Tuesday, 22 May 2012

Guest post by Arthur Doohan (II): Debt realities

Arthur Doohan: In five years we have gone from being the "pinup stars" for EU growth to being the "posterchildren" for austerity and, like a nodding dog in the back of a car, our leaders are as clueless now as they were then about the road taken and final destination.

Some of that 'clueless-ness' can be seen in 'loose talk' going around at present about the relationship between Ireland and the EU and the other EU member countries. An awful lot of this loose talk revolves around how damaged that relationship would be if the Irish people choose not to join in the Fiscal Compact. A further chunk of the 'chit-chat' revolves around the question of where else we would borrow 'the money' from when (much more so than 'if') we need a further dose of 'austerity medicine'.

I will skip over the blatant inconsistency of a Government that insists we are on the correct path with light at the end of the tunnel under a fully funded and committed financial program while at the same time hastening to arrange the paperwork on yet more borrowings. But not without pointing out that the Taoiseach has recently reiterated and reaffirmed that the existing borrowing program supersedes the envisaged ESM facility that may be provided by the Fiscal Compact.

I will also skip over the issue of whether the Fiscal Compact is a smart or pragmatic or sensible or even a 'pro-European' step to take.

I will skip over these things to state some boring, practical banking 'facts of life'.

There is an 'old saw' from the banking world which states that if you owe the bank 400,000 you have a problem, if you owe the bank 4 million you both have a problem and if you owe the bank 40 million the bank has a problem.

By the end of 2012, all financial sectors of the Irish economy, its households, businesses and the State, will be massively in debt. The State particularly will have a debt/GDP ratio about 120%. This is the level at which it becomes a very dicey proposition for both borrower and lender to go any further into debt.

But the most important thing about this debt is that this money is ALL SPENT. It is not sitting on deposit in a Swiss bank account.

You can debate all you like about whether we did the right things with that money. You can argue until you are blue in the face about whether we can repay it and grow our economy at the same time. You cannot deny that the money is gone and that all that remains is our promise to pay it back.

Those who lent it to us have no lien on the State. There is no court they can turn to enforce any security or charge because there is no such court and they have no security. And, once again, the money is not on deposit somewhere where they can go and seize it.

The only choice our lenders have is on what terms to lend us any more money. A refusal by them would put us into default.

So the issue is not where we can borrow. The issue is on what terms we will continue to repay.

Now, that is the hard practical business reality of it. If that is an uncomfortable truth for you, you should be aware that this is the reality that confronts every lender to every State that gets into financial difficulty. It is not some uncharted territory or some nightmare of eternally shattered reputation and financial purgatory. The experience of Iceland proves that. In fact, the experience of Ireland after it's 1993 devaluation proves that. And anyone who suggests that devaluation and default are different things betrays their hopeless ignorance of the mindset and disposition of the investment and bond trading communities.

One of three things will happen in our near term future. The happiest and least likely is that we will resume some solid growth in the economy and will slowly but steadily repay these debts over a fifteen to twenty year span. The unhappy probable outcome will be that we will have weak growth and the economy will move sideways for a decade or two. The unhappy possible third option is that there will be a default which may, or may not be, 'graceful' and 'managed'.

If and when that day comes for Ireland, some people will seek refuge in economic theories, some hope in protection of laws and regulations, some will seek solace in the arms of supra-national entities and a few will still seek help from deities. But the reality is that bankers and accountants will sit down with the politicians and thrash out what can be paid and seek to extract as much as possible for themselves and their clients.

If a country has leaders who care about it and who have some ability and some understanding of how the real world works, when they sit down to negotiate at that post-default table, then a positive and helpful result can be achieved for the people while being fair to the lenders.

Before that day comes it is still possible for leaders to start us down the path of a more sustainable debt burden that will in the end be fairer to both the borrower and the lenders by simply starting to talk realistically about these overarching realities. But they have neither the ability, the expertise, the self-confidence nor the courage to rock the 'European boat' and are content to be errand boys for the apparatchiks and the bankers by continuing on the path to default while asking us to swallow ever greater doses of pointless austerity.


Philip said...

Excellent article.

It always amazes me that politicians who talk of default for Greece (or Ireland, or Spain or take your pick) and its leaving the euro etc etc blah blah never seem to address the 'end-game'. And journalists of the 24 hour news orgy type are equally culpable (thick?) in this. So Greece leaves the euro and ditches austerity and 'goes for growth'. Well how the fuck are the going to go for growth? Growth has to be bought and you need money to buy things. Are you going to lend them any money? nope, me neither. The end game is the same either way. I.e. Greece will need huge bailout from the eurozone if the stay in the euro or a huge bailout from the IMF if they leave the euro which in the end is the same thing as the eurozone are probably (guessing here) the major contributors to the IMF. In the end we will all pay for this euro bullshit with only the vague hope of getting our money back in say 50 years.

Your final reference to 'pointless austerity' made me raise a questioning eyebrow (perhaps I misunderstood you). Pointless maybe but surely inevitable? if yer broke yer broke! ...and I hate to bring up the old saw about solving a debt problem with more debt as it only makes me sound like an old Thatcherite (which I am).....

artied said...


The programme for 'austerity' is 'pointless' in that it is being sold as a 'cure' and I think we agree that it is not any such thing....

And it is only realism (not specifically Thatcher-ism) to acknowledge that 'the answer to too much debt cannot be more debt'.

We are not 'broke', just not as wealthy as we like to pretend and want our children to prop up that pretence. So rather than more bailouts I would prefer a writedown (Icelandic style).

Thanks for the feedback.

Philip said...

I agree entirely with the writedown option. Much cleaner and has a finality (like this mess will ever end) about it that appeals. And also (huge simplification alert) if the lenders were so daft as to lend in the way they did then let them suffer the consequences(Caveat emptor) rather than getting the taxpayer to carry the can.

felix mctiernan said...

Another excellent contribution by Arthur Doohan . Can you imagine a speech by any of our Government Ministers in such terms ? Neither can I . We are suffering from a grave absence of political leadership . This Government was happy to scare the people into voting for this Treaty , without any mention of a stimulus package . Now that Francois Hollande is insisting on a stimulus package being part of the deal , our Government is saying that it was in favour of that all along ! If that is so , why were they berating people into voting 'yes' when there was no mention of a stimulus package ? An appalling lack of leadership from a spineless group of politicians ?

Felix McTiernan

paxtime said...

Arthur. It is interesting to see a comment from a Green Party member and a banker to boot.
It is clear that there is no moral basis far less a financial validation for this debt. It has occurred as result of economic manipulation that has not been opposed by this and the last government and indeed seems to be part of a wider pattern.
Naomi Klein and others have indicated that there is a world wide shift from plain and simple capitalism to an even crueller oligarchic takeover of financial and natural wealth. Debt is the tool which is being used to effect this annexation.
In this country an unproductive sector has been permitted to plunder the public purse using the tax system,speculation and gambling funded by debt for which repayment is not expected or demanded. This government and the last has chosen make good the losses and the thefts perpetrated by this sector using public resources. It follows then when this depletion is not replaced by a fair tax system or alternative levies on excessive profits the common good and particularly the welfare and peace of mind of the less well-off is destroyed. Remember also that this and the last government were not elected on an austerity ticket nor on selling off services to the private sector cheaply nor on transferring billions of euros public money into private hands. So the situation is also an affront to democracy.
Pat Rabbitte's slip of the tongue indicates that the Irish government have no real economic decision-making power.
However Iceland has refused to participate in this process and Greece might well do the same. There have been demonstrations in several countries asking Ireland to vote no to austerity and more cuts. The ground is perhaps being laid for an international federation which could oppose the depredations of corporations and oligarchies. We are dealing here with financial bullies. Bullies when challenged will soon realise that their behaviour can damage their own self-interest. Ireland should join with other dissenting countries and present the IMF, Goldman Sachs et al with the bill. Their resources,profits and dividends will be annexed and a retrospective tax bill presented Europe-wide if they refuse to play ball and cancel the so-called debts. The Labour Party should know from its founders that unity is strength. It should open talks with Hollande, Tsipras and others to ensure a common approach is employed. It should then bite the bullet and go to the country as part of a broad left allliance as has emerged in Greece. That scenario might also open the door for progressive greens as a means to rescue the reputation of that movement in Ireland.
Going cap in hand to the very people who constructed the scenario originally is unlikely to provide a solution that will benefit anyone other than perpetrators of this misery.

paxtime said...

I should add to my comments above that there is around three trillion euros of Irish money washing around the various financial casinos of the world. Whether this money has been taxed at source is unclear. It does not include monies in hedge funds and other even more esoteric financial instruments. This is occuring when there are children in this country who don't have enough to eat and there are older people living with fuel poverty on a daily basis.