How much is the taxpayer on the hook for?
Michael Burke has a post on Progressive Economy which shows how much we are really going to have to pay for these bank recapitalisations that never seem to be enough. It’s essential reading for anyone interested in whether or not Ireland’s debt level is sustainable, never mind just, given the ongoing hollowing out of the economy. He challenges the idea that its now ‘just ‘€24bn’ and that this is a final payment and points out the contradiction, happily assimilated with ease by many, that the level of interest to be paid on the debt, €4.2bn, will wipe out any of the so called ‘savings’ made through cuts in government spending: a further €6bn this year, and €3 for the next three years. I am providing an excerpt below, but go to Progressive Economy to read the whole thing, particularly the analysis of the assumptions underlying the stress tests. For example, one adverse scenario projects unemployment to reach 14.9% even though it 14.7% now and rising. Also see Michael Taft’s post on whether the debt is sustainable or not. Or not is the answer.
“Unsupportable debt
The €24bn, even if it were the last recapitalisation, would take the bank debt to unsustainable levels. The Department of Finance table below shows the bank recapitalisations to date.
It is variously argued that the €24bn is the last of the bailouts, that this recapitalisation contains a ‘buffer’ against adverse developments and that there is a residual value in the banks. It might be objected that:
- we have heard the ‘one last heave’ argument before
- that the buffer is nothing of the kind as even the ‘stress test’ scenario includes assumptions that are more optimistic than the current situation
- and that the combined market capitalisation of AIB and BoI, the new ‘pillars’ is now only around €800mn, reflecting market expectations that the authorities are determined not to wipe out shareholders in full, if necessary by further capital injections.
These objections need to be fleshed out. But for now, they are largely beside the point. The cost of the bailout funds is close to 6%. Before these policies led to the state being excluded from financial markets interest rates had reached much higher levels. 10yr government yields are still close to 10%. On €70bn an annual average interest rate of 6% produces an interest bill of €4.2bn.
Under the terms of the impositions from the EU & IMF there is a total of €6bn in spending cuts and tax increases planned for this year, and an average of €3bn in same planned over the following 3 years. That is, very rapidly, the interest paid on the bank debt of €4.2bn exceeds the supposedly vital measures to secure public finances and reduce the deficit. It is argued that these cuts/taxes are permanent, whereas the bailout measures are temporary, and will be concluded within the life of this Dáil.
Putting it politely, this claim is pure fiction. If, as advocates for bailing out EU banks with Irish taxpayers’ money assert, interest will only have to be paid for a short number of years, where on earth are the funds to repay the principal going to be found - all €70bn of it?
If the principal cannot be repaid in that timeframe then interest will continue to be paid on it until it is repaid. It does not appear as if the IMF, still less the EU Commission and the ECB are about to become charitable institutions.
Therefore Irish taxpayers will either have to fund €70bn is a few years’time- or, more accurately will for many years to come, be paying greater interest on bank-related debt than the ‘savings’ made from a fiscal consolidation that is billed as necessary to save the finances of the State.
Unstated debt
These numbers are an understatement of the true position, both currently and prospectively. NAMA has issued €28.6bn in bonds. Although the DoF seems desperate not to have them classified as government debt, the classification is immaterial as to the source of the interest on them- Irish taxpayers. In a re-run of the net asset argument and the eventuality that the NAMA assets will at some point be worth something, that is entirely possible but again beside the point. They are ‘non-performing assets’ currently, ie bearing no interest, and taxpayers are paying interest to acquire them. Jam tomorrow is never a convincing argument. It is irrelevant when dealing with an immediate crisis.”
In conclusion he says:
“Finally, in effective the same authorities who produced an economic and fiscal crisis leading to the impositions of the EU and IMF are now arguing that the related banking crisis can be resolved by parallel measures; assets sales and the protection of capital at the expense of labour. But Adam Smith noted long ago that all value is created by labour. Diminishing productive labour, failng to optimise its skill levels, increasing its naked exploitation and expelling a portion of it from the country for a prolonged period will damage the entire economy. Clearly, policymakers who have embarked on this course do not understand that economic principle or care less.
But, if they cut the wages of public sector workers and their numbers, and thereby hope to promote a ‘demonstration effect’ of lower wages in the private sector, and mortgage defaults rise as result, guess what the arguments will be? We need more capital for the banks and more cuts in public spending.”
We welcome and encourage lively discussion from the public about articles on Irish Left Review. You can leave a comment using the form at the bottom of the page. Please read through the existing comments before posting your own.