Analysis

Wednesday 30 July 2014

Stephen Kinsella: Let's refuse to pay that €3.1bn – it is the product of a mistake

Published 13/11/2012|05:00

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It is now clear the Government's strategy of ingratiation with the European authorities in order to get a deal on our bank related debt is not working. Since taking office 18 months ago, the key issues the Government focused on were the budget deficit, mortgage arrears and a deal on the bank debt.

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The Budget deficit appears to be narrowing, with October's statement from the Department of Finance showing an €8 billion primary deficit.

The mortgage arrears problem is still out of control. AIB recently showed the Oireachtas the details of its mortgage portfolio. AIB has 41,000 residential mortgages. Of these more than 9,000 are past due or now classified as impaired. The new insolvency legislation has yet to begin working on the ground for some of the most vulnerable in our society.

Worse, the Government's strategy to lighten the year on year repayment of the bank-related parts of the Government's debt is clearly not working. Despite talk of examining Ireland's debt last June, and repeated reassurances that the deal was, in fact, yes, honestly, still being examined nearly six months later, it now seems highly unlikely that we will be able to avoid repaying €3.1bn next March through the promissory note arrangement. The deal will keep on being examined into 2013, at which point Ireland will either exit the current programme, or apply for a new programme to deal with this debt in a different way.

The promissory notes were created to fill the hole left in the Anglo Irish Bank and Irish Nationwide balance sheets created through the NAMA process and the destruction of its property portfolio. The notes exist on the asset side of the (now) IBRC's balance sheet to offset money created by the Central Bank of Ireland which must be repaid. IBRC is owned entirely by the State. So is the Central Bank. March will see the Irish State borrowing real money, which needs to be repaid, and effectively destroying it. Think about the opportunity cost of that €3bn for a moment. Three. Billion.

The taxpayer's money can be better spent than this. Even better, we can just not borrow it.

This is not a default in the traditional sense. Actually, we'd be defaulting on ourselves. It would be a very Irish default.

The moment for simply not paying this €3.1bn is coming soon. Either during the Budget speech in December, or in early February, once the Dail returns, will be the ideal times to announce the Government is not prepared to waste the taxpayer's money so that one part of the Government can pay another part.

The ECB council would be called upon to discuss the issue –something they have not done up until this point. We could work out a deal based on the fact that with our banking debt securely sorted, the Irish economy could return to robust growth and fiscal health more rapidly.

The markets would not get spooked and refuse to lend us money to run the country. Remember, we wouldn't be defaulting on any debt owed to anyone apart from ourselves. We'd be in a better position to borrow in to the future. This is money we owe ourselves.

Last week Daniel Haugh of the influential Organisation for Economic Cooperation and Development told the ' Wall Street Journal' that "In real number terms, a promissory note deal can really reduce the Government's liability and would really help with the debt sustainability."

And as UCD's Karl Whelan has said, we could always agree to pay it back, say at a euro a year for 31 billion years.

The ECB would, I think, be happy to cut us a deal. But we don't matter in their calculus. We are not special in their eyes. Rather, we are seen as a problem en route to a solution, however painful for the domestic population.

As I've repeatedly argued, by their lights the troika relieve, rather than impose, austerity. Why should the European authorities focus on us?

For all eyes are on Spain, Italy, and France. The giants of Europe are looking increasingly weak. Ireland is too small to matter, and so when our officials protest behind closed doors, they can be safely ignored by the European authorities.

But their weakness is our strength, if we credibly and publicly commit to being what they would see as irresponsible. Forget all the talk of Dr Merkel's re-election weakening her position. It does not.

Forget all the discussions about Europe needing a win. They do, but the debt deal isn't crucial in that respect.

Forget the billions pumped into recapitalising Ireland's banks. That part of the debt won't be sorted until the pan-European regulator for banks is set up, sometime in late 2013. The ECB's President Dr Mario Draghi will deal with the Irish authorities on this issue, and it can be resolved to our satisfaction.

Focus on one, tangible, concrete issue we can win through focused negotiation. Let's not pay that €3.1bn back in March. It is odious debt, the product of a mistake made by a previous, discredited government for purposes that do not serve the best interests of the nation either now or into the future.

So let that debt go.

Irish Independent

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