Joining the dots – bondholders & public spending cuts
How many Special Needs Assistants or A&E units could €42 million of unguaranteed bonds pay for? Adam Larragy and Alison Spillane do the sums.
Today, EBS will pay €42,305,476 to senior unsecured bondholders – most probably large financial institutions. These bonds, one €40,000,000 and one €2,305,476, are not covered by any of the guarantee schemes introduced by the Irish government. It is very likely that these bonds were trading at discount, with financial market participants expecting at least a partial write-down in their value. However, the current government seems intent on pursuing the failed 'no bondholder left behind' policy of the last government. As of April this year, the outstanding senior unguaranteed bank debt stood at €16.4bn and the present government remains committed to paying this sum in full. Even a generous 'haircut' – in the strange vocabulary of finance – of 50% on this figure would represent an €8.2bn saving for the state. Despite the efforts of many on left and right - particularly the Dáil technical group, Sinn Féin, the Ballyhea protesters, and Namawinelake – the connection between public spending cuts and the continuing repayment of bank debt remains ignored by most of the media.
Ministers, presumably briefed by Irish Central Bank and Department of Finance officials, argue that the European Central Bank (ECB) remains implacably opposed to any 'burden-sharing' with senior bondholders, fearing that such a move would reveal just how under-capitalised some of Europe's core banks are. It is suspected, but never stated, that the European Central Bank has threatened to pull the €70.9bn in emergency funding (as of May 2011) it is providing the six domestic Irish banks (Bank of Ireland, Allied Irish Banks, EBS, Irish Life & Permanent and the now merged Anglo-Irish and Irish Nationwide). When Michael Noonan was asked whether the ECB had made any threats regarding the provision of emergency funding to the Irish banking system he somewhat cryptically responded that "a nod's as good as a wink to a blind horse," a tacit admission that some kind of pressure is being exerted by Frankfurt. However, pulling funding from the Irish banking system would precipitate a far greater level of burden-sharing – it is unlikely that any bondholder would be repaid anything – than the ECB is ostensibly attempting to avoid.
If concerted pressure is put on ministers to explain this policy to the Irish people any time they implement a spending cut or unjust tax then the connection between current banking policy and the current 'fiscal adjustment' will become clearer. For example, the Department of Education is implementing a cap of 10,575 on the number of Special Needs Assistants (SNAs), something Labour party TDs campaigned passionately against in the general election. This implies the loss of 227 full time positions. Assuming that all 227 SNAs have been in situ for five years, work full time, and are single, the total 'saving' to the state of this move is €2.7m, assuming all those unemployed SNAs would be entitled to Jobseeker's Benefit. If the EBS bondholders took a 50% haircut – a fair assumption given the failure of the building society – the resulting savings could employ the 227 SNAs for nearly eight years. This €21 million could also go a long way towards paying the salaries of 600 resource teachers for Travellers, 125 language support teachers, 47 rural co-ordinator teaching posts and 42 visiting teachers for Travellers – all of which are being withdrawn from September as part of a range of measures to reduce teacher numbers and achieve €24 million in 'savings'. And if we were to – shock, horror – refuse to pay anything back to the EBS bondholders, the remaining €21 million could almost cover the €22 million 'saved' through reducing funding grants to schools and VECs as well as grants for adult literacy, community education, the School Completion Programme and Youthreach.
Including today's bonds, a total of €215,556,390 has been paid out to senior unsecured bondholders in July alone. The tally for Bank of Ireland bonds for the month is nearly €163 million, a figure strikingly similar to the one given by Minister Phil Hogan earlier this week as he announced that a new 'household' charge had been approved by Cabinet. The €100 per year charge will be levied on an estimated 1.8 million households with a view to raising €160 million in revenue in 2012. The Minister did us the courtesy of providing some mealy mouthed excuses about funding street lighting, yet one cannot escape the fact that the €40m+ paid out today – a single transaction in a single day – is a quarter of the amount government hopes to raise from this tax in a full year.
This month also saw the closure, despite clear election promises to the contrary, of the emergency care unit at Roscommon County Hospital. It is estimated that the hospital has an overspend of €1.8 million, the lowest over-expenditure in the HSE West region. This sum is half a million less than the €2,305,276 paid out to EBS bondholders today – the lower of the two bonds maturing and the lowest bond repayment overall for July.
In mid-July the government approved social welfare cuts to the tune of €65 million in areas such as fuel, electricity and phone allowance. As highlighted above, more than three times this amount has been paid out to bondholders – not covered by any of the guarantee schemes – in a single month.
As ordinary citizens are forced to pay for the debts of private institutions, the people who ran these same institutions are by and large doing very well for themselves. When former CEO of EBS Ted McGovern stepped down in 2007 he received a severance package worth €1.8 million, not including the €680,000 acquired through pay, performance bonuses and pension contributions in the same year. His replacement, Fergus Murphy, received a pay packet of €522,000 in his first year with the institution, not counting a 'one-off' pension contribution of €300,000. The latest EBS annual report shows that Mr Murphy earned €433,400 in 2010 and also had a loan of €600,000 from the institution recorded at the end of the year.
As Professor Harald Hau of INSEAD has argued here, the 'no bondholder left behind strategy' represents an unprecedented transfer of wealth from European citizens to a financial elite. When they could be bothered to explain themselves ministers claim that they have no choice but to shut up and do what they are told, sometimes muttering about the ECB and ATMs shutting down. The world did not cave in when the Danish government imposed losses on senior bondholders at Amagerbanken, a small Danish lender. Imposing losses on bondholders would not immediately close the deficit, but it would provide far more room to make alternative economic choices in Ireland and develop some kind of investment strategy. If the ECB's bluff is called, Frankfurt could hardly pull the temple down on their heads in pique given that their stated policy is the maintenance of the stability of the Eurosystem.
The continued policy of repaying bondholders in full represents a clear and calculated political choice on the part of the present government. It is a political choice to cut Special Needs Assistants. It is a political choice to remove the emergency care unit from Roscommon County and other hospitals. It is a political choice to reduce fuel allowance. It is a political choice to continue paying Irish banking executives their obscene salaries. It is a political choice to transfer wealth from those with the lowest incomes and lowest opportunities in Irish society to the wealthiest people in the world. Whenever a minister appears defending a particular cut, they should be asked to justify cutting services to ordinary citizens while transferring money to the very institutions and people who caused the financial crisis.
See http://bondwatchireland.blogspot.com/ and http://namawinelake.wordpress.com/2011/06/03/when-are-bondholders-in-irish-banks-due-to-be-paid/ for a list of maturing bonds.
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