November 29, 2012

Greece is the word if you want to know where we go from here

Posted in Irish Independent · 230 comments ·

Greece has defaulted again, and the financial markets have shrugged their shoulders. The euro remained unchanged versus the dollar. The Greek stock market even rallied. What does this tell us? It tells us that, as this column has argued again and again, the markets have no memory. Because it improves the overall position of a country, a debt restructuring will be welcomed since it adheres to the golden rule: a broken balance sheet is made better by less debt not more debt.

The media is reporting this as a “deal” in Greece. It is not, it is yet another default from a country where the economy is destroyed and needs to be nursed back to health rather than punished.

The big news for Greece and for us is that the troika has accepted that the country must be healthy in order to pay debt. This logic applies to Ireland too. Before we focus on the implications of the latest Greek default for us, let’s look at the broader picture. And before you think that I am advocating we follow the Greek route, I am not, I am simply pointing out the reality of the global economy and the realpolitik at the centre of Europe.

Effectively, the troika and the Europa group of Greece’s creditors have “agreed” (rather they have had their hands forced) to restructure their bailout loans. Interest rates will be lowered and even deferred to give Greece breathing room.

The crux of the agreement is that Greece’s debt-to-GDP ratio should reach 175pc in 2016 and 124pc in 2020. So 120pc has become the new sustainability.

It has also calculated that this is how capitalism works. In a crisis, the debtor and the creditor suffer, they both lose out and that’s how the system works. It is called co-responsibility.

The eurozone’s economy is in tatters, carrying too much debt, unable to grow. Italian consumer confidence has fallen to a record low this month. It is now at the lowest level since the series began in 1996. The only countries that seem to be keeping their necks above water in Europe are Bulgaria, Romania and Poland. This is hardly a reassuring picture, is it?

As the great deleveraging continues and unpayable debts can’t be paid, it would be surprising if Athens is the only government to choose to face down its creditors.

This all brings us here to Ireland as we continue to squeeze the economy dry, foisting austerity upon austerity and the local economy falters. Next week will be more of the same. We have been at this for five years now and there is no sign of recovery. It is increasingly clear that the Irish domestic economy will not recover as long as the crushing debt burden on the country’s young workers is not lifted.

And as we all buy and sell to each other in the local economy, your spending is actually my income and my spe- nding is your income. And if we all stop spending at the same time and the Government exacerbates this by slashing spending simultaneously, who is spending? And if no one is spending, who is earning? And if no one is earning, who can possibly be saving without earning?

So you see that what sounds good for the individual, such as “I am saving”, is only good for me if others continue to spend; if we all save at the same time, there is no income.

Now as these macro-economic targets that the Government and the troika set themselves are always debt expressed as a percentage of income, if our income is falling because no one is spending, then debt expressed as a percentage of income will be rising, not falling.

This is why there has to be a debt deal for these hundreds of thousands of mortgages underwater. We already have 128,000 mortgages in arrears. This figure is rising consistently. There are 400,000 tracker mortgages which will only get more expensive as interest rates eventually rise over the course of the mortgage. These people will face default when this moment arrives and our banks will be bust again.

Now is the opportunity, when the EU is doing deals all over the place, to propose a big bank solution for Ireland’s mortgage debt. Such a deal would aid the Irish recovery, the EU would have the victory it so craves and ordinary Irish people would have the debt relief they so desperately need.

This would allow the economy to breathe again and it could be made the centrepiece of Ireland’s EU Presidency in the next six months. The EU President sets the EU agenda for the period when it has this role. Let’s not miss this chance.

Otherwise Ireland will become known as the country that never misses an opportunity to miss an opportunity. The Greek deal is an opportunity; let’s not throw it away.

David McWilliams’ new book ‘The Good Room‘ is out now from all bookshops.

  1. Dorothy Jones

    Jaynie lads; this is like the Jackanory version of Love/Hate. Either take each other out or get some Bromance going.

  2. Philip

    Anyway, let’s hope Greece can hang in there.

    Squeezing the economy dry – is our Troika doing did I hear u say?

    Fact is, the economy was always squeezed dry and there were ample crumbs to keep the rest happy. I am very interested to see how a few things will play out as follows

    1) Property Tax – how will they do it and still maintain a healthy and renewably and sustainable housing stock when it may be in your interest to having the whole place look like a ghetto. A lot of vested interests could get murdered along the way here and I would be interested to see if anyone has really figured out the consequences of this tax.

    2) The threat of doctors emmigrating: To where I ask? We pay a hefty premium it seems relative to other countries.

    3) C.Park Mark II…now there’s something that’ll get tricky. Do nothing and maintain status quo…less compliance from the rest of us. Do any cutting…They are on the streets.

    Snookered comes to mind.

  3. mcunning0708

    I have lot of sympathy & empathy with Ireland’s efforts to ‘get the yoke off our backs’ & get some sort of debt forgiveness BUT if we want a deal from ECB/EU we are going to have to concede on the little matter of corporation tax.
    I live in UK & the whole issue of tax avoiding multinationals is rapidly moving up the agenda. Countries that poach tax revenues from their neighbours are beginning to find themselves in the spotlight.
    Like it or not – Irish tax arrangements have had significant and detrimental effects on tax revenues in other EU countries.

  4. bonbon

    The ECB’s hawkish boss laid down the law to a broken and hapless Finance Minister, writes Daniel McConnell
    ON December 9, 2010, two days after he had delivered his final-ever Budget, Brian Lenihan was at a low ebb. As the snow fell heavily outside his Merrion Street office window and people outside slipped on the icy pavements, Lenihan, isolated, defeated and in failing health, sat in his office and formally committed Ireland to the penal terms of the bank rescue. It had been ordered by the ECB but the Irish taxpayer would pay for it.

    While the overriding narrative that the innocent citizens were screwed into bailing out our toxic banks has long been rehearsed since those dark days of November 2010, for the first time today we reveal how pathetic Lenihan’s capitulation really was.

  5. george

    PROPERTY TAX FOR FAMILLY HOMES IS UNMORAL AND UNJUST (a different matter is a holiday home, or an investment property for rent), so don’t matter if it is backed by law , because the principle of the injustice remains.
    It will be the last straw that will brake the camel’s back, and will make the Irish economy implode completely, because nobody will be expending a penny extra in the shops. And also will have the catastrophic effect, of stopping any intention from home owners, to do improvements in their properties; consequently builders, electricians, plumbers, and others in the trade, won’t have a job, or will be killing each other over the few around.
    The Labour Party in Government, is going to suffer the same fate that The Greens suffer in the previous Government. And Fine Gael as well, will be totally discredited, even in front of their own electorate. This can be only good news for Sinn Fein, which will be waiting for things to fall by its own weight!

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