Sunday 4 December 2016

David McWilliams: FF's parting gift of corporate welfare will sink the country

Published 09/12/2010 | 05:00

A farmer told me he had just taken €53,000 out of the local bank and put it under his bed

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YESTERDAY was the feast of the Immaculate Conception. In many other Catholic countries, particularly in Belgium and southern Holland, this is also the week that Santa comes and leaves presents in children's shoes. For many, both the Immaculate Conception and Santa Claus are simply not believable. For me as a child, December 8 was a day off school and that's all that counted.

What would Christmas be without Santa, or Catholicism without the Immaculate Conception? You can't have one without the other. Even if you don't believe, sometimes it is easier to pretend.

The Budget was akin to the Government playing a big game of 'let's pretend'. Let's pretend that the banks are solvent. Let's pretend that the problem in Ireland is 'social' welfare rather than 'corporate' welfare (because this is what bailing out the banks amounts to) -- welfare fraud by corporations. Let's pretend that the Budget can make the economy grow. Let's pretend that some other country has tried austerity without mass debt restructuring and succeeded. None of the above are true.

The problem with 'let's pretend' games is that, when we are young, they allow a child's imagination to flourish, with reality and fantasy crossing over, but when we become adults, we know it's only a game. We also know, for example, that the reason no country has ever tried what we are doing -- austerity budgets without debt restructuring -- is that it doesn't work. So why go through the charade?

The people know the Budget will not get us out of the hole, and they are voting with their pockets by taking money out of the banking system. The official response to this was, first, to deny it is happening and then to say it is all right because as quickly as our deposits leave, the ECB injects new cash into the banks and the net position stays the same. But this is a recipe for a banking collapse, as it implies that a banking system without deposits is a banking system; it is not.

For example, the other night, following a performance of 'Outsiders' at the lovely Backstage Theatre in Longford, a local farmer approached me tentatively. He mumbled for a bit, complained about the weather and abruptly told me that he had just taken €53,000 out of the local bank and put it under his bed (and being a farmer he had a shotgun by the bed). He didn't solicit any advice as to whether this was a good or a bad thing to do; he just stated baldly his own personal conclusion about the banks, the economy and the financial affairs of the nation in general.

Either we fix the banks or this farmer's approach will become commonplace and the establishment's course of action that increasingly looks like national economic suicide or 'patricide' will continue.

The only part of the banking system that is currently working is clearing. Most deposits are still in the banks, cheques still clear, the ATMs still work. But that is it. The original guarantee prevented a run back then, but the problem has changed utterly since September 2008. It is now failing. The reason it is failing is that it was the right solution to the wrong problem.

The banks are insolvent. It is interesting that the conversation is now about comparing levels of insolvency. Bank of Ireland is quite insolvent, AIB is more insolvent and Anglo is completely bankrupt. The thing about solvency is that either you are or you are not. You can pay the bills or you can't. None of our banks can pay their bills.

So, what is the solution? Let's look at the numbers. In September 2010, when the guarantee expired, the banks had €55bn of bonds that they needed to roll over. The market, knowing that the banks were insolvent, said 'no thanks', so the ECB and Irish Central Bank stepped up to the plate and provided the liquidity the banks needed in order to open for business the following day.

To that €55bn we can add the €35bn the ECB had already provided in liquidity, giving us €90bn.

Then we can add the €34bn of special liquidity provided by the Irish Central Bank and we get €124bn. To resolve this mess, we have to look to the biggest holders of Irish bank debt: the ECB and the Irish Central Bank as well as the bondholders.

It should be very easy to convince Mr Trichet that allowing Ireland to go bust -- as we surely will with the albatross of bank debt hanging around our neck -- would be against the very raison d'etre of the ECB.

What is the biggest cause of runaway inflation in every country from Weimar Germany to Zimbabwe? A currency that people think is weak, and therefore don't trust. The one thing that will weaken the euro is a sovereign default within its borders. It would turn into an existential crisis for the currency. There is no one willing to trust a currency whose continued existence is in doubt. Result? The euro plunges on the international market.

To stop this happening, the ECB has to sort out the Irish banking system in a way that does not lead to the people of Ireland being saddled with debts we cannot afford.

It should be fairly easy if there is a will to do it.

All deposits in Irish banks are held electronically. Ring fence these and move them to another institution. (This is not as odd as it sounds, it is exactly the plan Patrick Honohan outlined for the depositors in Anglo when he said that institution would be wound up by the end of January.) If a suitable institution does not exist, then we should create one.

The debts of the banking system can also be moved to the new institution, but the ECB would have to allow the money it is providing as liquidity to become capital in the bank. It would own, along with the other bondholders, 100pc of the shares in the new bank. As the property market here finally starts to clear, the bank could be sold to the private sector, fully capitalised and in good health.

Ireland is a systemic risk to the euro. We can deal with our own sovereign debt. We cannot deal with the debts of private institutions that went on a lending splurge to the private Irish banks for quick profits, nor should we.

If the ECB does not allow us to forego the bank debt, then it will reap what it is sowing. We will cause a crisis for the eurozone, and the demise of the very institution that has the power to save both itself and us.

The austerity Budget, without a deal on the banks, will lead to patricide. Corporate welfare, not social welfare, will sink this country. Will that be Fianna Fail's legacy?

David McWilliams is currently performing 'Outsiders' at venues around the country. Check local listings for details

Irish Independent

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