November 10, 2010
In the back of The Tavern on Castle Street in Carlow last Saturday night the lads, under the watchful eye of proprietor Sean Furey, were downing large bottles of MacArdles.
Apart from a recent local incident involving the slaps given out to a young fella from Eire Og, top of the lads’ worry list was the IMF and what they might do to you.
The conclusion, well into the night, was succinct — “d’IMF will be the new ‘Tans”.
When lads in The Tavern in Carlow are discussing global economics, you know that the world has changed. In fact, their conclusion, painting the IMF as an occupying force, may well prove more in tune with the populace than the over-the-top welcome given to Olli Rehn by the Irish political elite — many of whom were directly party to the destruction of the country.
In fact, the elite’s al fresco sycophancy towards Rehn was a lesson in unrivalled post-colonial forelock tugging and it reveals what path the elite is likely to take in the next couple of months. That path can best be summed up by “what do we have to do for you to love us”.
The fact is that Rehn will not save Ireland. On the contrary, he will use the Irish people to save the German banks.
Let’s cut to the chase to see what is really going on here. Ireland’s banks owe German banks alone â‚¬127bn. Looked at from another perspective, the German banks are in the hole to Irish banks and developers to the tune of close to 90pc of Irish GNP. By rubberstamping the Irish elite’s bank bailout, the European Commission has saved the reckless German banks — who don’t deserve to be saved — and punished the ordinary Irish citizen, who doesn’t — in the main — deserve to be punished.
Rehn knows that the credibility of the euro rests in the Commission preventing a bank default or sovereign default in Ireland; but the choice facing the country now if we do nothing, is either we default eventually or, worse, we experience a slow run on the banks as the middle classes take their money out of the banking system because they simply do not trust the authorities any more.
Only by negotiating a restructuring of private debt can we avoid this eventuality. But it can be done.
The ‘bank crisis’ that lead to the guarantee being introduced is still rumbling on. Financial crises tend to come in waves. This first wave was a bank-funding crisis sparked when the German financiers panicked and refused to lend any more to the Irish banks. This turned into a debt crisis caused by developer loans going south. Now we have the third wave, the coming domestic mortgage crisis.
Let’s be clear, this is all one big crisis. As each domino falls, the desperation of our situation becomes more obvious. But once the first domino (the bank funding crisis) had fallen, there was no stopping the process. The guarantee was supposed to make this process easier. The endgame is always an unpleasant deal with creditors where they lose. We could have used the guarantee to do this, but we chose not to. Our elite chose to pay every cent to delinquent lenders.
The first wave of the crisis, the bank funding crisis, used up all of the Government’s reputation and credibility. The second wave, the large borrowers going bust, used up all of the Government’s money. The third part, the residential mortgage crisis, is going to use up what’s left. But the Government has no reputation left — they can’t offer another guarantee because it will not be credible. We all know they are broke, so they can’t offer a bailout.
So, what does that leave? There are, believe it or not, several options still open, even at this late stage. We can decide that the mortgage holders who are in trouble are being rightly “punished” for their sins. Last week, this column tried to make it clear why this ‘do nothing for the little people’ policy will lead us all into the mire.
By doing nothing, we will condemn our whole society to years of zero growth, depression (the psychological kind, as well as the economic kind) and mass emigration. The generation that the Irish State would be giving up on, reacts by giving up on Ireland.
All the while as the Government’s bankruptcy is laid bare, the middle classes with savings will panic and get their cash out of the country.
If we want to avoid a bank run we have to give some form of debt amnesty. It might be that the banks would have to write down the value of outstanding mortgages before they are defaulted on, rather than after. It could come through changes in the mortgage contracts so the mortgage becomes tied to the property rather than to the borrower. It could even come through changes in our bankruptcy laws so people who are in dire straits can draw a line under their past and have some chance of starting afresh.
Currently, none of the alternatives are being discussed. Yet it is clear that people are struggling with their debts and as time goes on, more will fall into the trap. The Government’s excuse for inaction is that writing down the value of mortgages will leave the banks in more trouble, and by extension, the Government.
This excuse might hold water, except for one thing. The write-downs are going to happen anyway. Whether the Government is willing to admit it or not, there will be mortgage defaults in Ireland. Ignoring the problem will not make it go away. Dealing with it is the only solution.
But won’t moving more debt on to the national balance sheet just make Ireland’s situation worse? Yes and no. True, government debt will grow bigger when it has to bail out the banks again to cover the mortgage losses, but it is important to remember that this debt already exists in the economy. We will just be moving it around a bit through some creative accountancy (and anyone who read the government press release last week on the promissory notes will know this Government is not afraid of a little creative accountancy).
Of course, this will put more pressure on our bonds, as government debt would rise again, but not if we did a deal with our creditors to restructure all our debt at the same time. The deal with mortgage holders would be paid for by a similar but more severe deal with the creditors. The fact that the main creditor is now the ECB, actually makes renegotiation easier. What bit of “lender of last resort” does Mr Trichet not understand? In fact, what bit of “bank run” does he not understand?
There is a deal to be done which puts the Irish people first. It is not the deal that Rehn came here to do, but it is the only deal that will give the average Irish person hope. And if politics isn’t about hope in the future, what is it about?
David McWilliams hosts Ireland’s first economic festival in Kilkenny this weekend. www.kilkenomics.com