Brendan Kennan: Writing a cheque is easy -- recovery is the hard part
THE Governor of the Central Bank, Patrick Honohan, is a distinguished economist. So it is not surprising that he went to the nub of the question for the economy which arises from yesterday's banking announcements. "Is it affordable?"
Mr Honohan thinks it is, although he accepts that it is an enormous bill. Not, however, as enormous as some of the figures being thrown around in the political debates, such as that it would "cost" each taxpayer €22,000.
Labour's finance spokesperson, Joan Burton, was more circumspect. It would saddle each taxpayer with €22,000 of debt, she said. Which is correct. For taxpayers' own money, the cost and the size of the debt are the same thing, but for governments, it is different.
Solvent governments do not repay debt. They keep replacing it with new debt. For them -- which means their taxpayers -- the cost is the interest payments on that debt. With a typical long-term interest rate of 5pc, the taxpayer would pay €1,100 a year on €22,000 of debt. They do not have to count the debt itself.
But they have to pay the interest forever. The British government dutifully pays interest on the "perpetual" loans it took out to pay for World War I. Growth and inflation have reduced the cost to virtually nothing, but it will be many years before they reduce the significant burden placed on Irish taxpayers by the bank rescue.
The actual interest payments on a €35bn rescue of the kind outlined yesterday would be not far off €2bn a year. Perhaps that is a better way of looking at it, in the context of a planned €3bn correction in next December's Budget. The bank rescue adds to the pain involved in the process of reducing the huge budget deficits.
Not all those bills will fall due next year, or even the following few years. As with the money to be borrowed by NAMA to pay for the bank loans, the Department of Finance is trying to spread the burden over as many years as possible.
NAMA will issue the banks with bonds to be repaid by it in 10 years' time, but which can be exchanged for cash from the ECB now. In yesterday's capital injection scheme, the Government will give "promissory notes" to some banks, which will be exchanged for taxpayer cash at some time in the future, and in the meantime can be treated as capital under banking regulations.
This is not just a question of postponing the evil day, although clearly no-one would want the interest on such borrowings landing at once on the taxpayer. If Fine Gael spokesman Richard Bruton's estimate of a €75bn total debt is correct, the annual cost would be over €3bn a year. The more that can be spread over the longer term, the better. It is also the case that NAMA will get some money back from the €50bn it will pay for all the loans, and there should be some residual value from the investments in AIB and Bank of Ireland.
But, like the cost of World War I, or a 30-year mortgage, the real burden of debt can be eroded only by inflation or growth in income. If the European Central Bank has its way, there will be little help from inflation. Economic growth is critical, and not just for the bank rescue.
It may be depressing, but it has to be remembered that €40bn to re-finance the banks is the same as borrowings in the past two years to run the country, which mainly means paying public sector wages.
The tentative agreement with the public-sector unions was the only chink of light in a dark day. The banking crisis and the budget crisis have the same cause, but the budget crisis is much bigger. Unless that is solved, all will fail.
The Government's fairly optimistic projections see borrowing of €95bn in total between 2009 and 2014. Even by then, the annual borrowing will be close to €10bn and the national debt will be over 80pc of GDP.
Those who have to decide whether to support yesterday's agreement must try to imagine what an inability to borrow those amounts would do to their wages, not to mention everyone else's living standards. It is almost unimaginable, but a fall of 40pc is not unknown in such circumstances.
We can work on the Budget, but the achievement of economic growth is not entirely in our own hands. Most of it depends on the performance of others. All we can do is be ready when it comes, and keep our fingers crossed that it does.
The real measure of the success of yesterday' decisions will not be known until we see the newly-capitalised banks' ability to finance the recovery we all devoutly wish for.
- Brendan Kennan
Irish Independent
