News Analysis

Thursday 18 September 2014

Stephen Donnelly: Here's why the €64bn is ours for the asking

Published 07/10/2012 | 05:00

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Representatives of the Troika, from right, Ajai Chopra from the IMF, Istvan Szekely of the EU, and Klaus Masuch from the ECB

Ireland was never bailed out. But it was the ECB's middle man, saving Europe from banking contagion. Guess how we were rewarded, says Stephen Donnelly

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LAST week the president of the European Parliament was invited to speak to the Dail. I took the opportunity to ask him to take one message back to the mainland: Ireland did not get a bailout, and we are not looking for a bailout -- but we do need our €64bn back.

Martin Schulz is hardly a household name. He's a former bookshop owner from Rhine Westphalia in Germany. As well as holding the presidency, he is the leader of the Socialists in the European Parliament. And if the speech he gave on Thursday is anything to go by, he is on our side.

In his address, he showed an understanding of Ireland's economic plight. He spoke with passion of a Europe based on solidarity. Of the recent announcement by the finance ministers of Germany, Finland and Holland, he asked the following: How can we operate a European Union in which the word of the heads of government is meaningless? He also advocated a break between banking and sovereign debt in Ireland, adding that any attempt to stall the deal could prove disastrous for the EU as a whole.

We listened, we applauded (most of us anyway), and then we responded. There was much sensible talk of the need for a deal on the bank debt. But we need to go further. We need to fundamentally reframe the conversation in Europe about any such deal. Here's how.

The perceived wisdom among Europe's creditor countries is that Ireland mismanaged its affairs, was bailed out by them, and is now looking to be let off some of its obligations. There are moral overtones to this. A few months back our finance committee met with a delegation of the German finance committee. The tone was unmistakable -- you got yourselves into this, now stop whining and pay your debts. The Germans have no tolerance for debt, with 'schuld', the German word for debt, also meaning guilt.

We did make mistakes -- of that there is little doubt. And we are paying a very high price to correct those mistakes. But the bank debt is not one of them. Here, the numbers tell a very clear story.

Ireland is borrowing €67.5bn from the Troika. To date, we have given €64.1bn to the banks. The banks have in turn passed this on to the bondholders. At the time of the bank guarantee, Irish banks held €124bn in senior debt. All of this is being paid out in full.

Had the market been allowed to work, the banks would have been declared insolvent, and a creditors meeting would have been called. At this, an agreement to pay out less than the face value of the bonds would have been reached.

It is impossible to know what haircut would have been applied to the senior bondholders, but we do know this -- many of them sold on their bonds at a 50 per cent discount. In other words, they took a voluntary haircut of 50 per cent. It is not unreasonable therefore to suggest that a haircut of 50 per cent could have been agreed. In this case, the senior bondholders have been overpaid by €62bn.

So let's join the dots. First, €67bn goes from the Troika to the Irish Government, then €64bn (so far) goes from the Irish Government to the banks, and then €62bn in unnecessary payments goes from the banks to the senior bondholders.

Give or take a few billion, the Troika money essentially went straight from the troika to the bondholders. It was not used to run the country, to pay for teachers and nurses. And it was not used to keep the banks open, or to keep "money in the ATMs". The Irish banks could have restructured their debts while continuing banking operations for individuals and businesses. In fact, this is exactly what they did with the junior bondholders, and the ATMs worked just fine.

So if the Troika money was of absolutely no benefit to the Irish people, who actually gained from it?

Europe as a whole gained, by avoiding the possibility of contagion within the European banking system. But we're on the hook for it. We have temporarily surrendered our sovereignty over it, something a group of Irish men and women sacrificed everything to regain for us not so long ago.

Virtually nobody I speak to in the creditor countries understands this. It is not reflected in their mainstream media. They believe they have loaned us their hard-earned money to keep the lights on in Ireland, and that we are showing our gratitude by asking them for even more.

This can be tackled in two ways. First, our political leaders need to stop making public statements like people went "mad with borrowing" in "a system that spawned greed".

Instead, they need to start explaining to the citizens of the creditor countries that the troika money went straight to international financial institutions. Angela Merkel is up for re-election next year -- what her voters think about this issue matters a great deal.

Second, we should look for the return of the €64bn, not from the ESM, but from the ECB. The problem with looking for it from the ESM is that this is a fund of real money from the creditor countries. So any mechanism which uses the ESM to refund our €64bn really would end up costing German citizens money.

This would not be right -- they are no more responsible for the socialisation of financial sector losses than we are. The ECB, on the other hand, is.

We are told by the Government that it is the ECB which continues to insist senior bondholders are paid in full. A certain letter from Jean-Claude Trichet to Brian Lenihan may even provide documented proof that they forced us into the troika programme. And as luck would have it, the Irish banks still have in excess of €64bn of the ECB's cash on their balance sheets.

Were that amount to be written down by €64bn, the Irish State could then extract the same amount from the banks, leaving the balance sheets of the banks, well, balanced. And, usefully, smaller.

For very good reasons, central banks do not go around printing money and then writing it off. But in exceptional circumstances they do.

The ECB forcing the Irish people to provide €62bn of free cash to international investors in order to avoid contagion of the European banking system is just such a circumstance. In other words, if the ECB wants to cover the losses of professional investors, let it do it with its own money (and critically, at zero cost to any European citizen).

'If the ECB wants to cover the losses of professional investors, then let it do so with its own money...'

So this was my message to President Schulz: Ireland was not bailed out, nor is Ireland looking for a bailout. We do not seek charity, or benevolence from our European partners. But we do want our €64bn back.

In fact, we need it back.

If we don't get it, our debt to GNP ratio of 150 per cent means that we will inevitably, unwillingly, default on our sovereign debt. That would be very bad news for Ireland -- and for Europe.

If we do get it back, then as a country with a modern, hi-tech, efficient, export-oriented economy, we can contribute to the recovery of Europe.

Simple really.

Sunday Independent

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