July 5, 2010
In 989 AD, Ethelred the Unready, the Anglo-Saxon king of England, introduced a deeply unpopular tax called Dangeld (Danish gold).
These were coins that Ethelred minted from the tax and they were referred to as Dangeld or ‘Danish money’ because of the powers the king ascribed to these coins.
Having minted the new coins, Ethelred then waded into the Wash off the Norfolk coast and proceeded to throw the money into the sea.
This bizarre ritual was an effort to persuade the tides not to come in.
If he could somehow bribe the sea with money, the impending Norse invasion might not happen.
He would then live in peace and prosperity, safe from the ferocious Danish longships.
Ultimately, of course, the tides came in, the Vikings raped and pillaged, and the Anglo-Saxons were routed. Dangeld couldn’t prevent the inevitable.
The image of the demented king wasting money is one that recurs again and again when I see our politicians blithely writing cheques with money we don’t have in order to keep the markets happy.
This is particularly the case when we see the exchequer figure showing an overspend of â‚¬8.8 billion in the first six months of the year.
And this is without Anglo.
No amount of government promises or IMF and ECB guarantees is going to prevent Ireland from defaulting, the question now is not whether we default but how we do it.
The guarantees only prolong the agony.
And the agony is being captured as people and companies default on debts built up during the boom which we/they cannot afford to pay back.
New figures, revealed last Friday, showed that the number of companies unable to honour their debts was 27 per cent higher in the first six months of this year compared to the same time last year.
This trend will continue as incomes fall and debts rise.
We simply took on too many debts in the good times and now have a choice: either we stay in business by protecting our cashflow and default on these debts or we fold.
Many businesses are choosing the former and this will be the dominant feature of the Irish economy for the foreseeable future.
All the while the government keeps writing cheques, abusing its position in a most cavalier fashion. Ireland has spent the last two years piling liabilities on to the national balance sheet, to the extent that our national debt has more than doubled.
The ‘contingent liabilities’ via the banks dwarf our GNP and we use the national Pension Reserve Fund (NPRF) as an ATM for the bust banks instead of keeping it to meet that other great, unfunded liability, future pensions (net costs of future public service pensions will be â‚¬108 billion).
We should let the guarantee lapse in September and get on with the adult job of facing the music with our creditors, rather than extending the guarantee again.
None of this borrowing makes sense unless the Department of Finance is very dumb, in which case they are waltzing up the cul-de-sac of a massive crisis where we default in chaos.
Or there is a remote possibility that they are very clever, in which case we are borrowing while we can, in order to default in an opportunistic and organised fashion at a time of our own choosing.
Either way, this country is highly likely to default on our debts.
The private default is well under way and it is only a matter of time before this spreads to the public sector.
Private debt (household debt) is now â‚¬167 billion.
But adding the household debt to the national debt (â‚¬167 billion plus â‚¬84.6 billion) gives â‚¬251.6 billion, or â‚¬132,421 per worker in the country.
Friday’s exchequer deficit for the first six months of the year was â‚¬8.9 billion, or another â‚¬4,684we can add on to the total above.
This will sink us.
Remember, the ability of the public sector to pay its debts is a function of the private sector ability and willingness to pay taxes.
If the private sector is unable to generate income or unwilling because it chooses to work in the black rather than legal economy, the government is goosed.
A default is not only what is likely to happen here, but it is actually what should be done to kick-start the economy.
The biggest myth doing the rounds in Ireland is that a default would lead to us being cast into the financial outer darkness.
Nothing could be further from the truth. Consider the case of Uruguay.
The country defaulted in 2002.Notonly did the markets forgive Uruguay, but today Uruguay’s five-year bonds are trading at 2.7 per cent without any ECB or IMF guarantees.
Ireland, on the other hand, pays 3.8 per cent for five-year money with EU,ECB and IMF guarantees.
The idea that the markets penalise debt defaulters is just silly.
Markets have no memory, they move with the next opportunity, and if by defaulting the country increases the likelihood of growth, then the markets will back us.
Let’s consider the options open to us as a serial debtor now.
There are numerous cases in recent economic history of countries heading down the road we are on – adding too much debt, too quickly, and leaving themselves open to a massive, chaotic flight of capital because the people and corporates panic and take their savings out.
This is the first option.
This ramshackle default happened in Russia in 1998. I remember this well; I was there.
The second option is to do what our government is trying to do, which is to mount up more and more debt and then try to run a society encumbered by huge debts, paying off every cent.
This is the Romanian way. In the 1980s Ceausescu decided to pay off Romania’s national debt.
Very few countries have ever tried this – national debt is rarely paid off, it is just recycled. His attempt to do this led to the people in Romania starving because the country exported everything it produced in order to meet the president’s plan.
This plan would probably prove as unpopular in Ireland as it did in Romania, so probably best not to go this way – although Cowen is implementing a nuanced, 21st-century version of the Ceausescu doctrine: reckless lending, followed by reckless repayment. There is a third option.
This is the Uruguayan option.
In 2003,Uruguay was looking like it might have a serious sovereign debt crisis, but rather than going into denial and allowing the crisis to develop, it faced its problems and sought a solution with its creditors.
Professor Reinhart, who was working for the IMF at the time, said of the deal that Uruguay did with its creditors: ‘‘Everybody got together in a civilized way, and it was very successful.”
The restructuring meant that creditors took an average haircut of 13 per cent and maturities for the debt were changed. Uruguay faced up to reality.
Paying off the debts as they stood would have led to impoverishing the people of the country and eventually leading to a more chaotic, Russian-style default.
By being adult, it maintained access to capital markets and did the best thing for the people of their economy.
Unemployment in Uruguay has been falling steadily since the 2003 high of nearly 20 per cent, to stand at 7.5 per cent.
GDP rose 8 per cent in the past year and has not risen by less than 6 per cent since 2003.
I visited Montevideo in June 2007 to make a documentary on the similarities between the economies of Uruguay and Ireland. It was broadcast on RTE in September 2007.
The parallels are now uncanny.