In June the Government trumpeted that a decision had been taken which would, in principle, greatly alleviate the Irish debt position.
This decision was, we were told, “seismic”. Thus far, in seismic parlance, the “event” has proven to be more Richter scale 2 than Richter scale 10.
Since the summer, it has been clear that the real event preoccupying the European Parliament is when, rather than if, Spain will be forced into seeking a bailout. As the fourth-largest economy in the eurozone, Spain is too big to ignore.
The Government finds itself on the horns of a dilemma. They, quite properly, seek a writedown from somebody — anybody! — of a large part of the banking debt that has accumulated. At the same time, they wish to convince the markets that everything is ticketyboo, and that any day now we will return to normal funding of the ongoing government deficits via the private debt markets.
These two issues cannot be reconciled. What the Government is saying is, in fact, the Irish debt is Schrödinger’s debt — it is both sustainable and unsustainable.
The NTMA has estimated that, by the end of 2012, Ireland’s national debt will stand at €187bn. This is 117% of GDP, just behind Greece and Italy. If we accept that there is a large chunk of GDP which cannot easily be taxed, then the appropriate metric becomes GNP, and the figure then makes Ireland look closer to Greece than Italy.
We have poured in excess of €60bn into the banking system. We have put about €20bn into the main banks, equity which is now valued at approximately €8bn. The recent statements from Finland, Netherlands and Germany make it clear that the creditor nations are willing to contemplate the GSM only taking further equity stakes. In other words, a legacy bank is not going to be on the table.
We are, therefore, stuck with this ownership, stuck with the money sunk into the banks, and unlikely to see a rapid return on this money. The largest part of the banking debt that can be put into play relates to the IBRC promissory notes.
Every year, on Mar 31, the Government pays €3.1bn to the IBRC, which passes this money onto the Central Bank, which then destroys the money.
I have consistently been of the opinion that this is political, economic, and, — in the context of swinging budget adjustments — moral lunacy.
At the very best, it is likely that this promissory note will be replaced by longer-dated government debt.
This will reduce the annual outflow, but will not reduce the stock of debt. One year ago, I suggested that on the return of the Dáil, the Taoiseach should have stated that we were no longer going to pay this debt. I stand by this. If the Government were to tear up the promissory note, I bel-ieve nothing would happen.
At least, nothing bad would happen. Both Anglo Irish Bank and Irish Nationwide would become immediately insolvent, forcing them to be wound up. The Central Bank would have to sue the Government for the repayment of the promissory note or have to accept the loss of it. The consequence of this would be that the €30bn would remain as newly created money.
The argument against tearing up the promissory note is that upon this happening the ECB would cut off all funding to Irish banks. The latest data suggests that about €60bn in ECB funding is made available to Irish-covered banks, and some €80bn to all credit institutions in Ireland.
This argument is bunkum. What the ECB would be doing in that context would be punishing a well-performing (within the troika programme) peripheral country for taking immediate steps to ensure its sovereign debt is sustainable.
* Brian Lucey is professor of finance at Trinity College Dublin
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