News Analysis

Tuesday 23 September 2014

Marc Coleman: Rescheduling our debt won't help – we need a write-down

We must restore confidence so that consumers start spending again

Published 27/01/2013 | 05:00

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A small fraction of a fraction of a fraction. When finally totted up and set against the massive total of government indebtedness, that last sentence will probably be a fair description of the net effect of any deal agreed between the government and the troika on Ireland's bank debt.

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In Davos last week George Soros used more pejorative terminology to describe how that deal was shaping up: "A raw deal for Ireland." But let's not pre-judge the Government's efforts to date. Instead, let's hope for the best. But let's also stand back and see where we stand in relation to our national indebtedness, our exposure to the banks and our exposure to other contingent liabilities. When that is done, it will be clear that a rescheduling of Ireland's debt – as distinct from a write-down – is unlikely to make any material difference to Ireland's debt burden. Nor to the economy's capacity to grow in the future.

At €169.2bn last year, our national debt is equal to 118 per cent of GDP and on the verge of going over the critical 120 per cent barrier. This debt amounts to a burden of €36,943 on every man, woman and child in the country, and €91,892 on each worker in the economy. A crucial component is the promissory note, worth €31bn, of which about €28bn counts as national debt to be repaid in 10 tranches of €3.1bn between now and 2023.

Karl Whelan has argued that without this burden – necessitated by including unsecured bondholders in the September 2008 bank guarantee – "Ireland may have maintained access to sovereign bond markets and thus avoided an EU- IMF programme". Many economists believe this. Many go further and say that without a substantive write-off on the promissory note, our re-entry into the bond markets this year could be risky if not short lived.

As well as being (mostly) part of our national debt, the promissory note also makes up part of another large sum. Since the first injection into Irish banks during this crisis, the €5.5bn injected into AIB, Bank of Ireland and Anglo in December 2008, the Irish taxpayer has committed up to €62.8bn into the Irish banking system. Unless some write-down is achieved, the roughly half of this that pertains to the promissory note – which counts as our national debt – is lost and gone forever. But as Alan Barrett of the ESRI put it in 2009: "If the economy has a future, the banks have a future" and the long-term prospects for recouping the remainder – which does not count as national debt – are reasonably good. The Government may, as part of a deal with the troika, sell off some of these shares recouping some of this gain now. The question is whether this gain will short change the taxpayer going into the future.

A write-down that reduces the size of the promissory note burden will bring our national debt down closer to a manageable level and away from the danger zone of close to 120 per cent. A restructuring will have a welcome but modest impact on debt servicing. And it will avoid the embarrassment to the Government of having to fork out the mandatory €3.1bn interest payment on the promissory note in March, when the country will still be smarting from budget cuts and tax hikes.

An additional option being discussed is the use of the EFSF to take bank shares off the Government's hands at share prices that would provide some short-term benefit to the Government. Like any deferral in interest payments, however, it could be argued that this just kicks the burden down the road to be picked up by future generations. As can be seen from the magnitude of interest payments on the promissory notes compared with our overall debt burden, any benefits are likely to be very modest and make little difference to growth.

Some say that such a strategy is beneficial. Achieving a reduction in debt at the current time by pushing it out to the future will, they argue, help the economy to recover now to a point where growth will support future repayment. However, this view assumes taxpayers and investors are blind to the future burdens of debt repayment. Between 1982 and 1987 this strategy of deferral was pursued with little success. By contrast, when between 1987 and 1990 drastic steps were taken to quickly reduce the future debt burden, the economy began to grow quickly again. A rescheduling of debt coupled with a short-term deal on bank shares will certainly help the Government in the short term. Whether it will boost the confidence of taxpaying consumers and investors in our economy's future sufficiently to get them spending again remains to be seen.

Marc Coleman presents 'Coleman at Large' each Tuesday and Wednesday from 10pm on Newstalk 106-108fm. @marcpcoleman

Sunday Independent

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