Monday 22 January 2018

Dan White: Bank debt must be written down by €35bn

Dan White

Dan White

With the Government's borrowings set to exceed €200bn by the end of next year we desperately need a deal on bank debt. Unless our European "partners" agree to a deal that writes down our bank debt by at least €35bn we will never climb out of the fiscal hole, no matter how many hairshirt Budgets we are subjected to.

Documents published by the Department of Finance along with last week's Budget show that Government debt will be almost €192bn by the end of this year, up almost €23bn over the previous 12 months. And it's still climbing. Despite another savage Budget, the department is projecting that the debt mountain will be over €203bn by the end of 2013. If that sounds like a heck of a lot of money it's because it is. At the end of this year government debt will be the equivalent of 118 per cent of GDP and, even on the basis of the department's optimistic growth forecasts, will hit 121 per cent of GDP by the end of next year.

And that's barely the half of it. As anyone who keeps even half an eye on these matters needs no reminding, by including multinational profits, GDP massively overstates the true size of the Irish economy. GNP, which excludes multinational profits, is a far more accurate yardstick. Government debt will be 147 per cent of GNP by the end of 2012 and almost 152 per cent by the end of 2013.

The notion that we can extricate ourselves from this situation without a major debt write-down is utterly fanciful. Which is where the €64bn of Irish bank debt comes in. Ever since November 2010, when the worsening plight of the Irish banks allowed the ECB to bounce this country into a "bailout", in reality making the Irish taxpayer liable for the banks' debts to British and mainland European banks, it has been clear that one of the keys to any long-term solution to the problem will be a restructuring/writedown of the bank debt. With our bank debt standing at 48 per cent of GNP something has got to give.

If we are to have any chance of eventually paying our way in the world, a major write-down of our bank debt is absolutely vital. However, the path to a writedown of Irish bank debt is currently blocked by the opposition of Germany and other EU creditor countries to writedowns of debt owed to official creditors, such as the EFSF (AKA the bailout fund), the ECB and the IMF.

So how do we square the circle? Send for that well-known financial expert Buzz Lightyear. Movie buffs will no doubt remember the Toy Story character's catchphrase of "to infinity and beyond". Well that's what we need to do with Irish bank debt – stretch the repayment period as far as possible into the future and cut the interest rate we pay on that debt.

As things stand, we pay an interest rate of about 3.25 per cent on the €67bn, which the troika has lent us (about 80 per cent of this money, €54bn, has already been drawn down). This money is due to be repaid in 15 years.

Given the magnitude of our banking and economic crisis, proportionately the worst endured by any advanced country since the Second World War, this repayment period is far too short and the interest rate is way too high. So how long should the repayment period be and what interest rate should we be paying?

A possible template is provided by the post-war Marshall Plan when the United States gave over $13bn in economic aid to Western Europe. Most of the Marshall Plan money, including all of the $133m which this country received, was in the form of loans rather than grants. These loans were repayable over 50 years at a 1 per cent interest rate.

If our loans from the troika were to be restructured along Marshall Plan lines, a much less messy process than offloading Nama, IBRC, the promissory notes and various other bust banks on to the ECB, we could achieve a de facto write-down of our banking debt while still sparing Germany's blushes.

As the various arms of the troika borrow in the market, the 3.25 per cent interest rate it charges us is a reasonable approximation of the market interest rate. If the repayment period on our loans was extended to 50 years and the interest rate cut to 1 per cent, the present value of those loans would, if we used a 3.25 per cent discount rate, be reduced by about 55 per cent or €37bn.

However, this wouldn't be a formal writedown, so German Chancellor Angela Merkel wouldn't suffer any embarrassment. Reducing the interest rate would also have a more immediate impact by cutting the annual cost of servicing our troika loans from more than €2bn to less than €700m. The sooner Michael Noonan sends for Buzz Lightyear the better.

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