February 21, 2011
The only question that matters in this election is whether we should continue paying out money to people who invested in our banks and got their bet wrong.
The more money we pay these bank ‘investors’ – who have no right to be paid, because the banks they invested in are insolvent – the less we will have for repayments on our sovereign debt.
At a certain stage, the ability to pay our sovereign debt is eroded and we begin the slow process of defaulting on it in order to pay the gambling debts of those who speculated on the word of Anglo Irish Bank.
Solet’s think about it: we are putting the entire credibility of the nation at stake to payback debts incurred by a bank which is currently in the middle of a criminal investigation.
Surely at this stage, with an election in five days, this is the only issue at stake. But voters are not being given the option to decide on this.
The main parties – unless they change tack in the final days – are still more or less suggesting that we can’t allow capitalism to take its course.
Whether the bondholders are from Ireland or from Timbuktu doesn’t matter.
The idea that a single mother from Tallaght should pay for the bad decisions of private pension fund managers who others entrusted with their money is as bizarrely unfair a contention as I have heard in awhile.
Everyone has lost wealth in the depression – houses prices have collapsed, shares have been eviscerated, jobs have been lost – so why should pension fund holders be above this carnage? This is what happens when you don’t heed the warnings given in the boom: you pay.
And we will lose much more if we don’t separate the banks’ debts from the sovereign debt. Let’s have a look at the deterioration in the national debt as expressed in total tax take and then add the bank debt to see why we are risking everything for a banking system that is insolvent.
In 2007, Ireland’s tax take was â‚¬47.2 billion. Back then, total net debt stood at â‚¬37.6 billion. It would have taken only 42 weeks’ tax take to completely pay off the national debt. Last year Ireland’s tax take had fallen to â‚¬31.7 billion, but net sovereign debt had soared to â‚¬93.4 billion. It would now take 154 weeks’ tax take to pay off the national debt. This is about the European average
So, although the deterioration has been alarming, the starting position was so good that this only gets us to the EU average of national debt as a percentage of national income.
But once we add the bank debt the thing spins out of control. The bank bond debts break down as follows: â‚¬21 billion is unguaranteed bank debt; â‚¬22 billion is assets-backed (there are assets to back these bonds); â‚¬34 billion is government guaranteed debt issued in the past two years; â‚¬36 billion is the promissory note issued to prop up Anglo.
This is what we are talking about. The total bank obligations are over â‚¬110 billion. Given that â‚¬22 billion are asset-backed, these pay for themselves, but the rest is real. So the total unsecured, or not asset backed, debt is close to â‚¬86 billion.
We simply don’t have the money to pay for it.
Last week the total tax take in Ireland was â‚¬609 million. Therefore, if we paid only this and nothing else with our tax, it would take us 141 weeks to pay it off! We are insolvent.
There are two forms of insolvency: ‘‘hard-form insolvency’’ and ‘‘soft-form insolvency’’.
It breaks down like this.
A company (or country) can be insolvent (ie, have liabilities greater than assets) but still be able to survive.
This is ‘‘soft-form insolvency’’. In a company’s case, the company could make enough profit over the medium term to trade its way out of its difficulties. In the case of Ireland, soft form insolvency would mean we could raise enough in taxes to meet liabilities. We can deal with this type of insolvency.
In contrast, ‘‘hard-form insolvency’’ is where liabilities so outweigh assets and ability to pay that there is no hope of ever covering them. For a company, this means it will not be able to make enough future profits to cover the current losses. For a country, it means not being able to raise enough in taxes to meet its debts and run itself as a functioning state when the debts become due.
Ireland, without the weight of the bank debts, is ‘‘soft-form’’ insolvent. We would be able to raise enough revenue to meet our liabilities in the medium term. It would be hard, there is no getting away from that, but it would be possible. With the bank debt loaded on the sovereign debt, Ireland is ‘‘hard-form’’ insolvent. We will not be able to meet the repayments without destroying the economy.
A company that is soft-form insolvent is worth saving. A company that is hard form insolvent is not worth saving, and any attempt to do so will only end up wasting money – as we have discovered with Anglo Irish Bank.
It is the same with systems. The Irish banking system is made up of a number of banks. While it may not have been clear in 2008 that some of the banks were hard form insolvent, it has certainly become clear since. Yet we continue to pour money into them.
It is obvious that Ireland is heading towards default (as close as a country can get to being insolvent) so racking up further debt, rather than trying to reduce it, is close to criminally negligent.
If a private company takes on debt when it is insolvent – ie, knowing that the company will not be able to meet repayments – it is known as ‘reckless trading’. If it can be proven in court that the company is trading recklessly, the directors of that company become personally liable for the debts.
If someone accuses the Irish government of ‘reckless trading’ by taking on debt we know we cannot pay, who will be brought to court?
We are now trading recklessly and we are hard-form insolvent. So we, the people, need to decide what we are going to do. Is it too late? Clearly not. There is more than â‚¬85 billion at stake. And there is a mechanism in the Constitution for this.
Article 27 provides for a referendum on ‘‘issues of national importance’’. We should be allowed to vote on this. None of the big parties are giving us this option now, but privately they too want to see the end of this. So there is a chance. Maybe the best thing a government could do after the election would be to call a referendum on the bank debt straight away.
This would give them the mandate to say to the ECB that we can’t do anything other than give the debt back to the people who own it.
The ECB, as faceless bureaucrats, would be stumped and the process of recovery would start. As someone who has worked in distressed debt markets for a large bank, I know the bond market would reward us for such a move by opening up and financing us readily.
The balance sheet would be strengthened based on bank debt renegotiation; therefore the sovereign would be saved from debt default and the game changed.
Only a referendum can deliver it. Now is the time.