People in Ireland, and I suppose people in general, love to hate authority, and none more so than faceless, well paid authority like the European Central Bank (ECB).
This hatred was in full flood last week, as it emerged that the Fine Gael and Labour government had reached an agreement with the ECB to change the manner in which the Irish State makes good the impaired debt on the balance sheet of the Irish Bank Resolution Corporation, formally known as Anglo Irish Bank.
Previously, the Irish State have given the IBRC what is known as a Promissory Note, which is like the name suggests, a promise to pay the bank money at some future date, or in this, case approx. €3bn every year for 10 years. The IBRC then used this Promissory Note as security to borrow money from the Irish Central Bank to make good its balance sheet, so that it wouldn’t go bust and take the entire Irish Banking system down with it.
For a State collects approx. €35bn in tax revenue each year, and which has a sizeable budget deficit, €3bn per year is a sizeable chunk of change. A more palatable arrangement, argued the Irish Government, would be for the Promissory Note to be paid back over a longer period of time, which would give the State time to rebuild its economy, wherein the debt burden would require less credit financing, thereby reducing the cost to the Irish taxpayer.
A quite reasonable proposal it would seen, but the ECB is legally barred from engaging in what is called Monetary Financing, which means using the market mechanisms of the ECB, and it network of Central Banks, to provide de facto financial assistance to a member state.
The ECB viewed any extension of the debt held by the Irish Central Bank as Monetary Financing, and was loath to support any such move; and while the ECB was providing the bulk of the liquidity available to Ireland’s banking system, the ECB held all the cards.
That is until last week, when Irish Government officials finally won the ECB officials over to their side of the argument. Speculation has it that the ECB badly needed a success story, and Ireland was their prime candidate, so a deal was done to allow the Promissory Note to be converted into a series of long term bonds, reducing the Net Present Value of the debt being paid by the Irish taxpayer significantly.
To the casual observer, this would seem like a good news story. A conservative analysis of the likely cash flows arising from the deal shows that the Irish State will have an extra €1bn to play with in their annual budget for at least the next 10 years. It also means that the State’s cost of borrowing will come down, reducing the debt burden for future generations of Irish people.
The strange thing was that this wasn’t universally greeted as a good news story back here in Ireland.
To understand why, you need to look at where the debt arose from in the first place. Anglo Irish Bank was a reckless bank, lending money to property developers in the teeth of a very obvious property bubble. When the bubble finally popped, and the developers ran for cover, Anglo was left with a huge hole in its balance sheet.
Faced with its economy and banking system going into a tail spin, and frozen out of the sovereign debt markets, the Irish Government sought assistance from the EU Commission, the ECB and the IMF. The “Troika” as it became know, agreed to lend the Irish State the money required to keep the lights on, subject a list of conditions, one of which was the the debts of the Irish banks had to be made good by the Irish taxpayer.
And now you see why the good news from last week wasn’t received as such.
For 4 years, since the depth of the Irish banking crisis became known, the Irish media has been telling the Irish taxpayer that they have been greatly wronged by the Troika deal. And its not hard to see what the Irish taxpayer would agree with such analysis.
Anglo Irish Bank was a private bank, that borrowed money from other private banks, and then loaned it to private persons. Where exactly does taxpayer fit into this? Why should the taxpayer have to pick up the tab for the follies of a private bank?
The answer to this would seem pretty straightforward. The bank should be told to go fiddle, and the taxpayers should just go about their business. And for Irish taxpayers who have endured 4 years of budget cutbacks, that answer was a perfect fit.
And that’s why, for many, the news of the deal with the ECB wasn’t good news. For them, the only good news would have been if the Irish Government had told the ECB, and their Troika partners, that they were going to stop paying the Promissory Note altogether, as is suggested by an endless stream of commentators and celebrity economists in Op-Ed pieces and on talk radio shows.
For these people, its a question of morality. The debt had nothing to do with them, so why do they have to pay it back.
And from purely legal and technical perspective they are right. The problem is that if you want to make a moral argument, you have to allow that argument be judged on a moral basis, and the problem for Ireland’s debt rejectionistas, is that there is no moral basis to their argument.
Ireland’s property bubble started around 2002 and popped in 2008. In those years, Irish banks injected a mountain of borrowed money into the Irish economy, primarily into the construction industry.
For example, at the height of the bubble in 2006, Irish property developers built 93k new homes. If the average cost of each home as €200k, and 70k of the 93k homes were loan financed (all conservative estimates) that equates to €14bn loaned into the economy in that year, and that’s for residential development only. You could add another €5bn at least for commercial development.
That’s a huge injection of cash into an economy of 4m people. And its impact was immediate. Wages went up, asset values went up, Government tax revenues went up, public spending went up, capital spending went up, taxes came down, and all over a period of 6 years.
In short, every man, woman and child living in Ireland benefitted from the money that Irish banks, and in particularly Anglo Irish Bank, was lending recklessly into the Irish economy.
It is this point that seems to be eternally lost on those Irish people who continually reject the notion of paying back Anglo’s debt.
What they don’t seem to realise is that it is this point that is foremost in the mind of the Troika, who understand that allowing Irish taxpayers to detach themselves from the debts of the Irish banking system means that other EU taxpayers will have to step into the breach, either through having to make good the debts of the Irish banks, or seeing the value of their savings decline as the ECB pumps money into the eurozone system to cover the debts through inflation.
So on whose side does the moral penny finally fall? Yes, in an ideal world, we could just let the banking system cave in, but in sophisticated credit driven economies, that isn’t an option.
If ultimately, some taxpayers somewhere have to make good the banking debts, is it not just that those taxpayers who benefitted most should be in the vanguard?
The Troika seem to think so.