“Of course we are under tremendous pressure on the financial arrangements (of the EU-IMF deal) but getting the economy going again, returning to growth will make that affordable,”
“If our economy goes well, if we get back to growth, get to full employment, then we can pay this easily. If economic growth is weak, then it won’t be so easy.”
“So I think the arrangements with our European partners could over time be restructured in such a way that we give them a bigger share of our prosperity and our growth and on the other side if things don’t go well that we would have deferrals and a longer period of time.”
Patrick Honohan, yesterday, in an interview with RTE Television.
The idea being that we can accommodate the level of debt that the banking crisis has placed upon the economy, as long as the economy grows.
When Michael Noonan said in the Dail yesterday that “Tuesday September 30 2008 will go down in history as the blackest day in Ireland since the Civil War broke out,” you have to wonder if this regularly repeated story is true. Needless to say we can see plenty of evidence that the policy has been a catastrophe, yet the most significant news about the recapitalisation as a result of the stress test yesterday, apart from the 24 billion required, was that there was no mention of restructuring the debt in anyway. Nor was there an announcement of an ECB facility to replace the liquidy provided to the banks through the ECB and the ELA money pumped in by the Central Bank of Ireland, to the tune of 150 bn to cover the loss of deposits in Irish banks.
What the ‘infamous’ guarantee was supposed to have brought about was the piling on of private debt on to sovereign debt. As Simon Carswell puts it in an article about the guarantee in the Irish Times in September 2010:
“It was…arguably the biggest policy decision, ever taken by an Irish government. The move in September 2008 to guarantee the banking system, covering customer deposits and banks’ own borrowings to a total of €440 billion, tied the future of the country and
its finances to the survival of its banks.”
With the crystallising of losses through NAMA and the movement of other assets from Anglo to AIB and so on, there has been very little clarity since about how much is actually covered by the guarantee.
However, at the beginning of March the Central Bank brought clarity, which considering the opacity with which almost every facet of the banking crisis is mired surprised everyone. We now know through this document what the breakdown of guaranteed and unguaranteed bonds currently on Irish bank’s books:
So the significance of the moves yesterday was that although there is a significant amount of unguaranteed and unsecured bonds, €16bn with an additional €19bn in unguaranteed but secured bonds these will be paid off in full.
And despite Michael Noonan’s criticism of the FF/Green coalitions banking strategy there was no discussion of the €30.9 bn (plus interest) that still has to be borrowed to fulfil the promissory notes used to cover the losses in Anglo Irish Bank. These notes are to be paid down in tranches of €3.1 billion commencing this year.
So, if the guarantee was so detrimental, and is responsible for pushing private debt on to the public’s shoulders, why was there no move to at least seek to restructure unguaranteed debt? We know now that this is because the EU wouldn’t sanction it, and would never have sanctioned it. There was a curious moment, shortly after the significance of the guarantee for the Irish economy was publicly realised, when people started to wonder openly why the EU Commission had given such a devastating policy the green light.
The reason now is obvious. Even if that decision had not been made, the Irish state would still be liable for the gambling debts of the banks, both inside and outside Ireland, in full.
There are two practical reasons why there was no movement on debt restructuring yesterday and why the Anglo promissory notes will continue to be used to pay back Anglo debts in the years to come.
The first is because with the recapitalisation of the banks the government and the EU are hoping that the Irish banks will be able to access the interbank market to fund them. Restructuring of any of the debt, it is argued, would prevent this. At the moment they can’t get overnight money, and the mounting short term liquidity from the ECB and ELA is a result of this. In other words, the hope is back to business as usual. Nothing has been said about an investment bank, one funded by money that is not borrowed and with the specific aim of putting money directly into the domestic economy.
But there is every chance that house prices will continue to drop further than the 60% from peak used in the stress test (with still more losses to be realised) and every chance that with this additional capital and with the consolidation of the banking market that our two pillars will still be reluctant to lend into the economy. The history of Irish banking has shown that when it comes to the health of the domestic Irish economy they couldn’t be less interested. With these additional cash buffers their future is more secure. Ours however, is not.
There is also an indication that the promissory notes for Anglo will be used by the ECB as collateral against any future medium term ECB lending that Irish banks may require.
It is also possible that the reason why there has been no move on debt restructuring now, despite the unsustainable level of debt being imposed on the country, is that some sort of default situation is going to occur anyway at the back end of 2012. It is around this time that it is thought that the ECB/IMF facility will be used up and Ireland will once again have to try its luck by borrowing from the markets. With the planned ESM in place in 2013 the funding of Ireland, after default will be provided by this mechanism, with all the ECOFIN imposed discipline of the individual governments fiscal policy that this implies.
So, the thinking is very much business as usual and the Irish people will take up the tab.
But what about that possibility of growth that Patrick Honohan mentioned yesterday that is supposed to save our now devasted economy.
Well, we are being told that we are coming out of recession and that, by looking at our GNP figures, the economy is starting to grow again. Writing in the Progressive Economy blog today Tom O’Connor blasts this as completely untrue. Taking issue with the official reading of GNP over GDP, he says that:
“During this recession, the GDP figures are a far better indication of whether or not the economy is out of recession. It is a better indicator of how many jobs are being lost and created. It is a better indicator of how much money people have in their pockets and also how many people will emigrate.
The figures tell us why: firstly, the fact that GDP has fallen by 1.6% in the last quarter of 2010, and GNP rose by 2%, is explained mainly by the profit repatriation practices of multinational companies. Essentially, some of the 2% growth in GNP in the last quarter of 2010 is a statistical aberration, and happened mainly because multinationals didn’t repatriate as many profits as normal in that quarter!”
As Michael Burke has also argued the real indicators of growth in the economy are down:
“The key components of growth fell- personal consumption -0.4% in Q4 to a new low, 11.1% below its peak. Investment (gross fixed capital formation) also fell 2.3% in Q4 to a new low, 60.7% below its pre-recession level. The total decline in investment from peak is now €27.6bn, which is the same as the total decline in GDP (€27.7bn) and exceeds the decline in GNP (€22.8bn).”
He also explains that GNP is rising “because Net Factor Income from the Rest of the World has been rising”. However, Tom O’Connor makes an essential point about the illusion that these rising exports signify:
“Much of the work on these exports has already been done in Bermuda or elsewhere and is only registered as an Irish export to take advantage of the low 12.5% corporation tax. Multinationals’ employment levels have been relatively stable over that last number of years, fixed at around 100 to 120,000 workers. The new technology which continues to revolutionise these companies also reduces the numbers employed.”
So, this export growth, with its illusory returns for the domestic economy will not affect the real indicators of how the economy is going. The banks, even adequately capitalised banks based on the same business model as before are not interested in financing the real economy. And the money being ploughed into the banks, depleting the cash reserves in the NTMA, will do nothing to turn around the biggest problem that we have – the 444,000 unemployed with an additional 80,000 emigrating each year.
During the election there were plenty of promises to “burn the unguaranteed bondholds” and to increase employment from those currently in government. From the evidence so far, it appears that they will do neither.
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