Monday 11 November 2019

Brendan O'Connor: Deal just doesn't add up fully for us ordinary folk

A few simple questions about this grand new debt arrangement

Brendan O'Connor

Brendan O'Connor

It was truly another great day for Ireland. It was momentous. It was a turning point. And it was exciting. Late-night Dail sittings, rumours about rumours. And it was satisfying. We finally got to put an end to that awful chapter in our history that was Anglo Irish Bank.

But it was also confusing for us ordinary folk. Never mind that we still don't fully understand why IBRC had to be put into special liquidation at this very specific moment. We were told it was because of the leaks, to protect the assets. And we said yes, we understand why you were pushed into doing it. But why, in more general terms did it have to happen at all in conjunction with the ending of the promissory notes?

It seems to be connected with the ending of the Emergency Liquidity from the ECB and the passing of the promissory notes into the ownership of Nama. But to be honest, it's vague. And even with these complex finance things, if something is vague, you will usually find there is something that doesn't 100 per cent add up. As confusing as it can be to understand this stuff, it should make sense. You have to wonder if the banishing of IBRC was partially just a bit of showbiz. Because this whole thing has had an uncomfortable sense of showbiz, with many ordinary people having their questions brushed aside with grandiose statements and assertions from politicians. If you need to ask, you don't get it, is roughly the vibe. Stop spoiling the fun.

I do not claim to know anything about all these matters, as most of us don't. But there are some things I don't understand and maybe someone can explain them.

Firstly, there is the fundamental question of "This was the best we could ever hope to do", or "There was never any question of a debt writedown". Why is everyone suddenly agreed that this was the best we were going to do? Am I gone crazy or were we not led to believe that we were going to get some of Anglo's debt written down? Were we not led to believe that we shouldn't and wouldn't have to pay off the debts of a private bank? Am I mad in thinking that the whole point was that Europe had forced us into the position whereby we assumed Anglo's debts and that we were trying to change that situation? And now it turns out they never even asked for a write-down because that was never going to happen?

I first became aware of this shift a few weekends ago when there was a discussion on Claire Byrne's RTE radio show on Saturday about the promissory notes and Joan Burton referred to a writedown on that debt as a "default". So now we are celebrating that we have assumed Anglo's debt totally and utterly and to look for a writedown on this debt that wasn't ours and that we assumed in order to save Europe, would have been to go rogue and to default.

The other big new truism that no one told us before was that it doesn't matter what size your national debt is, no one cares about that and no one ever pays off their national debt. All that matters is that we don't have to pay it off right now. Am I wrong or did we not used to think that the size of our national debt was enormous and unsustainable and a source of worry? We are, I believe, one of the top five most indebted nations in Europe and our debt is five or six times what it used to be. This is coupled with personal debt that is nearly equal to our national debt. Does none of this matter anymore as long as we don't have to pay it back right now? In that case, should we just borrow more and more money? As long as the terms are right?

Speaking of which. Another stupid question. Michael Noonan and his colleagues have been portraying the new deal as basically free money. Michael Noonan likened it to buying his house for a few grand and then how 20 years later, that few grand was a pittance. Ah, the marvels of inflation, the rain that will come and wash all our debts away.

It feels like Noonan and others have just discovered the fact that the real value versus the nominal value of money goes down over the years. And, God bless him, he seemed so thrilled to have discovered this idea. Clearly he has never had an interest-only mortgage like many people, whereby you just paid down the interest and then you paid off the capital at some unspecified date in the future, when you would be able pay it out of your spare change.

But what I don't understand is this. We all know that inflation can make the same amount of money be worth less in the future. But if you have a very powerful institution whose sole remit is to keep inflation to a minimum, like, say, the ECB, is that not going to limit how much less your principal will be in real terms in the future? Also, do interest rates not roughly go hand in hand with inflation? Therefore, if there is inflation of, say 12 or 15 per cent, the kind of inflation that really wipes away debt, the kind of inflation that Michael Noonan might have seen, at times, during the period of his mortgage, does that not mean you will also have enormous interest rates, up in the teens?

But no, we are told, the effective interest rate on the new deal is only going to be 1 per cent, because effectively, the interest rate the Government pays the Irish Central Bank for the new bond will be the ECB rate plus the premium people demand to lend to Ireland. So say that rate is the 3 per cent, but the Central Bank is only paying about 1 per cent to the ECB for the money, the other 2 per cent we pay to the Central Bank is actually paid back to the State the following year as a dividend. So we are, in fact, profiting from loaning money to ourselves.

But that is still a variable interest rate. ECB rates are at an all-time low at the moment. Does the Government really think that interest rates are going to stay at this level forever? That's dangerous thinking, as anyone who has had a hike in their interest rate or who has moved off fixed or a discounted variable will tell you. A tracker, which is essentially what we have on this, is a great thing when interest rates are low and the threat of inflation is minimal, but things change. And if Noonan is to get that inflation he wants, he could also get higher interest rates, couldn't he? And aren't inflation and higher interest going to happen eventually if the world keeps pumping money into the system? I don't understand these things fully. I'm just asking.

There is one other bit I don't understand about the cheap interest rate of 1 per cent. That will happen as long as ECB rates don't rise, and as long as our Central Bank owns the new bonds and gives back the profit it makes from the interest payments. But our Central Bank will not hold these bonds forever. In fact, if you average it out, the Central Bank will hold the bonds for less than half of their life. John Moran, of the Department of Finance, said on Thursday that the average weighted amount of time the Irish Central Bank would hold these bonds was 15 years (though they will be sold in dribs and drabs down the years, let's take the average for simplicity). Now the average length of time before the bonds mature is 34 years. Therefore while the Government will get back the premium on the interest rate for 15 years, while our own Central Bank holds the bonds, for another 20 years they will pay the full whack of interest to some investors, with none of it coming back to us. So really, is it wrong to portray these bonds as having an effective interest rate of 1 per cent?

Look, no one is denying that it is a great thing that we will have to borrow €20bn less over the next decade. It is also great that we will apparently save a billion a year, though we will believe the softer budgets when we see them. Remember, the less euphoric civil servants keep stressing that this is only one variable in making up what we need to do in the budget, and also our budgets will increasingly be written by Europe anyway, even when we come out of the bailout. That's just how it is now. That's what we've signed up to with the fiscal compact, etc.

But amidst all this euphoria, does it not make you feel slightly uncomfortable? Does it not remind you of what got us in trouble in the first place? When you see a Minister for Finance, who seems, frankly, a bit high, boasting that managing to borrow a load of money is essentially getting free money. Apparently interest rates are never going to go up and paying off the principal will be a piece of cake, and anyway, none of us will be around then. And it doesn't matter how much money you owe as long as you don't have to pay it back right now. It almost seems we are back to the days when debt was a good thing. And then there's that other uncomfortable point, the point it's hard to forget – this is not our debt.

We all hope this deal is as good as we're being told it is. Like the French revolution, it's probably too early to say. And the truth is, Noonan and most of his colleagues and many of the capital markets people, won't be around to find out how this works out. It is beyond their time horizon, as they say in investment circles. But for now, the Government and their supporters are euphoric, and all is well. Paddy pulled one over on the ECB. Who's laughing now?

Irish Independent

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