David McWilliams

Thursday 10 July 2014

Debt deal is just jiggery pokery dressed up as a game changer

Published 06/03/2013|04:00

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THE news that the State has secured a deal to push out Ireland's debt repayments represents a victory for the Government's – or more accurately the EU's – giant "delay and pray" strategy. The deal would see the repayment of a significant chunk of the €40bn troika loan pushed out for another 15 years. What we have executed is in effect a "gentleman's default". We won't pay what we said we'd pay and the creditors won't get what they expected to get and we'll see how we are all fixed after a dozen or so years. Let's look at the details to see what this means.

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It appears that €10.5bn of EFSF/EFSM debts, which were due to be repaid in 2016, will now be kicked out to some future date. This will ease repayments. There was going to be a dramatic spike in the amount of money due in the next few years. With the economy fragile at best, there was no guarantee that the Irish State would manage to squeeze more cash out of us. From the EU's perspective, a fresh Irish bond crisis must be avoided at all costs. Yet a bond crisis may have been the most sensible outcome. Debts that can't be paid won't be paid.

Maybe it would have been more effective to recognise this now and extract a real concession on principle rather than postponing the problem for another few years – but more on that point later.

There is another €18bn owed to the IMF which falls due in 2020 and, presumably, this will be the focus of the new negotiations.

When we take a bit of altitude, we can see that the EU needs a victory in Ireland because its entire "austerity works" strategy is based on Ireland squeezing itself out of the bailout next year. This overlooks the fact that the term "exiting the bailout" only means postponing debt repayments in order to incur yet more debt and fresh borrowing next year.

The EU top brass also know, considering what happened in Italy last week, that austerity doesn't win elections or popular legitimacy. In fact, the opposite is the case. Remember, the man the financial markets and the EU wanted to win the Italian elections, Mario Monti, won less than 10pc of the vote.

In the strange alliance that has emerged in Europe, which pits the interests of the EU/bond market/establishment civil servants against the will of the people, the new triumvirate of barrow boys, hedge funds and unelected policy makers, is doing whatever it can to force through its agenda.

As a result, we have the bizarre and inconsistent spectacle of the EU – which has just slapped caps on bankers' pay because of greed – exalting the wisdom of the same bankers and relying on the sagacity of the bond markets to justify their actions.

How many times have you heard people in Brussels and Merrion Street refer to the fall in Irish bond yields as if this fall represents the totality of the economic picture in Ireland?

The fact that much store is put in the opinions or positions of financial markets – like the bond market – ignores the fact that it was the financial markets' inability to assess risk that caused the bubble in the first place. These were the same guys who financed Irish banks up to the very last minute, who drove up stock prices to stratospheric highs and who have revealed a profound inability rather than ability to assess hazard.

So having failed so miserably to predict the future on almost every measure, we are now supposed to prostrate ourselves in the face of their wisdom?

So what does all this mean? These types of deals whereby everyone tries to buy time are regularly described as "kicking the can down the road". But what if the truer metaphor is "rolling a giant snowball down the hill"?

What if we are simply storing up problems and, rather than facing facts now, we shove the responsibility on to our children?

Supporters will counter the "future generations" argument with the response that while we may be storing up more problems ahead, isn't it just human nature and good economics to kick things out a bit? Don't we all tend to do this when in a bind, we buy a bit of time, we try to sort things out and hope time will heal?

Supporters will point to the fact that the creditor in this case accepts that he will not be paid back when he thought he would and the debtor is given a bit more time. The logic of this argument is that if the financial markets are prepared to back these types of deals and finance the State, surely this is the best option?

I can buy this line of thinking except for the fact that what hasn't been mentioned in all this is the economy itself. The Irish economy may emerge from the bailout unreformed and weaker, unlike the original plan. The "insiders" – those with a stake in society – have moved to protect their interests despite austerity. The "outsiders" – those without a stake such as the young and unemployed – have truly shouldered the burden.

In the end the country won't be more competitive, but less competitive because the people who want to, and can, make a difference don't have the capital or are simply not here anymore. Capital is still tied up in a dysfunctional banking system and the mass emigration of the young, educated population weakens growth prospects in the years ahead.

In contrast, the problems in the economy – such as carrying a big expensive public sector with a smaller tax base, carrying huge mortgage arrears, which is still destroying domestic demand – have not been addressed.

SO, like George Bush declaring victory in Iraq prematurely, victory is declared but there is no real victory at all. All that has happened is the debt pack is reshuffled to avoid a principal default but the economy is not just fragile but less able to take on the challenges of the globalisation.

In a sense this might be the worst of all worlds – a fictitious victory based on kicking the debt problem out to future generations, high fives from Europe, slaps on the back from the financial markets, a herd that will change their minds in an instant, while locally, the same old snouts remain in the trough.

That outcome would truly be hard to take. The crisis and the opportunity it presents to really change is wasted, the bill is given to the next generation and a bit of financial jiggery pokery is dressed up as a game changer when, in fact, nothing has changed.

www.davidmcwilliams.ie

Irish Independent

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