbelievably ignorant in its dismissal of any alternatives whether positioned within or outside the orthodoxy.
And at each point more weight has been burdened upon the shoulders of the citizens of the Republic.
Actually, what’s also fascinating is how broad the dissent on much of this. Take Colm McCarthy in this weekends Sunday Independent who notes that:
There is a practical objection to a Europe-wide bank resolution: it would finally address the burden-sharing issue which French and German politicians wish to avoid. The ECB, whose policy throughout the crisis to date has been driven by no-bank-must-fail mantra and the protection of bondholders, needs a thorough redesign if another crisis is to be avoided. The Franco-German plan is also silent on this crucial issue.
Aside from employees of the European Central Bank, prominent economists have been virtually unanimous these last few months in dissenting from the non-policy being pursued. Bloomberg quoted another well-respected practitioner of the dismal science during the week in the following terms: “Senior bondholders of European banks should take a haircut on their investments instead of struggling banks being supported by taxpayer bailouts,” Citigroup’s chief economist, Willem Buiter, said.
“As soon as the end of this year, all the European zombie banks could be restored to health or put out of business by making senior bondholders pay instead of the taxpayer,” Mr Buiter said, adding that state support for failing financial institutions should be removed as soon as possible.
Actually he says something else of interest, but dealing with that is for another day:
The result of the banking crash has been a descent into unsustainable budget deficit in many countries. Those which had big government debts to begin with (Greece), or which allowed a greater banking bust to emerge (Ireland), have ended up in the most trouble. But the problem is general and in Germany, for example, the budget rules of the Eurozone were broken earlier than in countries like Ireland and there is widespread nervousness about the true condition of large parts of the German banking system.
And perhaps more predictably Brian Lucey writing in the Irish Times this week also argues for a ‘debt write-down’. Indeed he seems to argue that we have a stronger hand in demanding such.
He notes that:
The ECB has in excess of €100 billion extended to domestic banks. The Irish Central Bank has extended more than €50 billion. The only reason money flows from ATMs is that it is being provided by the ECB.
The decision by the ECB – and although this has never been explicitly articulated it has never been denied – appears to have been a quid pro quo. In return for the Irish authorities not imposing losses on senior bondholders, the ECB would continue to fund Irish banks.
Above and beyond all this lies the fact that at its heart the euro is a political, rather than an economic, experiment. Any solution must therefore also lie in politics. It is generally agreed that the terms and conditions of the bailout, in particular that part of it emanating from our European partners, are such as to make it incredibly difficult for the State to avoid significant and unnecessary cuts.
We must therefore negotiate a political solution to the banking crisis, and this must involve the writing down not just of the interest rate we pay on the bailout, but the actual amount of money we are borrowing.
We have political power and we should use it. Even if the Government is forced to consider a unilateral decision; and I would favour that if we begin movement towards that using the powers of the Minister for Finance, the ECB will not cut off emergency liquidity. To do so would expose it as a neocolonial power.
I do not believe that it is such. Irish banks borrowed foolishly from European institutions. European institutions lent bullishly to Irish banks. The solution to date has been for the Irish taxpayer take on all of the adjustment. Time to call a halt.
But what then of Europe itself? What of them?
The line there seems to be ‘Yes, but not yet’.
“It is essential to respect the plan, respect the memorandum and especially for 2011 the decisions are very much framed by the memorandum but concerning the outer years there is more room of manoeuvre.”
Mr Rehn did not elaborate, but made clear his support for the principle of a lower interest charge on rescue loans. “If there will be any changes to the pricing policy, which I personally support and the commission supports, it will take place for the overall European reasons not specifically because of electoral statements in Ireland.”
The pricing of the loans was under review in the light of concern about “the real issue of debt sustainability and its relation to growth dynamics”, he added.
But here too we see evasion. Rehn must be able to read the same stats as anyone else, must therefore be able to see that the levels sustainability [and note I’m putting aside considerations as to whether the state should take on these debts as distinct from the reality that so far we have] are such that the capacity of the Irish state to continue under the original terms of the bailout are simply unfeasible. And his comments at the same time about the bondholders don’t negate this at all. If the bondholders aren’t to be burned then the EU/IMF deal would have to be amended in some other way in order for it to be feasible for the Irish state to service the debt.
If there hadn’t been a shift away from the orthodox line as expressed by Lenihan et al subsequent to the bailout would Rehn now be so equivocal about what happens in the future? If there were not a growing pressure from both left and right about this issue would the orthodoxy still be holding firm that all this was sustainable, as articulated only a week or so ago in the Irish Times in an almost incredibly panglossian article by Rossa White of the NTMA?
But what’s this? Brian Lenihan is shocked… shocked he tells us!
There is ‘considerable shock’ among EU finance ministers at the tone of the debate in Ireland regarding the possibility of a bond default in the Irish banking sector, according to the Minister for Finance, Brian Lenihan.
Speaking at the end of an EU finance ministers meeting in Brussels, Mr Lenihan this was damaging credibility.
‘There’s considerable shock at the whole debate in Ireland about bond default and they see that as something that’s deeply damaging to confidence in the Irish system – that’s the European perspective on this,’ Mr Lenihan said.
Earlier Mr Lenihan said: ‘Olli Rehn has made it clear that the EU arrangements are not open for renegotiation, it’s very important we appreciate that in Ireland.
‘What the EU are (sic) saying is… that we need to be more competitive, we need to downsize our banks, we need to bring our public expenditure under control.
‘They agree with that, we agree with that.’
But note what Lenihan is doing. He’s eliding default and renegotiation and, one must assume deliberately, eliding at least three different positions. I’ve previously noted that there’s the left of SF position which is repudiation, left of the LP [ie the SF position] which is burn the bondholders, the LP and FG positions [not precisely the same but close] of renegotiation with the bondholders expected to do some heavy lifting. There’s also the Shane Ross/David McWilliams positions which are effectively managed default. But Lenihan confuses all three – albeit the logic of all of them involve at the least renegotiation.
And worse he ignores the voices from – arguably – within his own general camp, such as McCarthy, who are also arguing for at the least renegotiation.
There’s a comment on an Irish Economy thread on NTMA article referenced above that goes like this:
Given spoof and bluster worked so badly with the problems we have faced, one wonders why it is persisted with. And then one remembers… it is what institutional Ireland does best.
Sadly, it is indeed.
And is that latter attitude going to prevail? Will there be any change under FG? The experience of the Fianna Fáíl administration where black continued to be white until the very last moment, and even after, doesn’t give much cause for optimism. Because much the same class will be taking up the reins of power from their supposed adversaries in FF.
So what has been learned in this trawl? That renegotiation, far from being an absurd approach is now reaching the level of certainty, not least because underlying all else is one inescapable fact, that we still cannot afford the costs of the bailout. But that there’s more.
As the ranks of those economists, commentators and politicians who demur from the recent prevailing orthodoxy on this matter what will be the response from the EU if, as already we are beginning to hear, there is a actual danger of outright default?