It's time to leave behind mistakes of the past and set ourselves on a different path, says independent TD Stephen Donnelly
Right now we have a choice. We can continue with the sins of our past, or we can wake up, recognise what’s happening, and choose a different path. As a sovereign, democratic nation, that choice belongs to all of us, and to Michael Noonan as our representative.
Time is running out. Every month we continue down the disastrous path of Fianna Fáil policy our options narrow. If we are going to wake up and choose a different future, we must recognise some critical misconceptions. Once we do this, new options emerge.
Armed with these new options, we and the new Government can begin to fight back. We can stop the madness that has the Irish people paying off the debts of private investors. We can use our taxes instead to help struggling families in Ireland. We can create a banking system that is vibrant and responsible. We can get money out to businesses to create jobs.So, what are these misconceptions? At a recent conference I attended in Washington there were various comments from one particular speaker about the foolishness of the Irish people. Heads nodded. The Irish had blown it, and now they were bankrupt.
Afterwards, over a beer, a German financial analyst tried to comfort me. Even though he and the other German taxpayers were bailing us out, he said, it was worth it. As the EU’s biggest exporter, Germany got huge benefit from the euro. He was surprised at my somewhat tense response: the Irish people were not being bailed out. We were bailing out German and other banks, and it most certainly was not worth it.
To explain, I gave him the following example: the IMF lends €100 to the Irish Government. The Government gives this €100 to Anglo Irish Bank, who duly gives it to, say, a German bank. The Irish people then give €100 to the IMF, plus interest, to pay back the loan. The result? The Irish people are down €100; the German bank is up €100.
My German friend hadn’t thought about it like this before. He suggested that German and French taxpayers might change their opinion if they understood this. Were this to happen, the German and French politicians, who are demanding high interest rates and the sacrifice of our corporation tax regime, might soften their stance too.
The Irish people are not being bailed out. Yes, the IMF has loaned us a stack of cash. But every cent of this is being used to pay the losses of private investors in Irish banks. If we weren’t doing this, the IMF would not be here. We would be borrowing what we needed to fund our declining budget deficit on the open market. Yes, the ECB is providing a huge amount of cheap cash to the Irish banks. But this is just allowing the banks to continue to cover the same private losses. Even here, the cost of this cheap money is offset by the huge profits the ECB is making by lending to us through the IMF at nearly 6 per cent. It borrows at just over 2 per cent.
Nothing is coming to the Irish people, who, contrary to much government rhetoric, are not the same as the Irish banks. The people who are actually paying for everything are the same people who are not getting anything in return - the Irish people.
The misconceptions do not end there. Do these two ideas sound familiar?
“We must cover the losses of people who invested in Irish banks (the bondholders), or nobody will lend to the banks or the State.”
“The Irish banks will lend widely and wisely again if we give them enough money.”
This nonsense first came from the Fianna Fáil-led Government, with disastrous consequences for the Irish people. We poured about €50bn of our money into Irish banks in an effort to get them to start lending again. We gave Nama another €30bn to buy all those fields, foundations and buildings. At the same time, the banks paid about €110bn to holders of unguaranteed, unsecured senior bank bonds. The result? The banks are not lending and nobody has any intention of lending to them or the Irish State.
Worryingly, the new Fine Gael-Labour Coalition appears to believe the same misconceptions as Fianna Fáil did.
There is about €35bn still unpaid to senior bondholders who invested in the Irish banks before the September 2008 guarantee. It is Fine Gael -Labour’s intention that the Irish people pay the vast majority of this. They give the Fianna Fail line on this - we’ve got to pay, or nobody will lend to us - the downgrading by Moodys last week puts this rationale to rest.
So a new reason is now being given: if we don’t pay the bondholders, the ECB has threatened to raise the interest rate on the very cheap money it lends to Irish banks. Increasing the interest rate would cause real problems for the Irish banks, but this could be mitigated. The alternative is a bill for €35bn, or €25,000 per Irish household.
It is also the Government’s intention to put up to €24bn more into the banks. This does not include whatever else Anglo and Irish Nationwide may need. With this money, and the money from selling off many of the banks' assets, the Government believes the banks will have so much cash that they will not be able to stop themselves lending. They are going to set up a team in the Department of Finance to make sure the banks are lending. They are going to tell the banks what sectors to lend to. The Government plan is to force the banks to lend approximately twice as much as the Irish Central Bank estimates is required.
Here’s the plan. We will borrow up to €24bn, for now, and give it to a group of banks which have failed in the past, which are failing right now, and which the markets believe are likely to fail in the future. And we will hope these banks lend widely and wisely. And we will force them to lend too much, to sectors which politicians like. The central allocation of capital is something which history suggests does not work terribly well, but it seems that we’re going to give it a shot, just to check.
If we continue on our current path, the Irish people will have covered the losses of private investors to the tune of at least €70bn, possibly far more. This €70bn-plus is dead money. To put it in perspective, paying off the €70bn would require every euro in income tax paid by every person in Ireland for the next seven or eight years. The next time your bank frowns at a loan application, or mentions your late mortgage payment, you can remind them that every household in Ireland is each giving them a gift of at least €50,000. The final figure could be much, much higher.
Michael Noonan was visited last week by the ghosts of Banking Past, Present and Future. Just like Mr Scrooge, he has options:
- We can choose to tell the Europeans the truth about this ‘bailout’.
- We can choose not to pay a large portion of the €35bn outstanding senior debt.
- We can choose to use debt-for-equity swaps to further clean up the balance sheets of the banks, meaning they would need less money from the Irish people.
- We could let some of the banks fail, meaning the ECB threat of more expensive money would be less damaging.
- We could explore large-scale restructuring of the portion of our national debt which is due to bailing out the bondholders.
It is becoming more and more likely that this is going to happen anyway, so let’s get on with it - this would restore confidence for investment in Ireland, promoting jobs. We could ally ourselves with the Greeks and Portuguese to strengthen our position on this. We could set up the Strategic Investment Bank now and give it our €24bn. This is in the Programme for Government but I don’t believe it will happen soon or at scale. We could have meaningful reform of the banks. Asking the failed boards of failed banks to come up with ways to improve themselves is ridiculous.
I do not envy the task ahead of the Cabinet. They have inherited a chaotic situation from a disastrous Fianna Fáil Government. I believe Michael Noonan when last December he described the IMF deal as a “downright obscenity”. I have no doubt that it’s hurting him to implement it. The Cabinet has some good ideas on bank restructuring and jobs growth, but they are not good enough.
This is a time of crisis and they need to step up. This is not about making the Europeans happy. This is about protecting Ireland.
Every course has risk and every course has downsides, but the Fianna Fáil course, which we are still following, is most surely not the best one.
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