February 17, 2010
Driving past Holles Street Hospital yesterday reminded me that, despite all the economic and political travails, life goes on.
We still fall in love, still have children, still protect them and try to give them the best start we can. Sometimes we overburden them with our expectations or maybe sometimes we don’t push them hard enough — but as I saw a new mother walk out the door with her swaddled infant, I thought to myself, this is what life is all about.
That warm feeling stayed with me until I started to do some calculations. Finance Minister Brian Lenihan was on the radio telling us how we were not Greece. Obviously the mutual backslapping of his European counterparts had gone to his head. The spin now coming out from Brussels is why can’t Greece be more like Ireland.
Our politicians and top civil servants love this position, Ireland as the teacher’s pet, the role model, the prodigal son. Why can’t the errant Greeks take a leaf out of our book? The reason is they are not half as delinquent.
Let us go back to Holles Street and look at the prospects of a child born in Dublin vis-a-vis a child born in Athens. The child born in Dublin today will come out of its mother’s womb owing â‚¬46,641. This is before the baby takes its first breath. There will be more than 66,000 children born in Ireland this year and each one will be weighed down by this enormous debt — the legacy of the Cowen/Ahern years.
Contrast this with the situation in Greece. The newborn Greek baby will owe about half as much as the newborn Irish baby. The figure is still huge at â‚¬26,300 but it is â‚¬20,300 less than the Irish child. So don’t tell me Ireland is better off than Greece. It isn’t.
Mr Lenihan was in Brussels yesterday telling the Europeans that we are not Greece. This is true, we are worse than Greece.
Ireland’s total debt per head is much worse than Greece’s. Its government, in collusion with its banks, lied to foreigners; in Ireland, our banks, in collusion with our Government, lied to us. And clearly there is no way in the world the next generation can or should be lumbered with paying back the debts of the previous generation.
Let’s look at the numbers. Our national debt is â‚¬17,042 per person; Greece’s is â‚¬26,300. However, the Greek bank lending to the Greek people is covered by deposits. The Greek banks were well-behaved in the boom. They didn’t borrow from every Tom, Dick and Gunter to enrich themselves and inflate a property bubble.
Our banks, on the other hand, have a funding shortfall of â‚¬120bn. This is what they borrowed abroad to lend to the developers and the property buyers. Now the balance sheet is in ruins, these so-called assets are worthless — but the debt remains. If you add this â‚¬120bn to the national debt of â‚¬208bn, you get the real level of debt in this country. This is our babies’ inheritance — â‚¬46,641 of debt before they learn to walk.
So we are a more delinquent version of Greece, the only difference is that the financial markets are looking at sovereign debt rather than total debt at the moment. In so doing they are missing the picture. But should that surprise you? As they were the people who cheer-led the Irish lending splurge, the same people who rated our banks as virtually risk-free and who in the end believed “this time it’s different”. They were the same people who brought you sub-prime debt, 30-year mortgages and financed great opportunities like the Glass Bottle Factory and the Jurys site.
Just because the financial markets don’t see what is going on in Ireland, it doesn’t mean we should stick our heads in the sand too. Remember, when the bill is presented it will be you and me who will cough up for this mess, so we need to look deeper than the headlines in the ‘Financial Times’.
There are a few essential differences between Ireland and Greece but one of the most significant is that Greece is having a government spending crisis which is undermining its banking system, while Ireland is having a banking system crisis that is undermining our Government. Clearly the Irish Government and, arguably more egregiously, top civil servants are culpable in all this as they are the people who caused the mess. They were elected or promoted under the assumption that they would make the right policy choices to run the place. They failed miserably.
Their failure has left Ireland in a more significant debt bind than Greece. In looking at a country’s ability to pay its debt, there is little point at looking at the government’s debt or looking at the government’s ability to service government debt. This is because the ‘government’ doesn’t pay government debt; the people pay government debt.
There is a myth sometimes swallowed by financial markets and most often believed by politicians and mandarins that the ‘government’ is some autonomous outfit that can raise revenue to pay the debts that it has incurred. This is a grave misunderstanding of how a country works. The sovereign or the government is only the amalgamation of each and every one of us — the people. So you need to look at the total debt of the people and add this to the government’s debt to get the full picture.
When you do this for Ireland, the numbers make Greece and the average Greek citizen look like a paragon of virtue.
Taking the total debt into account, we can see that Ireland is caught in a debt cul-de-sac. This means we have nowhere to run, nowhere to hide. With these debts, the banks will not lend to us. So we don’t buy things that we used to because we can feel credit leaving the economy. This is why mortgages are down 50pc in the past year and will be down again next year. Houses prices are falling precipitously and everyone knows this. So we keep adjusting our price expectations downwards and keep postponing. So we don’t spend.
Meanwhile the banks, despite all the capital they have been and will be given, and despite NAMA, are not lending but are advertising in all the newspapers for deposits. This will cause the economy to contract.
Mr Lenihan can take all the plaudits from eurocrats, but the real story of this Government and the civil service elite’s mismanagement lies behind the proud smile of the new mothers at Holles Street. Each baby carries this Government’s â‚¬46,000 legacy.
What was that one about giving our children the best start we can?