IF you want to feel upbeat about the new year, just ask yourself how much worse can it get.
Financial markets are beginning to settle down again. They demanded what they wanted, but they didn't get it all their own way. The EU banking model may be seriously flawed, but its sheer size secured its survival. We may have the EU presidency, but those who hold the purse strings still call the shots.
But as long as we give others hope, they must cut us some slack.
The Government is too dependent on a professional elite to guide them. So they keep the rotten banks and give the multinationals whatever they ask for. The public sector won't give up what it has – and if something has to give, it will be the service.
At least we know what we are up against. The Government and the EU are fixed in their resolve to tax middle Ireland to save the system we have. In spite of everything they have thrown at us, global markets see Ireland as a safe bet. If we don't have a stable economy, we have the foundations for one.
When the president of the European Council, Herman Van Rompuy, visited Ireland last week, Enda Kenny would have liked him to tell us that our financial independence will be restored. But he didn't. He just pinned another gold star on Enda and told us all what good boys and girls we have been. If we toe the line the euro will survive. We are the linchpin and that is why they need us.
The next payment on the infamous Anglo promissory note will be deferred as it was last year, even if nobody is willing to say it. We will not get a reduction in the outrageous debts the Government has heaped on our backs. But the ECB and the IMF will lend us what we need, even if we cannot repay it. That way no European bank will fail. So long as we play along, our future is secure. But if you are not part of the establishment, you might have to work harder to claw your way back.
Last week the Government flogged off €1bn of high coupon Bank of Ireland contingent convertible notes (CoCos). These are risky financial commodities that were used to prop up ailing banks. Now that the risk has abated, they are attractive to institutional investors. What other bonds pay 10 per cent?
The Government raised another €2.5bn by selling government bonds. Its target for 2013 is to raise €10bn in the open market. It needs to build up its reserves as nearly €12bn of debt is maturing next year. It can do this at the lowest interest rates since the recession began, and it will. The interest rate on these bonds is about 3.32 per cent. Low and all as it is, this is still higher than what stable Europe is paying. It's a positive sign but a drop in the ocean nonetheless. The national debt is about €140bn. If the Government could raise €100bn at 3.32 per cent in financial markets, that would be impressive. But how can we ever pay it back?
If the USC was redirected to pay off the national debt, it would take at least 30 years. And that would leave another huge hole in public finances that middle Ireland would be left to finance. As it stands, the USC wouldn't even cover the interest charges on the national debt (about €7bn a year and rising). Financial markets are willing to lend to Ireland, not because the Government got it right, but because the rest are willing to take whatever is thrown at them. We are a docile economy.
When the Irish banks were propped up, it avoided default of as much as half a trillion euro. If that contagion had set in, it would have spread like wildfire across Europe and the global economy would have been ravaged. Like it or not we saved their bacon.
Not that Herman Van Rompuy will admit it. European Commission president Jose Manuel Barroso came close. They may have said enough for financial markets to go easy on us. But if they let us off the hook too soon, attention will return to Italy and Spain. And they are not ready yet (and won't be this year).
If the outlook for 2013 is as good and positive as they make out, they should shelve the tax hikes that are proposed this year. Private sector workers will pay more PRSI, now that the €127 tax allowance has been taken away. But politicians and most public servants are not affected. The changes are highly discriminatory and place the greatest burden on those who can least afford to pay. Property tax is on the way but it is at least two years premature. It should be deferred too.
If recovery is so close, shelve the tax hikes until middle Ireland can get a foothold on the ladder. The EU and the IMF gave clear signals after the Budget that the Government may have already pushed it too far. It is not too late to roll back on what is proposed. The pittance that the Government raised in the bond markets won't do much to restore public confidence. Reversing the blunders would.
The Bank of Ireland Cocos are risky investments provided for the bank's benefit. It gave them a cushion when they needed it. Now the risk has abated. The 1 per cent premium the Government got when it sold them doesn't compensate for the risk it took. They earned annual interest at 10 per cent. That would cover three times the interest we pay on government bonds. Put another way, the income we earned on the €1bn invested in CoCos, would cover what we pay on €3bn of debt. Maybe we were a bit hasty selling when we did.
Little has changed since last year. We owe too much, we can't pay it back and we are not getting the help we need. It's time we got the cuts we've been waiting for. The EU can afford to take over our unsustainable debt. If it is not ready to do that, it should shelve our repayments indefinitely – and that includes the outrageous interest charges that we are paying. We are in the hands of the financial markets. We are dependent on global recovery if we are to grow. Deferred consumer spending has started up again, but only because it is necessary. Confidence has not been restored.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning