Greece’s debt difficulty is Ireland’s opportunity — but we must plan now
With total loans of €353 billion, their national output of €200bn cannot sustain repayments. More liquidity won’t resolve underlying insolvency. Even if an interim €8bn is sanctioned in coming days, it only postpones the inevitable. IMF, World Bank, G20, US Treasury, markets and now European leaders have begun to drop denial and start planning for fallout on the euro and global economy. Ireland should rethink it's own strategy.
The Green Jersey Brigade still maintain a delusionary stance that this is unthinkable. Official Consensus Comrades, who faithfully promised us “soft landings” and “no bailout”, assure us that in the worst eventuality of contagion, we are unaffected. Their constant communication strategy is to highlight we are the best boy in the bailout class and best German in the group of PIIGS. They trumpeted most recent quarterly CSO growth statistics as confirmation of economic progress, despite previous accuracy warnings of subsequent adjustment in annualised returns and poor July industrial figures.
They promise audiences our appetite for austerity remains unsated and eagerly advocate frontloading more pain. Above all, their central tenet is that our debt is “manageable ”. National debt officially stands at €93bn. Comptroller and Auditor General estimates it to be €148bn by the end of last year. Market analysts assess the total at €173bn. GDP is stuck on €164bn. Each concession of lower interest costs and extended repayment periods are trumpeted as a game changer of debt sustainability. Those concessions, which may be worth up to €1,200m annually, don’t justify the injustice of having to redeem €3.8bn of unsecured and guaranteed senior Anglo/Nationwide bondholders. No pretence of a precedent exists for bailing out those investors. The previous insistence was to maintain the myth that European banks’ balance sheets were sound.
Details now emerge about excruciating terms of the promissory notes, to the value of €31bn, to fund the bailout of Anglo and INBS. We knew shortly after St Patrick’s Day, each March for a decade, we have to repay €3.1bn — let’s call it “crucifixion” day. Next year we will repay this at the rate of 8%, which will be applicable until the balance is repaid. Unless these are refinanced, we face a total interest bill of €17bn, starting with €1.8bn in 2013. Taxpayers are handcuffed to most penal dissuasive costs, despite no blame or benefit. This burden has the capacity to cause a decade of fiscal stagnation and impose unnecessary budgetary hardship. As the Greek drama unfolds, our government needs a contingency Plan B. Instead of betting solely on austerity/compliance/recovery, we need an each-way wager on debt restructuring. Smart guys at Citibank are on the right track. Their economist Willem Buiter suggests that Portugal and Ireland are entitled to similar debt relief as Greece. Excluding IMF liabilities, he argues a debt haircut of 53% can arise out of political contagion. Threats of renewed global downturn mean our creditors’ needs are secondary to ensuring Ireland’s economic recovery through debt restructuring. The Government urgently needs to create a good cop/bad cop narrative. If we argue we are doing so well, we risk creating a hostage to fortune that deprives us of parity of leniency.
Leaving aside primary government deficits, this depression is at heart a banking crisis. Balance sheets of BNP Paribas, Société Générale, Crédit Agricole, Italy’s UniCredit and Greece’s EFG Eurobank survived repeated stress tests by the European Banking Authority. It maintained that only €2.5bn recapitalisation was necessary on 91 banks that they evaluated. As in 2008, the markets extracted the truth. Since May €200bn was wiped off the value of the top 300 European shares stocks. French banks alone face a potential Greek loss of €53bn. Despite Franco-German summits, Polish presidential initiatives and G20 grandstanding of the past three weekends, no concrete consensus has emerged to preserve the Euro intact, post-Greek default. The European Financial Stability Facility needs to be boosted from €440bn to €1.7 trillion, according to US and Chinese governments and World Bank. Tim Geithner and Christine Lagarde issued repeated warnings about worldwide consequences of European leadership paralysis. Olli Rehn promises once Council decisions of July 21 are implemented new financial architecture will be constructed. The European Stability Mechanism will be fast forwarded by a year. A facility would be put in place to insure the issuance of debt, as a precursor to Eurobonds.
Markets are left in suspended animation for potentially up to six weeks. Only crumb of good news being the short-term palliative of a further €8bn for the ailing Athens administration. European banks must be recapitalised or a Lehman’s style calamity will happen on this side of the Atlantic. How unfair that the Irish had to nationalise their banks and repay their creditors, if it transpires that the EFSF is used to recapitalise continental counterparts. A financial firewall must be constructed on the basis of parity between the 17 eurozone member states. Bank nationalisation and state equity stakes are the only equitable resolutions.
A fundamental fulcrum of disagreement amongst market analysts is whether the euro currency can ultimately survive intact. If debt delinquency and prohibitive costs of sovereign finance extend to Spain and Italy, the game may be up. The ECB remains active in secondary bond markets, with €150bn purchase of sovereign gilts in recent weeks. Despite this, 10-year bond yields are edging upwards. Rating agencies continue with downgrades, S&P blithely disregarded credibility of Berlusconi’s austerity plans, reducing Italy to A status. Absolute resistance to underwriting peripheral state finances is hardening amongst hawks in Germany, Austria and Netherlands. While these fault lines persist, Eurocrats in the commission and ECB remain split and paralysed.
If, in the face of these gigantic uncertainties Ireland, maintains a “hear no evil, see no evil” mantra we end up fooling nobody. If Angela Merkel can deploy her coalition partners, Free Democrats, as hardline hawks against Eurobonds — Enda Kenny needs to counter false bravado and highlight patent injustice of our public absorption of European investors failed folly in Anglo, INBS and AIB. Each time we acquiesce to John Claude Trichet’s intransigence, we reinforce and copper fasten errors of our bank guarantee bluff. When bondholders called that in, we should have reneged.
2014 remains the crunch year for our debt servicing spike. The C&AG annual report highlights how exchequer debt servicing costs, increased last year by €1bn. Just when the bailout cash tapers off at the end of 2013, the greatest funding pressure arises on repayments. As of now €12bn is set to be repaid in the year of the local and European elections. Domestic political short sightedness dictates the Cabinet probably isn’t thinking beyond this December’s budget. Unless they construct a debt discount scenario, consequent on Greece’s collapse, they will have missed the last opportunity to escape the errors of the last administration.
