Friday 15 December 2017

Making the case for 'yes'

Yes, let's default (or sort of yes, or even yes, default but in disguise)

OUT-and-out default wasn't a popular option with those we talked to, but a version of it was something some thought should be considered.

A growing weight of opinion favours defaulting on at least some of the Anglo debt. Whether this equates to a sovereign default in disguise is hotly contested. At least part of the €7bn of Anglo debt that falls, due this month, could be repudiated, Stephen Kinsella, an economist based at NUI Galway suggests. "Should we be going to the bond holders saying, 'you're not getting your money'? We absolutely should," he argues. "This would have big immediate consequences for Europe -- but in two years' time we won't even remember that.

"We can't keep going with the gaping holes in our financial architecture like Anglo. We can negotiate a coordinated step down from high-level debt, but it's not an option for the fainthearted. The moment we even think about this, things would go crazy with the markets, but under the normal rules of capitalism bond debtors just have to take the pain."

"The question is," he continues, "is the State's future and the future of the banks to continue to be tied together? If the answer is 'no', we have to ride out the storm of opprobrium that comes with that. If the answer is 'yes', we have to be prepared to take 10-15 years of economic hardship related to Anglo debt."

The end of the bank guarantee this month is an opportunity to renegotiate, Kinsella says. "Go with something like Brian Lucey suggested in the 'Irish Times' last week: we guarantee AIB and BoI and their future liabilities, but for all past liabilities -- good luck and thanks. We would annoy everybody, the ECB, the EC; we'd have to be prepared to take the flack. If Brian Lenihan even twitched, his €20bn worth of Anglo paper would suddenly be worth €5bn."

This is a 'you can't please all of the people's option, obviously, Kinsella acknowledges, "but GNP has collapsed, the domestic economy is in tatters. We just have to be credible with whatever decision we make."

Michael Cummins of financial services firm Glas Securities says other disguised versions of default or at least restructuring could include some kind of debt-for-equity-swap arrangement with bond holders. "Bond holders could be offered equity in the listed banks in lieu of debt payment," he says. "This would be less extreme than wiping them out completely. In theory, something could be structured, but I don't think the Government or the EU is thinking along those lines."

Energy economist Paul Hunt thinks we can't tackle the storm of debt spanners in the economic works without some sort of outside rescue.

"There is no way that Ireland can deal with the fall-out of this banking fiasco relying entirely on its own resources," he says. "The Government has done quite a remarkable job so far -- and it seems determined to keep kicking the can: get a decision on Anglo from the European Commission this month, drive through the Budget in December and hope that the NTMA can get away a sizeable bond issue at reasonable cost early in the new year, etc.

"Meanwhile, the economy is being bled white, so it has to stop at some stage. Applying for EC/ECB/IMF protection would kick-start serious reform of the public, semi-state and sheltered sectors that is so badly needed.

"The Government has nothing left in its tank to tackle these and reforms here would have a greater beneficial economic impact than any limited haircut on the Anglo bond holders."

Sunday Independent

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