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Bondholders expect to get burnt -- it's part of the game

'They look like f**king eejits paying it off. This is a game, and they need to start playing it."

That's what one of the best financial brains I know told me when I asked him about us -- the taxpayer -- paying off private bank debt to bondholders, whether via the ECB/IMF/EFSF or not. This is a guy who knows private sector bondholders backwards. He has worked with them for years in mergers and acquisitions and he points out that haircuts are an accepted part of the game when things go wrong. And not only will the big private equity houses like Blackstone and KKR accept a haircut when things don't work out, they'll be back again to fund the next merger or acquisition. Because it's just part of the game. You win some, you lose some, but you don't stop playing just because you lose now and then.

We have a remarkable situation in this country right now. Economists from the right and the left all over the world, all the non-establishment economists in this country, and a big majority of the people agree on one thing: Not only can we not afford to pay off those who recklessly lent to Irish banks, neither is it moral that we should.

Increasingly everyone agrees that given our growth rates, our inflation rates and their interest rates, this economy will never be able to get out of a hole while it has to pay off not just the sovereign debt we have incurred by overspending for the last while but also the billions that we never incurred, which the IMF and EU forced on us to pay off German banks that had lent recklessly to Irish banks the same way they recklessly bought up so much US subprime debt.

So impossible is it for us to pay off this debt that increasingly, no one believes we will. In a Bloomberg survey of global investors recently, 53 per cent of them thought that Ireland will default. The cost of insuring against the non-payment of debt from Ireland suggests a similar 50/50 chance of default.

But putting aside what will actually happen, just as important right now is what people think is right and wrong in this country. Irish people have always thought it was right to pay off our debts. But now people here firmly believe that it would be immoral for us to pay off this debt. It's not our debt and we shouldn't have our lives crippled by it.

Yet, the only party in this country that is vaguely articulating this view, albeit in a crazy way, is Sinn Fein. The political parties here are pussyfooting around with the small stuff while the single most important issue facing us now is whether we make f**king eejits of ourselves by paying off this debt, debt that isn't even ours, or whether we learn to play the game.

Unlike some, I'm not overly worried about Sinn Fein doing well in this election. They won't. People aren't daft.

While Adams will get in in Louth, his condescending and ill-informed attitude to this country will continue to do huge damage to Sinn Fein nationally, same as it did last time. The Sinn Fein brand is hugely tied up in Pearse Doherty. And while people may get an occasional warm feeling toward Sinn Fein because of him, when they go to vote Sinn Fein and realise that the nice, handsome, smooth Doherty is not their candidate but they are in fact looking at voting for some other person, who they may suspect has a past, they will not actually do it in the end.

But you can't deny that right now, with their Europhobic noises, and the fact that they are the only ones really reflecting what people feel in their guts about paying off the bailout, SF, bizarrely, could be said to accidentally have their finger on the pulse.

Let's put aside for a moment that fact that Adams's bailout plan is completely insane and would ultimately leave us like a Soviet bloc or third-world country. If you're only half listening and you hear him giving out about the bailout, and you don't bother to look into it, you might think you agree with him.

What needs to happen now is that one of the major political parties needs to wake up and muscle in on this territory. Fianna Fail we can put aside. Let's face it Fianna Fail doesn't want to be in Government and they're not going to be. They are also in a bind. As much as Martin has managed to wash his hands of many of Fianna Fail's sins, he has clearly decided it would be a step too far to suggest they could do a better deal than they did when they were bounced into the bailout. They are stuck in a Catch 22 where they have to stick to the line that this is the best deal we could have got and it can't be renegotiated.

On Friday, Martin appeared to cop on where everyone else was at and he talked vaguely about a broader consensus-style renegotiation. He didn't go into detail. So let's put FF aside for a moment as irrelevant to this discussion.

Like most things with the Labour party, it can be difficult to see what they feel about all this. Since the bailout deal was done, Gilmore and Joan Burton have asserted that it needs to be renegotiated. It is hard to fathom exactly how they will specifically do this but they seem to roughly mean a renegotiation of the interest rate. But then on Friday Ruairi Quinn seemed to back off on this and he dismissed Gilmore's 'to Labour or to Frankfurt' talk as campaign posturing.

And then there is Fine Gael which, as we all know, has already been over to Europe to make noises about a renegotiation of the interest rate. It's fighting talk, but it doesn't really tap into the public mood the way the Shinners do. Most of us are now aware that the numbers on cutting the interest rate a bit aren't too impressive. Getting an interest rate cut is at best a timid effort. And depending on who you listen to, Europe is either going to already do that anyway or else it is impossible no matter how much we ask because our interest rate is part of a European-wide formula that cannot be tampered with.

So that leaves us with Sinn Fein and a host of top international and Irish economists and most of the Irish people on one side, and Fine Gael timidly on the other side, Labour in a kind of vague space out the left, and Fianna Fail not really wanting to be in the picture.

So essentially, if they want to take this crucial issue off Sinn Fein and achieve the kind of huge populist vote they can get in this election, Fine Gael needs to get a bit bolder on the bailout and it needs to stop asking and start telling. Fine Gael needs to start playing the game, and the game is hairdressers.

The main reason why some kind of renegotiation of debt, in the sense of a haircut to bondholders, is never properly discussed in this country is because we keep getting told: "You can't do that." But who says what we can and cannot do anymore? All the rules have changed and are up in the air. Equally you would have said before that you cannot make a people responsible for the private speculation debts of European banks. But they did that didn't they? Capitalism and the state didn't used to get entwined like this but they did. All the old sacred cows are gone out the window now.

And let's not forget that Anglo, in terms of some of its debt, offered some bondholders a massive haircut or nothing recently, and -- surprise, surprise -- they took the haircut.

Haircuts are a fact of life in the private sector and the people being paid back here are ultimately the private sector. And we are among the only eejits in the world paying back 100c on the euro on debt that went disastrously wrong.

There is a story in Michael Lewis's Vanity Fair article on the fall of Ireland of a former senior bond trader in Merrill Lynch who got caught with a pile of bonds in Irish banks on September 29, 2008. He had been trying to sell these bonds back to the bank at 50c on the dollar. That is, he was willing to take a 50 per cent haircut just to get out of it. That guy woke up the next morning to find his bonds were worth 100 cents on the dollar. He couldn't believe his luck that our government had guaranteed them.

The point Lewis is making is that no one in the world of the private sector expected 100c back in the dollar on debts that went disastrously wrong. And then along we come like alter boys and insisted on crippling ourselves to pay back everything. By the way, if you haven't read Lewis' article you should. Putting aside a tendency toward Paddywhackery and slight errors, it is the most embarrassing thing you will ever read about yourself. Like someone writing a blow-by-blow dispassionate account of everything you did the night before, read while you have a hangover and the fear. But worth reading.

The big argument against some form of restructuring is that no one would lend us money anymore. But then, that has happened already. And given the unsustainable position we are in with our current debt mountain, we don't represent a good bet. Adams is right when he says that if we were to deal with the current debt overload we would have a better chance of getting loans in the future. We just need to play the game. And the game that everyone understands in the world of finance is haircuts on bonds. It's not actually breaking the rules and even if it were, the rules are being changed all the time. as Shane Ross has pointed out. Why is it wrong to default on debt now but it won't be in 2013?

Someone needs to take this election by the scruff of the neck. They promised us real debates on real issues but so far it's been the normal pussyfooting. Someone needs to be bold and look at the bigger picture. Before he became the heir apparent I seem to remember Noonan talking about burning bondholders. Just a few weeks ago he wrote in this paper that "Irish and other European taxpayers can no longer be expected to carry the can for reckless lending between Irish and other European banks. It is a basic rule of capitalism that if you lend recklessly, you must take the consequences.

"Fears about the implications of bank-debt restructuring for European financial instability are probably over-cooked. A large proportion of unsecured Irish bank debts have already been sold on -- at significant haircuts -- to private clients and hedge funds in London and elsewhere, who hope the Irish State can be pressed into honouring these bank debts in full."

It would also do Enda Kenny the world of good to be seen to be doing something bold and visionary, something that could save all our asses. And he doesn't need to call it an incineration, just a little haircut. And don't ask Europe. Because they'll just tell us we can't. Let's just tell them this time. Tell them that this is how it works in the world of private debt.

And when Barosso and Trichet and Lorenzo Bini Smaghi tell us its our own fault and they're not for turning, we could always remind them that our bubble had a lot to with the cheap interest rates Germany needed to pay for reunification back in the good old days and they essentially owe the rest of us one.

Sunday Independent