Yes, there is an alternative
Thus far, the general election campaign has been marked by 'don't hold me back' style commitments by the major parties to renegotiating the EU/IMF deal. With their political masters under pressure, political correspondents such as Stephen Collins and Shane Coleman went into overdrive, insisting that any moves to renegotiate the terms of the deal, never mind default, are delusional, and that the country must simply 'knuckle down and pay its debts'. Yet as Andy Storey showed in his Crisisjam piece last week, there is a basic analytical consensus among radical political-economists and such figures as David McWilliams, Constantin Gurdgiev and Colm McCarthy on the inefficacy and extortionate terms of the deal (if not, obviously, on 'the instrumentality of the debt response to the furtherance of corporate power and wealth). In a week which saw the ULA and Sinn Fein continually pressed on their 'delusions', noted CIT economist Tom O Connor sets out an alternative plan for dealing with 'our debt'.
There are clear alternatives to the EU/IMF deal. Presently, this deal involves us borrowing €67 billion at an interest rate of 5.8% and giving up €17.5 billion of our reserves in the National Pension Reserve Fund and the government cash balances administered by the National Treasure Management Agency.
My suggestions are:
The Banks
Most of the €35 billion for the banks should not be paid. However, I'm not suggesting a blanket default. Start with the bondholders. These are owed €10 billion. Huge discounts of up to 70% should be applied to subordinate bondholders. The senior bondholders cannot be paid unless they agree to a substantial discount of at least 50% and this debt should be rolled over into new 12 year bonds. So, the government pays nothing for 12 years and even then only pays a fraction of the €10 billion. This is a 'settlement' and not a default.
This leaves the €25 billion that is earmarked for recapitalisation of Anglo, AIB and the other banks. Seven billion should be paid right away from the National Pension Reserve Fund to further recapitalise AIB and bring it in to public ownership.
Given the settlement with bondholders, Anglo's bondholders would be dealt with. This leaves their deposits. These deposits should be transferred in to the newly recapitalised AIB. The process of winding up Anglo should then start immediately.
The government and the Central Bank Governor should then aggressively seek buyers for the remaining banks and many of them should merge together. It will be the responsibility of the big international banks that purchase new merged Irish bank entities to recapitalise these institutions themselves.
Consequently, the government pays out only €7 billion immediately of the €35 billion earmarked for banks and bondholders. The remaining €28 billion does not arise in the medium term. In the longer term, a fraction of the €10 billion owed to bondholders would be paid after 12 years. If we put this figure at €5 billion, then a maximum of €12 billion of the €35 billion for the banks and bondholders under the EU/IMF deal would ever have to be paid.
Funding the Exchequer Deficit
If we subtract the 7 billion from the government's reserves in the National Pension Reserve Fund and the government departments' cash balances, the government has €19.5 billion in reserves.
Then, if we accept the amount of the deficit for each of the next four years will be 50 billion, as predicted by the Department of Finance in Budget 2011 last December, then clearly we will need to fund this amount to keep the country going.
The government can fund €19.5 billion of this from its own resources as outlined. So, it needs €30.5 billion. The government should not ask for this money from the IMF because it demands austerity in return for cash and forces us to pay interest of 5.8%. Given the influence of the IMF on the EU in the recent deal, their joint approach has been to ask for 5.8%.
However, if the IMF is kept out as outlined, we then need to do a deal separately with the EU on the €30.5 billion that is needed to run the country till 2014. The deal with the EU should be framed as follows: Ireland will stay in the euro and will bring down its deficit to 3% of GDP in return for the lending of this money to Ireland at a rate of 2.5%. This will be agreed without conditions and will give the EU no say over Ireland's fiscal policy. This debt will be repaid by 2020 with an option of a three year extension by Ireland if necessary. It will be funded by the European Central Bank.
In addition, Ireland will be free to raise taxes on sections of Irish society that can easily bear the cost in order to prevent the deterioration in public services which might ensue given our commitment to bringing the deficit to 3%.
These proposals can start the debate towards considering viable alternatives to the EU/IMF deal. There are alternatives. We do not need to be bullied and strait-jacketed into the current proposals which most reasonable economists have denounced as daft.
(Image top via funkypancake on flickr)