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News : Irish Economy Last Updated: Feb 24, 2011 - 4:06 AM


The Irish debt burden and the market for simple solutions
By Michael Hennigan, Founder and Editor of Finfacts
Feb 23, 2011 - 5:59 AM

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From left to right: Dalia Grybauskaite, Lithuanian President, Angela Merkel, German Federal Chancellor and Brian Cowen, Taoiseach, having some fun at the EU summit, Brussels, Oct 28, 2010.

There is an inevitable market for simple solutions at times of crisis and the Irish debt burden can apparently be significantly cut unilaterally, without any consequences.

In Depression times, US President Franklin Delano Roosevelt was pilloried from the Right for betraying his own wealthy class by championing the underdog while from the Left, the demagogic Huey Long of Louisiana and the Canadian-Irish radio priest, Charles Coughlan,  pushed their alluring agendas including the spectre of a Jewish conspiracy.

Three decades later, President Kennedy said in his undelivered speech in Dallas Texas: "There will always be dissident voices heard in the land, expressing opposition without alternatives, finding fault but never favor, perceiving gloom on every side and seeking influence without responsibility. Those voices are inevitable...We cannot expect that everyone, to use the phrase of a decade ago, will 'talk sense to the American people.' But we can hope that fewer people will listen to nonsense. And the notion that this Nation is headed for defeat through deficit, or that strength is but a matter of slogans, is nothing but just plain nonsense."

The situation in Ireland is striking: advocates of unilateral debt default avoid the issue of reform within our own control, to apparently avoid alienating some of their audiences and they are calling for a national referendum on the debt burden to be held soon after the General Election.

Newspaper commentators Fintan O'Toole and David McWilliams had planned to stand in the General Election but opted to stay on the sidelines and a national referendum would likely give them the platform to lead an anti-European campaign, which would surely give voice to extremists and risk shaming the country.

People who may have never made a consequential decision in their professional lives, are advocating courses of actions as if any possible downsides are irrelevant or not even worth the hassle of detailing.

In The Irish Times on Tuesday, O'Toole bemoaned that come Saturday morning, like every morning after every election in the history of the State, right-of-centre establishment politics will be triumphant. Fine Gael and Fianna Fáil will have well over half the vote between them from a 'timid' people.

An Irish Times reader named Aidan went to the heart of the matter in a comment on the article:"I believe it comes down a failure of those with a left leaning to sufficiently capture the imagination. In theory I might agree with some of the sentiment of Joe Higgings (sic) et al, but what struck be about their arguments is the complete lack of realism. I, as a politically aware 20 something, with left wing-pinko tendancies (sic), would have been in their demographic, but their answers were so juvenile as to be disingenuous. They simply didn't address the 'what ifs?' in relation to rejecting the EU/IMF issues. To think of a vote as a contract, I would like to know what the worst case scenario is, if I agree to sign up to something. It saddens me that we will be once again governed by party political verterans (sic) in ill fitting suits with a snide discontent for 'lay' people, but once again it was they who got their message across better, be it right or wrong. On the brighside (sic), think of this as a first outing for the new left, they may learn to beat to beat them at their own game yet...."

On Sunday, David McWilliams wrote in The Sunday Business Post, that a referendum would give Irish political leaders "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."

No wonder they opted to lob the grenades from the sidelines and not stand for election; they would surely also be the first in the queue to bemoan the collateral damage.

In this world of simple solutions, Ireland can exit the euro and the banks can collapse while a magic wand is waved.

There is no worst-case scenario, as was the case on the fateful night of Sept 29, 2008, when political leaders agreed to issue a blanket guarantee of existing bank debt.

It will all turn out grand, as was the case too with the world's 'cheapest' bank guarantee.

These people are generally well-off individuals and likely live insulated from the challenges of the tradeable goods and services sectors.  
 
Apart from the already unemployed, the most vulnerable workers are in the SME sector; they generally are the worst paid in the economy, have no occupational pension and are very vulnerable to unemployment.  
 
Over 1,400 Irish companies were declared insolvent in 2009 -- an increase of 82% on the previous year, and up 287% on 2007; over 1,500 companies were declared insolvent during 2010.  
 
In addition there were hundreds of sole trader and partnership collapses.  
 
The survivors at this point have endured falling sales revenues, stretched payment periods and unpaid debts owed by the collapsed businesses.  
 
Many are undoubtedly in fragile state and a banking shutdown would surely be the tipping point.

About half of the outstanding €33bn in bank debt is owned by Irish investors, including pension funds and in The Financial Times today, the Lex column says Ireland needs a comprehensive, agreed debt restructuring schedule with its creditors, to include at a minimum the €17bn of senior unsecured bonds in the Irish banking system.

Lex says the European Central Bank (ECB) and the European Commission (EC) may not be ready (yet) to consider such a step. However, if Ireland was prepared to make concessions "on its overhyped 12.5% corporate tax rate, there is the basis for a grand bargain between Ireland and its creditors that could create the template for an orderly resolution to Europe’s debt crisis."

We had a 2-year period after the September 2008 guarantee, when there was a slow-motion response to the banking crash and the issue of bank debt was off the ECB/EC table.

What is amazing is how little support Ireland has among the other 16 countries of the Eurozone and at institutional level.

We should push for change on the bank debt but that shouldn't blind us to the urgency of  getting the budget deficit under control and returning the economy to a sustainable path.

The peddlers of simple solutions selectively cite examples of actions taken by other countries but whether it is Argentina or Iceland, they depended on the help of neighbouring countries.

We need to have friends in Europe and we also need to implement the reforms agreed as part of the EU-IMF program.

Sovereign debt restructuring may well happen with the assistance of the IMF, as part of a European agreement.

According to Reinhart and Rogoff in their celebrated book, This Time is Different, the last default in the industrial world was Japan and Germany in the immediate aftermath of World War II. There have been no advanced country defaults for more than half a century.

The 20 sovereign defaults since 1997 were Mongolia, Venezuela, Russia, Ukraine, Pakistan, Ecuador (twice), Turkey, Ivory Coast, Argentina, Moldova, Paraguay, Uruguay, Domenica, Cameroon, Grenada, Dominican Republic, Belize, Seychelles and Jamaica.

"Overall, 15% of defaults were due to banking crises, 15% to long-term economic stagnation, 35% to high debt burden, and 35% to political or institutional weaknesses," said Elena Duggar, group credit officer for Sovereign Risk in Moody's Credit Policy Group.

Past defaulters had high foreign currency exposure, an average of 76% of total debt was in foreign currency in the year prior to default, and high debt servicing costs.

Advocating unilateral default in a country more dependent on foreign firms than any other developed country, is easy to make from the comfort of a well-padded armchair.

Meanwhile, German Chancellor Angela Merkel on Tuesday evening signalled that European Union leaders may renegotiate the terms of Greece’s bailout as part of a broader package to support the euro.
 
“There certainly is a discussion about whether to consider extending the running time of the Greek program,” Merkel said while noting that last year’s bailout plan for Greece was limited to three years compared with Ireland’s program agreed last November, which extends over seven years. “It’s one point that’s on the table.”
 

Merkel was speaking to reporters in Berlin after talks with Greek Prime Minister George Papandreou and she added that any extension would have to be a part of the comprehensive package to respond to the debt crisis being negotiated for March's EU summit. No decision has yet been made on such action, she said.

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