June 20, 2011
As per usual in summer, the temperature difference between Dublin and London last Tuesday was significant. Strolling up Park Lane towards the Dorchester Hotel, past the swanky car showrooms selling all sorts of expensive stuff for lads in the bulge bracket banks, London felt more continental than British.
At Grosvenor Square, the heavy security outside the US embassy seemed over the top, as the sun blistered down on the lazy sunbathers sprawled out on the grass.
The Marriott hotel on the corner, bedecked with flags, had the air of a self-important hotel doing brisk business.
I was at the Marriott to give a keynote address at the annual BCA research conference. BCA is the world’s oldest financial research company, and its client list accounts for the vast majority of the significant fund managers in the world.
This is the market.
These fund managers are the people who invest in countries and companies, and these are the people who will decide whether Ireland can access funds in the future. In a word, this is where it’s ‘at’.
The packed hall of a few hundred of London’s top fund managers had just heard views on Greece, commodities and geopolitics, and they were as interested in Ireland as they were in all the above. I opened with the Varadkar test; asking for a show f hands on who thought Ireland would access the bond market again in the next two years.
Not one hand shot up. In fact, every single fund manager thought that there was no way that Ireland could go near the market – or, more to the point, the market would go near us.
However, as we began discussing the issues, a familiar conclusion was arrived at.
The consensus was that Ireland should renegotiate all the bank debt with he ECB, if we were to avoid a sovereign default. The market players suggested that the meltdown in Greece gave us a golden opportunity to put everything on the table.
They agreed that there was no way the ECB would cut off funding to Ireland in the event of a ‘burning of the bondholders’, because the ECB couldn’t afford another credibility disaster in peripheral Europe. Significantly, the consensus was that, after a bank default, the Irish balance sheet would be immeasurably stronger and the re-entry to the market much more likely.
This accords with my own view, which is that we are being excluded from the bond market not because we might default on bank debt but because we won’t! The more we pretend to have the money when everyone knows we don’t, the higher the risk premium and the more we are shut out. So we have a choice: do we want to be shut out from the world for the foreseeable future or not? It really is that simple.
Given that this is a political process, why doesn’t the government, which already has a weakness for referendums, bolster our negotiating position by having a referendum on the bank debt? This is a far more important referendum than something on judges’ pay. As for the judges, just don’t pay them. We are in a recession, so tough luck, my bewigged friend – get over it.
We could also begin a process of dealing with the debts democratically.
The way to do this is via what is termed a debt audit. This is a well-known process where debts of a country are split between ‘odious’ debts – the debts incurred by a government that the public should have to pay – and ‘sovereign’ debts, the normally understood concept of sovereign debt.
The debt audit would allow us to appeal to the market’s understanding of what should and shouldn’t be paid.
Once the government gets the people’s backing for a debt audit via a referendum, the process of easing the debt burden begins.
People always say: but what will happen to our so-called credibility?
In this case creditors will split between ‘normal’ creditors, who will do a deal, and ‘rogue’ creditors – normally hedge funds and other financial bottom-fishers – who will try to get all their money back.
We should treat the rogue creditors as we would rogue countries, like pariahs.
Years ago I worked in what were called distressed debt markets, and this split between reasonable creditors and rogue creditors always occurred.
Once the debt audit is done, the credit rating of Ireland will rise because we will be better able to afford the debts that we chose to pay – the debts we always expected to pay.
The banks’ debt of close to â‚¬64 billion can be dealt with by picking off the various different creditors at rates that we decide.
After all, there is no other buyer in town bar us, so getting 2 cent on the euro will be value to them.
In tandem with this move, we issue new licences for new banks.
New capital will come in, and who wouldn’t move their depositors into these new banks? In so doing we re-order our banking system and wind down the old names such as AIB and Bank of Ireland, and move on.
In fact we can protect taxpayers’ interests by stipulating that the money we put into the banks in the last two years as capital might be treated as discounted equity in the new banks.
This might make the banks slightly less attractive to new capital but given that the prize is owning a new banking system in Europe in an economy with a significant post-default growth potential, many investors would find this attractive.
At least that is what they told me at the Marriott last Tuesday.
We now have a chance, with Greece in such a mess and the ECB in such disarray, to make the next political moves on the banking industry.
A referendum would immeasurably strengthen the hand of our politicians, while the ‘debt audit’ would allow economic justice to be done.
Any policy that financially strengthens the balance sheet, while morally siding with the people and the average guy, is much more robust than something that is increasingly seen as a diktat from unelected central bankers in Frankfurt.
Interestingly, this is not the view of the left, but the view articulated by the capitalist right on a sunny afternoon in Grosvenor Square last Tuesday.