Back to punts — a big step backwards

IT’S the Friday evening of a bank holiday weekend.

People are finishing work, going about their business, looking forward to having Monday off.

The Dáil is closed, ministers are in their constituencies, businesses are hoping the long weekend loosens customers’ pursestrings.

There is a bit of a buzz in the air as people prepare for a night out. The first stop is the ATM. The first one says sorry, it’s out of service. So does the next one. And the next. There is something wrong — they can’t all be out of money.

RTÉ announces a break in programmes for a special announcement and immediately goes over to the minister for finance. He cuts to the chase quickly — Ireland has left the euro. There is no need for panic.

However, nobody in the country will be able to access their bank accounts for the next few days/weeks/months. Capital controls have been introduced — no money leaves the country, no money transferred electronically.

We are back to the punt.

While they warm up the printing presses, the punt will be an electronic currency. Perhaps euros would be overprinted in green. Each will be worth let’s say 70c — about €3 for two punt. It will make our exports great value, everyone will want them, once we organise clearing and settlement in the new currency.

Economist Anthony Foley in DCU business school said the impact of a devalued punt would be difficult to assess in advance. Lower prices for our exports would increase the volume, boost GDP, and increase employment but it would depend on the size of any increase in exports/sales.

The price of imports would increase and reduce demand and perhaps allow imports to be replaced by domestic producers. Tourism might benefit by attracting more visitors to a cheaper country but energy costs would increase.

But this bank holiday weekend could be a long one — in Cyprus, capital controls will last at least another two months. The British macroeconomic research company, Capital Economics, in its award-winning study on how to manage a euro exit, says households and businesses might be forbidden from investing, buying, or having bank accounts abroad.

Foreign businesses could be forbidden from repatriating profits — that thunderous sound would be multinationals fleeing the country. Controls, according to the IMF, could be applied to a range of transactions from gifts and inheritances to equities, bonds and commercial credits.

When you do get paid, it will be in punts, which will effectively mean a cut in wages of 30%. The cost of your mortgage would be converted from euro into the new currency, increasing the total. The money borrowed from the markets, the €67bn owed to the EU’s bailout fund and the liquidity lent by the ECB, will all have to be repaid in euro too, as would the interest.

All that debt — currently 120% of the country’s GDP — will now make up an even bigger percentage of the country’s wealth, increased because of the lower value of the punt. Freed from the constraints of the ECB and their insistence we cannot default on debt, the country would be free to announce it will not be paying its creditors, at least in full. We will look for a deal, a haircut, and offer our creditors so much in the euro.

Or we may convert our debt into punts — which would amount to a default. Just introducing a new currency would be seen as a material change to a bond contract, allowing for the bond to be called in — so the State would have to look for ways to refinance them. According to the Central Bank, debt securities issued by Irish financial and non-financial firms, and the Government was €1tn at the end of February.

Either way, it would effectively lock Ireland out of the markets the country has been trying so hard to impress. Any investor that did want to buy our debt would demand a massive rate of interest. And our sweet deal with the ECB buying Irish government bonds to keep the rate down would be off.

In fact the governor of the central bank, Patrick Honohan, would find his regular trip to the ECB in Frankfurt off the agenda. Ireland would join other non-euro members on the outside, desperately pushing for some say through the lobbying efforts of Britain. Ireland would have a choice whether to put its banks under the ECB as the EU’s single supervisory mechanism — but given our bank bailout we might have no choice but to be included.

Mr Noonan would no longer have to spend a night a month in Brussels, as he would not attend the eurozone ministers meeting usually on a Monday evening where decisions on the euro are taken — which invariably affect the economic situation in the rest of the EU. He would have to be content with getting a confidential briefing from the president of the eurogroup at the general finance ministers’ meeting on the Tuesday morning.

Taoiseach Enda Kenny would find himself excluded from the secretive eurozone summits where the finer details of monetary union are discussed and agreed, but which invariably affect every EU member.

The Government would immediately have to balance the books — no more gradually bringing down spending to come into line with income, because nobody would lend the country the extra 7% it needs to borrow to pay for the services — and the interest payments. The commission would continue to oversee the annual budget, testing it for inflationary elements, ensuring sufficient is being spent on education and research and insisting on the 3% budget deficit limit and moving towards the 60% of GDP in debt.

The ECB would be more annoyed with us than up to now and could certainly not be seen to use their money to support the Government. Banks would once again be shut out of the interbank market as they were largely for the past few years, the ECB would not want to know them and the Irish Central Bank would be able to do very little other than to start printing punts and risking further devaluing the currency and increasing inflation.

Banks would have little option other than to push up their interest rates, and their charges in an effort to stay in business, and any money they did borrow from abroad would be at very high interest rates. Financial institutions would need foreign exchange desks to handle the billions of euro/punts transactions and all would be mayhem while the transactions in process during the change over were worked out in either punts or euros.

The minister for finance may not have to load up a suitcase with cash to fly to Washington to talk to the IMF — as the Icelandic minister did as his country’s currency crashed without giving him much warning. (And, by the way, they will want their money back, having first call on whatever is available — unlike our borrowings from the EU’s bailout fund, the EFSF.)

Mr Noonan might take the boat to London instead and discuss rejoining sterling — the punt was linked to the pound for over half a century up to 1979. Giant management consultants, Accenture, sees this as a neat way of exiting the euro and says while it may be “politically upsetting, it has to be set against the potential prospect of years of recession” — and sensitivities could be overcome by putting the harp on the sterling notes.

The Irish pound would be worth less than the prevailing pound/euro rate, devaluing assets and liabilities while at the same time gaining from Britain’s market credibility and accessing finance at more reasonable rates than if the country went it alone with the punt. Such a move would also be less expensive for everyone.

However, it could mean losing the ability to change the exchange rate to gain competitiveness at will in the future and possibly also to change interest rates — to prevent future housing or other bubbles aided by cheap and easy money, and keep inflation in step with theirs.

When Iceland introduced capital controls in 2008, the value of their kroner fell by 50% and inflation rose to 22%. Exports are helping them stabilise their economy now but output fell, jobs were lost and the government decided come what may, they would maintain their social benefits.

But while Iceland’s exports were largely homegrown, e.g. fish, with no components needed to be imported such as chips or chemicals, Ireland’s multinationals do need such imports. And according to Capital Economic’s study, for every 10% fall in the exchange rate, imports would increase by 8% in Ireland. So with a punt worth 70% of a euro, the cost of imports would jump by almost a quarter.