Debt restructuring the only way to save Ireland and the EU

By Ivan Yates

Thursday, July 28, 2011

EUROCRATS and politicians still conspire to ensure that the truth is obscured about our future debt destiny.

Crisis management continues to be the order of the day within the EU hierarchy. The outcome of last week’s summit means the Rubicon has been crossed.

Greece’s sovereign debt default is inescapable. The so-called voluntary burden sharing on bondholders is being enforced by repudiating redemption dates (by up to 30 years) with obligatory debt swaps. Investors and banks have to suck up losses of €20.6 billion. Despite provision of a second bailout of €109bn, total Greek state will decline by 24%. The laboratory rat in Athens has provided a case precedent of agreed orderly multilateral debt restructuring. Let’s have some of that.

All the guff from the ECB is gone. Lectures about "dissuasive" interest rates on peripheral states and the sustainability pretence of debt obligations have had to be discarded. Official scoreline? ECB 0 Markets 3. When push came to shove, Trichet was reduced to being a mere civil servant.

Berlin reminded Frankfurt that the euro remains a political project. The break-up of the currency could destroy Germany’s competitiveness by hardening in value, thereby destroying their export output. It is not for the love of the PIGS that debt is being forgiven. Reduced interest rates and longer repayment periods are not concessions (crumbs from the captain’s table) — rather the only way to maintain unity.

The gospel according to Brussels and Dublin is that the latest Greek deal is securely ring fenced. Why? The repayment schedule for the Irish government is steep and arduous. 2011-€5.2bn; 2012-€7.2bn; 2013-€8bn; 2014-€12bn. This mirrors the path of our national debt, currently at €94.5bn — to reach €204bn in 2014. In three years we will hit the crunch period, when our debt/GDP ratio will be 115-120%. Overall fundamentals of our total indebtedness remain unaltered, despite recent improvements.

Enda Kenny’s latest "no default" declaration seems oblivious to what lies ahead. These liabilities exclude €150bn of liquidity support in our banks from the ECB/Irish Central bank.

Our case for debt restructuring is more just than that of Greece and Portugal. The government state bank guarantee of September 2008 unknowingly obliged us to repay €3.1bn each March for a decade to cover losses of Anglo Irish and Nationwide banks. Instead of liquidating these liabilities, we socialised them. There remains an opportunity for the Government to attack in the autumn by not redeeming €2.8bn of Anglo and €600m of Nationwide senior bonds, not covered by the guarantee, by November. No visible collateral reputational damage arises by this action. Previous caution in burning these bondholders is no longer justified. Our central goal must be to disassemble genuinely accrued exchequer debts from legacy costs of indigenous bust banks. The necessity for Franco- German debt resolution within the euro has signalled the beginning of a new phase of economic integration within the 17 member states. Sarkozy and Merkel are due to table new proposals next month. The IMF is to be accompanied by EMF (European Monetary Fund), with a new EU Treasury Department to be established. The Maastricht fiscal criteria of restricting national budget deficits to 3% of GDP were openly ignored. To avoid a repetition of the causes of the crisis, new disciplines will have to be enforceable. This has been interpreted as a colonisation by Germany of weaker EU states. Truth is Europe’s wealthy have more to be doing than taking over basket case countries.

Instead of worrying about diminished sovereignty, our anxiety should focus on whether euro superpowers have done enough to secure the currency. Beneath grandiose leaders’ platitudes lies insecure architecture. The EFSF bailout capacity currently has a ceiling of €440bn; only €220bn is still available. Despite previous commitments to expand this to €780bn, this remains to be done. The combined debts of Portugal, Ireland and Greece, amount to 6% of the eurozone GDP of €9.2 trillion. If the contagion of debt unsustainability spreads to Italy (€1.9 trillion) and Spain (€600m), the arithmetic radically alters, extra debts equivalent to 22% of eurozone GDP are un-absorbable.

Lest we are overcome by mortification of our bad debtor status, we can take comfort that the largest world currency, Big Daddy of democracy, is also deeply over indebted. President Barack Obama continues to arm wrestle with Republican congressional leaders on Capitol Hill over raising the USA’s debt ceiling of $14.3 trillion. Their deadline of August 2 focuses minds on a compromise, involving expenditure cuts over the next decade. Their lower costs and advanced technology continue to dominate. Corporate boardrooms have no difficulty segregating reputational issues of sovereign finances versus suitability as an investment location base. Meanwhile, snouts are in the trough to gobble up the €1bn of repayment savings procured. Vested interests are seeking to prevent cutbacks. The Cabinet is correct in dampening expectations of a reprieve against reforms. Fundamental reappraisal of social welfare structures is unavoidable when there are 7.2m PPS numbers for a population of 4.6m people. The tax base must be widened to cover household liability. The four-year austerity plan has to be implemented. Over optimistic growth forecasts underpinning it, had meant next year’s budget correction of €3.6 billion would have to be increased to €4 million. The extra wriggle room only means that the previous targets won’t have to be superseded by extra pain.

KENNY and Gilmore leaped onto the bandwagon of describing the undoubted benefits as their "achievement". The public probably suspect that we, and Portugal, merely piggybacked onto a Greek solution. We have committed to willing constructive participation on new corporation tax structures/computations. This may well be a Trojan horse. Time alone will tell. In the short-term, this outcome will maintain the feel good factor of an extended government honeymoon. Lasting popularity will only be procured by more substantive resolution of our debt crisis. Lower loan servicing costs represent only low hanging fruit.

Prospects of Ireland returning to the markets, with NTMA monthly bond auctions, in the foreseeable future or in 2013 are remote. Michael Noonan interprets the council’s outcome as ensuring we avoid a second bailout. This seems to be based on the first bailout being a continuum or a perpetual one up to 2014. Obviously he seeks to circumvent additional onerous terms and conditions. Ultimate market requirements for insolvent states? Debt/GDP ratios of less than 100% and real economic growth. Rhetoric is no substitute for these realities. Reducing total indebtedness and repudiating further bank bond liabilities are key game changers to convincing markets that Ireland Inc’s recovery is assured.

ECB officials steadfastly maintained that a "credit event" was impossible. French and German banks have to now face up to impairments on Greek sovereign bonds. A fault line has emerged within the eurozone. The coalition must create a narrative that acknowledges our austerity of €20.5bn since 2009 and focuses on renegotiating the Anglo/Nationwide promissory notes. Nothing ventured, nothing gained. It’s our silver bullet solution.

This appeared in the printed version of the Irish Examiner Thursday, July 28, 2011