November 29, 2010
Our government, with its New best friends the EU and IMF, has considered finally crossing the Rubicon and announcing burden-sharing for senior bondholders of the banks.
The fact that this should come as news to anyone amazes me.
We don’t have the money to pay them so they won’t be paid, plain and simple. This has been clear for some time. The question now is, will they take the final step and realise this, when the deal with the EU and the IMF is announced, quite possibly today?
Burden sharing doesn’t go half far enough. This column has called not for burden-sharing, but burden-carrying.
The bank debt has nothing to do with us. We are already paying in negative equity, unemployment, higher taxes, fewer services and emigration for our mistakes; we are carrying our burden. The banks’ burden is not our business.
If the IMF deal means we pay one red cent of the debt of those banks that lent to Irish banks, this deal will collapse because it will be immoral and financially mendacious. That the Irish government’s possible reluctant decision to represent the Irish people and not bank creditors is hailed as progress shows how pathetic our politics has become.
The government’s insistence that the sovereign state would stand behind the banks at all costs (Cowen promised to write ‘‘whatever cheques you have to write in the interests of maintaining the financial stability of the state’’) has tied the state to the banks. It is time to end this nonsense.
This policy has led us to the position we are in now, where there is a danger that whatever cheque the government writes will bounce.
Obviously, the intertwining of the banks and the state needs to be unwound. The (comically optimistic) four-year plan released last week didn’t seem to contain any mention of the banks at all.
All government commentary on the plan insisted that it was viable, and that the banking problem was ‘‘under negotiation’’. It seems the only way this plan can have even a passing association with reality would be if the bank funding mess can be sorted out in away that avoids further costs to the state.
Worries about senior bondholders taking a haircut are more than a little overstated. Yes, they will complain, and yes, the mechanism will probably be challenged in court. Screw them. This is capitalism. I am not afraid of the likes of SocGen or UBS or the many other instititutional investors, are you?
In addition, the rest of the financial market wants us to do a deal which roasts these investors, because this is how we start again. The world is full of new money. That new money will come here if we are seen to be solvent and that means less debt, not more debt.
From the very start, this column argued that the guarantee should have been used to negotiate with the creditors in an orderly fashion calmly to execute a well-planned deal whereby creditors were forced to take equity in the banks or nothing. This is what the US did in the savings and loans bank crisis in the 1990s.
This course was open to the state for two years. All we needed to do was pass a bank resolution bill, which would have superseded all other laws and initiatives that went before. But, no, they did nothing, bluffing their way to Armageddon. Well now we are here.
When the initial guarantee expired in September, inexplicably â‚¬55 billion in bank bonds were paid back in full to investors. But no new investors were willing to buy, so the ECB and Irish Central Bank stepped in and provided liquidity to the banks.
The ECB is the focus now. Forget the bondholders. They take what we decide to give them, but we should be working on the mechanism whereby the ECB funding (all â‚¬90 billion of it for the covered banks) and the Irish Central Bank liquidity (about â‚¬35 billion at the end of October) can be converted into shares in the banks.
As the central banks self-define themselves as ‘‘the lender of last resort’’, they can find a new mechanism to take shares on their balance sheet. After all, the lender of last resort is obviously more likely to lose out than any other lender. In fact, when you think about it, central banks were set up to be defaulted on because, by the time they step in, everyone else has stepped out.
Because they print the money, central banks do not have the same pressure on their balance sheets as companies do. So if the ECB has to take a loss on the liquidity it provided, it doesn’t really matter. It can simply make an entry on its financial statement to account for the loss.
All this debt in the system that is causing the problems is wasted money that was spent during the boom. It is the ‘investment’ in the housing market from 2004 onwards.
Those investments have gone south, and there will be no return on them. In any market, when an investment does not work out, the investors lose their money. Irish mortgage holders have lost money, developers have lost money, builders are going bust. And yet the debt is still hanging around. It needs to go the same way as the Celtic tiger and be consigned to history.
The ECB has the power to solve this problem: failure to exercise that power will put the future of, not only the Irish economy, but also of the euro, at risk.
This is our trump card and we must have the courage to play it. The deal is simple. If they don’t do the deal willingly, we need to default and see what happens.
And do you know what will happen? They will find a mechanism to take the shares of Irish banks onto their balance sheet. And the crisis will be over, because they will not risk the euro and all that political capital to teach the Irish a lesson.
Those at the ECB know that the stakes are much higher. We must now squeeze them. That is what real patriots do: they stand up for their own people. And the financial markets would support us. Without the euro, there is no need for the ECB. Even if they do not want to act in our interest, they may be forced to do so out of self-preservation.
If nothing is done, or if the agreement reached today is little more than a fudge, the banking system to which we have hitched the fortunes of the state will come under more pressure because people will take their deposits out as quickly as the professional lads sold bank shares two year ago. In addition, the euro as we know it will not see out 2011.
Let’s be clear. The solution to this crisis would simply be ‘‘focused quantitative easing’’ which zeros in with laser-like precision on the Irish banks. It is obviously in the ECB’s collective talents to come up with such an obvious solution. If it isn’t, we should – for the sake of our country – force it to.
David McWilliams performs ‘Outsiders’ in the Everyman Theatre Cork, tonight and venues nationwide for the next two weeks.