Working out Ireland's debts
Rather than 'burn the bondholders' Ireland should lobby for its debt to be put in the category of a 'work-out', writes John Farrell Clark.
Back in the days when I was a commercial banker in America, and later in Europe, a career that spanned thirty years during which we sometimes had to say “no” when it came to loan requests because it was in the best interest of both the bank and the customer, we would at times have problem debtors to deal with.
As everyone knows Ireland as a nation, and as a borrower, is a problem debtor. Quite simply it can’t make its loan payments as agreed because its annual revenues (tax collections) are less than what it spends; and it also has a significant amount of accumulated debts it also cannot properly pay without going into deeper debt.
Although there were times in my career when we had to be a “hardnosed lender” with uncooperative borrowers, for the most part we would accept the fact that we had a “work-out” situation and handle the problem accordingly. As long as the borrower had a good track record, defined sources of revenue and a product line in demand, it was in our best interest to work with the borrower. We’d review their operating expenses to find areas to cut that would not be detrimental to the integrity of the business and could free up cash flow.
Equally important, if not even more so, was the need to review the other side of the profit and loss statement to suggest ways to increase existing revenues and even find new sources of revenue. It wasn’t just about cutting expenses.
The worst thing we could have done was to burden the borrower with unrealistic loan terms (high interest costs and short repayment terms) for the sole purpose of maintaining a performing loan.
Instead, the first thing we would do as a lender would be to put the loan on an interest only payment schedule, or even in some cases, on accrual, meaning we would accumulate interest payments on our books that were due but defer a demand for payment. This would give our borrower breathing room to have enough cash flow from revenues to meet other obligations that were integral to their ability to stay in business.
Secondly, we would in some cases make an additional advance of new loan proceeds secured by fixed assets, not to be used to keep our loan current, but instead to provide needed capital to generate new revenues. We would match these new funds to specific outlays, such as the purchase of equipment for a new product line. Our mutual objective was to generate new revenues to keep our borrower in business and as a means to secure future loan payments on their existing debts. We needed to work together to keep the business viable.
After all, it was in both our interests. If we were only acting as a “hardnosed” lender, placing unrealistic and draconian measures on our borrower, which would only shrink their business to the point of eventual shutdown, we both would lose.
Most commercial American bankers used to take this approach. But here’s the problem. Ireland doses not have that kind of lender. The troika of the European Central bank, the European Commission and the International Monetary Fund have only programme: austerity. They just want to make sure their bosses, namely the Goldman Sachs of the world, get their bond payments on time. A major newspaper in this country said it best at the onset of the ECB/EU/IMF take-over with a headline: “THE SHAKEDOWN”. And it was.
The debate about “burning the senior bond holders” (the large global financial institutions) or not is ongoing in this country, and gaining more and more traction. However, there is another alternative worth considering and that’s placing these debts in the category of a “work-out”. Technically it would be a default, but with the proviso for future payment.
The fairly recent negotiations that resulted in the interest rate being reduced by about two percentage points and the term nearly doubled was a step in the right direction, but it’s clearly not enough.
By placing the debts on accrual, temporarily eliminating payments of any amount, the “cash flow savings” would significantly increase Ireland’s ability to start to bridge its deficit gap.
But more important would be the troika advancing new funds through the sale of Euro Bonds issued by the ECB and injecting the proceeds into Ireland for the sole purpose of job creation through infrastructure projects.
Robert Reich, former Secretary of Labour under President Clinton, and now a professor at the University of California, Berkeley, recently wrote a piece in which he said: “Every time you hear an American politician analogize the nation’s budget to a family budget, you should know the politician is not telling the truth. The truth is just the opposite. Our national budget can and should counteract the shrinkage of family budgets by running larger deficits when families cannot.”
Cutting deficits ought to be secondary to slowing down the rate of job losses and to creating new jobs.
In most market economies consumer spending represents 70% of the overall economy. Any meaningful recovery is predicated on working people buying goods and services. But if all you do is cut jobs, increase taxes, cut services and eliminate any capital expenditures that could have produced jobs, you end up putting the country in a position where revenues continue to decrease along with the quality of life; and the troika will never get its money back doing it that way.
Just as we would have given our borrower, who had a strong track record, the time and means to bring their business back to where it had been, or at least toward that direction, Ireland, which also has its own economic strengths, needs to go to its creditors and tell them that we’ve learned our lesson and need time and capital to redirect our economy. Specifically, we need to tell them that we cannot, at least at this time, make our payments as agreed, but we do honour our responsibility to do so when we can afford to.
These same investment bankers made investments in the Irish economy knowing full well the risks they were taking. They were sophisticated. They knew what they were doing. Unfortunately, they continued to invest funds into the Irish economy while never asking if Ireland would be able to repay its mounting debts. Sometimes lenders and investors have to say “no”. Unfortunately, in Ireland’s case they never did, until it was too late.
Image top: wfabry.