April 19, 2010
Watching the Quinn administration saga unfold, I couldn’t help wondering when Ireland would be put into administration.
The reason Quinn is in trouble is because we are in trouble. In fact, the business model of Quinn and the business model of Ireland Inc were remarkably similar. Both came a cropper due to massive borrowing on one asset: Anglo in the Quinn case and property in the case of the country.
When you look at the country, the prognosis – given what happened in Greece in the past few days – is not good. If we are borrowing â‚¬500 million to stay afloat, if growth is negative, prices are falling, people are defaulting and our total debt/GDP ratio is exploding, Ireland is not too different to a company trading recklessly. Where, with all these debts, are we going to get the cash to pay back the present borrowing?
If the country continues to borrow and borrow, it will wither on the vine. Is it time to do a deal with our creditors, rather than promise everyone that we can pay back everything when we clearly can’t?
The whole point of examinership – or administration in the case of an insurance company – is to prevent liquidation. This is what the management of Quinn has acceded to for its insurance arm, for the sake of the workers and policyholders. What about the workers and stakeholders in Ireland Inc? Where do we stand? What is our management doing to ensure that we have a future?
To see how close national liquidation could be, we only have to look at what has happened to Greece last week. Recently, this column wrote the following about the eurozone/IMF bailout of Greece, which was announced over the weekend and welcomed by mainstream economists as the solution to Greece’s problems:
‘‘I sense that smart bond investors will use any putative EU bailout as the last opportunity to sell. The clumsy ones will buy, believing the government and brokers’ spin. But as they realise that Greece’s problems haven’t gone away, the positive euphoria accompanying the EU bailout of Greece will dissipate.”
And so it came to pass.
The initial commentary suggested that the bailout would embolden investors to believe the Greek stabilisation plan. This would lead to investors buying Greek debt, because they would believe that the Greeks would respond to the eurozone/IMF pressure. But, as I suspected, after a few days of euphoria, the markets slumped and the Greeks said they were finalising preparations to apply for the bailout money.
This is the endgame for Greece and the process of defaulting is now in train. The issue now is about the pace, rather than the direction, of events. The problem is that the market isn’t prepared to lend to Greece – bailout backstop or no backstop. It is shut to Greece.
By the way, we just lost the â‚¬480 million that we pledged last Sunday to give Greece, because this money will be used to buy Greek bonds, which hedge funds are now selling. So our cash will go to bolster the balance sheet of financial players speculating against Greece, because – as they say – for every seller, there has to be a buyer.
Unfortunately, that buyer of Greek bonds is our government using borrowed money to buy Greek bonds when even the Greek public is selling.
How mad is that?
With events in Greece moving rapidly towards a conclusion, the markets are now likely to turn their attention to Spain, a country where 40 per cent of men under the age of 30 are on the dole. How much pain can Spain take? The rules of the euro demand that Spain cut its expenditure now. This is practically impossible.
We are now firmly gripped by the logic which caused the gold standard to blow apart in the 1930s.The members of the gold standard tried to maintain their reserves of gold in the middle of the depression by cutting expenditure.
This made things worse and ultimately led to the gold standard being dropped. Once it was dropped, the economies started to recover, after doing deals with creditors and injecting new cash via the printing presses.
This is what should happen in Europe, but won’t because of political attachment to the euro project. So we will go through a pointless exercise – like the one we are going through with Greece – but next time it will be bigger and it will prolong the recession.
Next, the eurozone will have to put together a bailout for Spain. Given that Spanish GDP is over four times that of Greece, let’s assume the bailout will have to be over four times bigger. So that means that Ireland will have to pledge nearly â‚¬2 billion to defend the Spanish bond market in the next few weeks.
Where are we going to get this cash? Will we borrow the cash from the European Central Bank (ECB) in order to pretend that we have the firepower to back up our euro credentials?
Ultimately, the markets’ guns will focus on us, as they did in 1993 during the currency crisis. Back then, it didn’t matter that we argued Ireland was different. The markets saw a currency to be attacked and they went for it. The same is likely to happen to our bond market.
Do we have a Plan B figured out if and when this comes to pass? My fear is that we will adopt the position of the Quinn Group up to recently, which is to try to carryon as if nothing is wrong. This makes the situation worse because, when the blowout comes, it is much more severe because the room to manoeuvre is so tight.
The Quinn Group, like Ireland, has a decent future. However, the levels of debt which both are carrying make it almost impossible for either entity to achieve its full potential. The creditors of both have a choice: do they try to get all their money now and risk the company just imploding trying to pay all the debts? Do the creditors let the bad bits of the company destroy the good bits?
The management also has a choice. They can carry on trading, ignoring the new realities, or they can cut a deal.
The management of the Quinn Group has been forced to conclude that putting the insurance company into administration would be the best deal for policyholders, workers and the group in general.
It might not be the best solution for the shareholders, management or creditors, but it is the only way the company can survive. In the long term, the creditors will be better off with a company that grows, rather than one which folds now. After all, the smaller part of a growing pie is better than a big bit of nothing.
Are we going to wait until we implode like Greece? It doesn’t matter that we don’t consider ourselves to be in the same boat; the markets are looking at our debt dynamics and seeing that, although our government debt is not nearly as bad as that of Greece, our private sector debt is far, far greater and all that private debt has to be serviced.
Equally, Nama and Anglo Irish are in the process of doubling the national debt with no perceptible increase in assets on the other side of the balance sheet. We know Anglo is a black hole and, the way things are going, the next time Brendan McDonagh is back in front of the Oireachtas, the Nama ‘assets’ will look worse than they are now.
So do we have a default plan? Is the government drawing up a set of scenarios to address the day that the contagion spreads from Greece to Spain and Portugal and then to us? Like the bank crisis, up until the last minute, they will accuse those who pointed out that the banks were flirting with bankruptcy of ‘dangerous talk’, ‘loose talk’ and, ultimately, of being ‘unpatriotic’.
What was that about patriotism being the last refuge of the scoundrel?