Our bankrupt State

There is no way I know everything contained in the Memorandum of Understanding (MoU) and any subsequent amendments between the Irish government and the ‘troika’. I am sure I am not alone in this. And that is at the core of the problem when it comes to drafting the budget. People I talk to just want to know what the score is in clear and understandable language and not in the double-speak of technocrats. Just plain and simple, so ‘we can get on with it’.

But whatever the message is and the decisions that are to be made regarding the Irish budget, they must be fair and equitable to all, and balanced between the needs of the people and the demands of the moneylenders. Burdens and sacrifices need to be shared.

With cuts to child care allowances and assistance to the elderly being discussed, the perception is that the government is actually considering taking food out of the mouths of children and giving less support to the older generation as a means to free up money to satisfy the terms of the MoU.

These cuts may not come about, but what is disturbing is that they are even being considered. It may be true that some reforms, including means testing, are necessary. But should we not implement reforms first before implementing such cuts across the board?

Almost no one is saying it, but for all practical purposes Ireland is essentially bankrupt. It has enormous liabilities in the form of government debts and the debts of banks which were guaranteed, all of which far exceed its assets. In addition, it has an ongoing deficit gap between what it produces in tax revenues and fees and its expenditure. But in business terms Ireland is still a ‘going concern’.

The Irish situation is like a classic US Chapter 11 Reorganisation Bankruptcy Proceeding wherein one of the first actions in such a case is to temporarily suspend all payments to creditors to allow for an orderly restructuring of debts over time.  These creditors would be required to wait for repayments as originally scheduled until Ireland gets its finances in order. This is a standard procedure, whether it was the Chrysler Corporation’s reorganisation in 1979 or that of a family business.

In the spring of 1975, New York City was on the brink of bankruptcy. The newly elected Irish-American Governor of the State of New York, Hugh Carey, brought in Felix Rohatyn, then managing director of the investment bank Lazard Freres, as an advisor to help structure a rescue package. To make a very long story short, it worked.

About three years ago I watched Mr Rohatyn, then aged 80, being interviewed on an American business television channel. During the interview he referred to this event, giving great praise to Governor Carey.

The governor had told Mr Rohatyn that he (the governor) had to give to the people an explanation of the fiscal problems of the city, how and why the problems had occurred and what steps (including shared sacrifices) would be necessary to find solutions.

Mr Rohatyn advised the governor that the situation was quite complicated and not easily understandable to which the governor had replied - and I am paraphrasing – ‘Then you need to make it understandable to the common person. If I tell the people the truth and they can understand it, then they will follow me. We need time to solve our financial problems.’

Simply said, the governor delivered a message of burden sharing and the key element - time - was secured to enter into negotiations to work out solutions in an orderly fashion. Over time, the City of New York avoided financial disaster.

As an Irish-American former commercial banker, retired since 2004, and having had the experience of successfully working under a bank MoU (the principles are the same), it seems to me that Ireland’s fiscal problems are not just about finances. There is a moral issue here. Reckless borrowing did take place. But there was also irresponsible and reckless lending, not only on the part of the banks but equally so by the Central Bank and the politicians who just looked the other way and abandoned their regulatory responsibilities. In doing so, they participated in the near collapse of the economy.

As such, the government must take responsibility in finding solutions in a fair and even handed manner. And that includes simply advising the creditors that they too are responsible for their role and must make their own appropriate sacrifice in the form of agreeing to delayed payments on money owed them.

It’s not so much a matter of burning or not burning bondholders, rather it’s a matter of how and when to service the debts. To only pass the burden on to the Irish people is, frankly, unjust and immoral. {jathumbnailoff}

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