The Government should shift its focus from the bondholders to householders
WHEN the debt crisis first exploded, and impossible billions were being poured into banks, the lament was that our grandchildren would be lumbered with this dreadful burden.
Last week the grandkids were officially lumbered with more of it – and this was cheered as a splendid idea. Now that the debt has been incurred, and the costs are falling upon us, transferring as much as possible to the grandchildren does not seem such a bad idea.
It would save us billions, said Michael Noonan. As another Irish politician, the 18th-century Boyle Roche, famously, and a bit more accurately, said: "What has posterity ever done for us?"
Posterity already has plenty on its plate, such as keeping the present adult generation when they are old and frail, but bereft of the pensions they had once hoped to save.
So it sounds like another crime against innocent infants that repayment of money borrowed from the EU rescue funds will not be repaid for much longer than planned – when the responsibility will fall on their poor shoulders.
The successors to Boyle Roche seem merely to have moved house from Dame Street to Kildare Street. But, as several politicians and commentators gamely struggled to explain during the week, it is not quite as bad as it sounds.
Mr Noonan quickly conceded that it is not quite as good as he initially made it sound either, but one can forgive him for not wanting to wade into the impenetrable thickets of explaining government debt.
It is good for him and his Government, but also for the rest of us, in that another small step has been taken on the long road to collective sharing of eurozone debt. This is where explanations are necessary – as to whether posterity can handle all this debt and, if not, what is to be done?
Understanding has not been helped by references to the impossibility of re-paying €180bn (€45,000 per man, woman and child). Of course that is impossible, but that's not how it works.
More recently, people have become aware that governments repay debt, not by finding the cash, but with freshly borrowed money. As UCC economist Seamus Coffey put it, the "decisive" factor is the annual interest bill on that debt. It happens to be one of the most readily available figures. The annual interest bill is running at around €10bn a year – or €2,500 for every man, woman and child. That at least is a figure one can grasp, but is it possible to carry such a burden? Big as it sounds, it might be.
It may not be a coincidence that the bailout programme is on the margin of what is tenable, to judge by historical experience. There would be no point in a programme which set impossible levels. Low levels would simply not be credible.
This looks like making the question fit the answer, instead of the other way round. But so far, as we are always reminded, the programme is on track. Debt this year may actually be less than the projected 122 per cent of GDP, and that is supposed to be the peak. Net debt, after counting cash in the kitty, peaked last year.
For now. Interest costs may be the decisive item, but they are not the only one. The rate of growth, the rate of inflation, and the size of the debt, all play a part in deciding what is affordable.
In its analysis of debt sustainability, the IMF shows how marginal it all is. Continued growth of half a per cent would leave debt on an unsustainable path. Higher growth and a bit more inflation will both be needed, especially after 2015.
They may come, or they may not. The difference in the consequences will be profound but those who claim to know them tend to define the future as a continuation of the present arrangements.
That really is untenable. If the euro survives – in which case it must be prospering – unsustainable debts will be taken over collectively. Decisions on what is tenable will be also collective and political. If it does not survive, posterity's job will be to pick up the pieces.
That raises a most extraordinary thought. The public debt is not on its own. There is the even bigger sum of private debt. Unlike governments, households cannot pass their debt on to posterity, or replace it with new debt. It could however be collectivised, by bank writedowns and more government borrowing to cover the resulting bank losses.
The Government is terrified of that, and the commentariat is obsessed with rescuing "banks". They should think again. It may have been a mistake to "socialise" the debt of developers, or bondholders, but rescuing householders is a much more palatable idea.
Go to it, and let posterity, and the Eurozone, look out for themselves.