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Thursday, May 24th 2012

Kill Anglo-Irish Debt: Vol. 1

Author: Michael Taft of Notes on the Front

Published: October 6th, 2011

Section: Articles, Economy

Discussion: 3 comments ↓

Possibly Related: , , , ,

Over the next 20 years Anglo-Irish (including Irish Nationwide) will cost the Irish taxpayers €90 billion.

Just reflect on that for a moment.

Now repeat:  over the next 20 years Anglo-Irish will cost us €90 billion.

It’s difficult to get one’s head around that amount but it is based on figures released last week by Michael Noonan in response to a parliamentary question from Pearse Doherty, TD.  Recently, Michael Burke, Tom McDonnell and I co-wrote a post on Progressive-Economy on the subject arguing that the Government should immediately enter into renegotiation with the Irish Central Bank and the ECB with a view to writing down that debt.

At that time, we estimated the cost at €65 billion - based on the Department of Finance’s note dated November 2010.  However, the Minister has released a revised schedule of payments.  And the cost has risen - substantially.  Here I reproduce Tom McDonnell’s calculation from Progressive-Economy.  The breakdown is as follows (difference in total due to rounding):

Kill Anglo Irish

There are a couple of notes here:  first, the interest rate used after we exit the EU-IMF funding facility is 4.7 percent - the same rate that the Department of Finance used in their previous cost estimate.  Second, the 4th column - Interest on the Cumulative Interest - pertains if the budget is in deficit.  Given that even if we were to hit the Maastricht borrowing guideline of -3 percent as a percentage of GDP by 2015 (or 2016 or 2017), it would be a long time before we reached surplus.

So €90 billion is a decent enough estimate.  Even if it turns out to be €85 billion, so what?  Would it matter to you if a 2.5 ton boulder fell on you rather than a 3 ton boulder?

I won’t bother going through all the proportions and comparisons (this makes up over 70 of GNP this year, etc.).  But there is a cost we should consider:  opportunity cost.

Opportunity cost is the cost of the next best alternative that is not chosen.  For instance, we decide to pay off Anglo-Irish debts rather than, say, installing a Next Generation Broadband; or a state-of-the-art water and waste system; or a pre-primary school system; or a heavily subsidised childcare network; or one-on-one tutorials for those with learning disabilities; or free comprehensive health care; or . . . or . . . or . . . etc. etc. etc. (when you are dealing with €90 billion you are dealing with a lot of ‘or’ and a lot of ‘etc.’.

All these next best alternatives would boost growth, employment and living standards.  We can be sure that the value of the €90 billion put into economic and social investment would result in positive multiples measured in terms of GDP.  Paying off the Anglo-Irish debt will result in depressed growth as money is siphoned off a weakened economy and mostly flowing out of the country.

As Michael, Tom and myself proposed - it is time the Government announce that it intends to open negotiations with the Irish Central Bank and the ECB with a view to writing down this debt.  And until a satisfactory conclusion of that negotiation is reached, the Government should, in my opinion, suspend all payments owed under Anglo-Irish/Irish Nationwide.

And it should do this before November 2nd.  For on that date we the people will be forced to pay over €700 million to unsecured and unknown bondholders.

Such a move by the Government would be overwhelmingly supported in all corners (for this is not a left/right issue or a trade union/employer issue - this is an issue of basic economic rationality).

And it would certainly focus minds in any negotiation and help ensure that we come out with the best deal possible - namely, the wiping out of this odious, illegitimate and irrational debt.

Discussion

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  1. Comment by: Des Derwin

    Oct 6th 2011 at 11:10

    Now I’m confused. But what’s new.

    According to Simon Carswell, author of the recently published ‘Anglo Republic’ the range of funds the state will put into the wreckage of Anglo Irish Bank is €25 to €29 billion (Front page, Irish Times, 27th September 2011, http://www.irishtimes.com/newspaper/frontpage/2011/0927/1224304802291.html).

    Simon, similarly on a front page piece, has since put the total costs of the bank bail out to the state at €65 billion.

    Can you edgemecate me as to the differences? Simon Carswell seems a decent sort.

  2. Comment by: Michael Taft

    Oct 6th 2011 at 13:10

    Des - it is a bit confusing. I suspect that it is done intentionally to hide the overall cost.

    First, the €25 to €29 billion refers to the promissory note for Anglo alone(the €25) plus the 2009 capital payment (the €29). The full promissory note - €30.6 billion - includes Irish Nationwide.

    Second, the €65 billion (which Michael Burke, Tom McDonnell and I used for our previous post) was based on the Department of Finance’s original schedule of repayments produced in November 2010 that was listed to last 15 years.

    The difference between the two (the €65 and the €90) - is that now the Minister has produced numbers that stretch over 20 years.

    The question is: when Finance originally produced its November 2010 estimate - did they know that the payments would stretch out over 20 years while only producing numbers for 15 years? If so, this was intentionally misleading as to the total cost.

    Or did the Minister / Finance stretch out the payments to 20 years subsequent to the original estimate? If so, they didn’t tell anyone (i.e. the public).

    I hope that clarifies the situation. The numbers that Simon used were correct at the time.

  3. Comment by: NJ

    Dec 29th 2011 at 17:12

    so 25th January approaches and another 1.25bn euro about to slip out the door to Anglo bond holders. are we any the wiser on who owns these bonds? and can we not use the current request to sign up to the next chapter of the Euro project to allow for some debt forgiveness in Ireland? Even a 6 year old child can work out that the amount of mortgage and government debt in ireland is not sustainable. it was sad to return home for Christmas and to see the amount of homeless people on the streets, the news stories about calls to the Samaritans, the public servants still living in cuckoo land. I appreciate there has to be de-leveraging and hardship after an asset/debt bubble but its simply not sustainable and I feel if the authorities in Europe do not relax their stance towards the periphery then it is inevitable that the countries will have to leave.

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