Time to reject 'careful now' economics
When it comes to debt, Ireland still has cards left to play and time left in which to play them. Once again showing us that there are economic alternatives, Andy Storey argues that our Father Ted approach to economics is giving Wall Street a good laugh.
According to Central Bank Governor Patrick Honohan on RTÉ's Prime Time, Irish debt is now largely owed to the public sector (i.e., European taxpayers) rather than to private agents. In other words, as adverted to previously, the debt is on the way to being 'socialised', so that the costs of any future default will be borne by the (European) public and not by the speculators who created the problem.
But, while the thrust of the strategy is clear, all the horses have not yet bolted. There is €21.5 billion of debt owed by Irish banks that is unsecured and unguaranteed, and that will fall due for repayment this year and next. Goodbody Stockbrokers (of all people) is calling for that debt to be written down by 50%, while Damien Kiberd, writing in the Sunday Times, suggests an 80% discount which would generate a saving of €17 billion. Kiberd proposes that guaranteed and secured bank bonds – worth, he estimates, €38 billion – could be burned by 50%, on the grounds that they are currently trading for less than 60% of their value i.e., the 'markets' already figure there is little chance of their being repaid in full. What chance is there that the new government will go after these kinds of savings?
We know for sure that the outgoing one was utterly, cravenly in favour of paying everybody back everything. On 31 January this year, Anglo Irish Bank repaid a debt (we do not know to whom) that had fallen due of €750 million – this was unsecured debt that was not covered by the government's bank guarantee. The government could, on a completely sound legal footing, have refused to pay back a cent of the money, or (if it was feeling impish) offered the creditor an equity stake in Anglo Irish by way of compensation.
It was therefore fairly worrying to hear the chief executive of Barnados children's charity say, a few days later on 9 February, that the "total preoccupation of election candidates with bank bailouts and the IMF" was 'deeply worrying' because it was drawing attention away from allegedly more important social concerns. His call echoed that of the chief executive of the Carers Association the previous week, who had spoken of social issues 'getting lost' in the election debate. What makes this especially worrying is that the Barnados chief executive is Fergus Finlay, a man familiar with Labour Party policy-making and still probably quite influential behind the scenes. If Labour heavyweights are not making these connections, or choosing to ignore them, then we are in even bigger trouble than we thought, and the advocates of carers, children and everyone else will end up fighting over the bones of the economy after the flesh has been eaten up by the loan sharks.
But putting the loan sharks first will be high on the agenda of elite opinion formers in the coming weeks. Donal O'Mahony, a 'global strategist' with Davy Stockbrokers, was granted an Irish Times column on 28 February to argue that we should 'burn the rhetoric, by all means, but not the bondholders'. A day later, Arthur Beesley's 'European Diary' in the same paper argued that the new government is operating from a 'frail negotiating position' on the restructuring of the debt. The O'Mahony/Beasley stance is reminiscent of the classic Father Ted episode where the priests' attempt to stop people going to a porn movie includes their holding up a placard saying 'careful now'.
The mechanics of debt restructuring would be complicated. A report by the Fitch ratings agency identifies some of the difficulties, such as the heavy reliance of Irish banks on European Central Bank (ECB) funding as their own deposits fall away, and the possibility that disgruntled creditors could (legally) seize Irish banks' assets in other jurisdictions if they don't get their full pound of flesh. There is also the fact that many of the bondholders are Irish institutions. But just because something is complicated does not mean it cannot, or should not, be tried. Denmark is already imposing 'haircuts' on the senior debt holders of one failed bank there, and so far the ghost of Hamlet's father has not loomed up out of the mist to chide the Danes for their irresponsibility. As Kiberd points out, 'the notion that the government would voluntarily pay 100c in the euro and fully "socialise" these private risks has made us a laughing stock on Wall Street, where wiseguys play hardball as a rule.
So, to return to the original question, how likely, in practice, are our new leaders to play hardball? Contrary to the overly cautious approach espoused by O'Mahony, Beasley, et al, Ireland has cards to play here: even a temporary suspension of repayments of bank debt would leave gaping holes in the balance sheets of European financial institutions as they gear up for new 'stress tests'. That provides us with very powerful leverage.
But, while the leverage is there in theory, we also know that the leaders of Fine Gael and Labour identify more closely with their fellow European elites than they do with their fellow Irish citizens (even if those elites do contemptuously regard them as soft touches). And the only thing that would change that is massive popular protest, along the lines of the popular movements in Argentina that compelled the Kirchner government to repudiate debt in the early 2000s. The raw material is there for that protest to emerge: as a recent IMF report coyly remarked regarding Ireland's 'adjustment' programme, "a lingering domestic perception of inequitable burden sharing persists". The significance of the emergence of the United Left Alliance and other left leaning forces is that we now have a powerful parliamentary presence to help mobilise opposition to that inequitable burden sharing (real, not 'perceived') and to build resistance to it.
[Image top via Olmovich on Flickr]