FOREIGN debt is higher in Ireland than anywhere else in the eurozone. Based on figures published last year, the average foreign debt per capita in Portugal, Italy, Greece and Spain (the Pigs) was less than €38,000.
In Ireland, it was more than €390,000, more than 10 times what the average Pigs owe. Their average debt to GDP was close to 240 per cent, while ours was more than 1,000 per cent. It was criminal for the government to place this burden on the Irish people and we are fools if we let it continue. If ever there was an exceptional case to mutualise debt in the EU, it must apply to Ireland.
If the Germans, French and British shouldered their share of our international debt, the burden would be manageable. The most we can hope for, on our own, is to pay the interest. There isn't enough money to pay back the capital. There is a lot of talk about mutualising debt in the EU. One example of this is the concept of a common euro bond. Governments raise funds by issuing bonds. If the economy is strong, it can borrow at low interest rates. Germany can issue bonds without paying any interest because the investor is more interested in protecting capital than whatever interest it earns.
A euro bond would treat the EU or the eurozone as a single financial area. While countries such as Greece and Ireland may be subject to high interest rates, if they can borrow at all, the EU as a whole would pay less because the financially sound countries reduce the financial risk for the group as a whole. In theory, even the weaker countries should be able to secure funds in the open market, because we have all signed up to a policy where banks do not default. It drives our success in the IFSC. The problem is that markets are not convinced that default will be avoided.
The obvious thing to do when default became possible was to mutualise the debts if financial markets were to be reassured. But the powers that be realised they didn't know the extent of the problem, so they would not commit themselves. On the one hand, lax financial regulation allowed the debt burden to spiral out of control. Governments, such as in Greece, had not been honest about their own economic circumstances. Meanwhile the EU prevaricated while it tried to keep a lid on the problem.
EU countries that are financially sound would be forced to pay higher interest charges on their borrowings when they raise funds by issuing common euro bonds. It
would be a small price to pay if they can avoid being lumbered with the debts of the peripheral countries. But they have dithered, and even if euro bonds become a reality, financial markets will demand higher interest rates than were possible before. At present, we can only expect euro bonds to reopen the door to financial markets. Euro bonds do nothing for the overhanging debt. In Ireland's case, this is the real problem.
Euro bonds might help us get access to financial markets again, but we need mutualisation of the debts themselves if we are to get back on the road to recovery. It might be too late for unsecured bondholders to take their losses. But it is not too late to mutualise the debt and let the authorities in the EU carry their share.
Ireland was too small to provide the funds to bankroll the madness for which we are paying. It took countries with populations far greater than ours to come up with the funds. The only hope of restoring what we had is for the same countries to share the losses.
Debt mutualisation is not even on the agenda. Paying back unsecured sums to bondholders is taking away the resources we need to revitalise the domestic economy. We might balance the budget over the next few years, but it will drive a wedge between those who have and those who have not. The solutions are there, but the EU refuses to accept them. Bank debt could be mutualised all over the EU and across borders. This would involve the foreign banks bearing their share of losses in the weaker nations. It could fix the banking crisis across the wider EU network without shifting the burden to innocent citizens who didn't create the problem. The ECB would be the mediator to stabilise the banks.
Spain is an example of a country with moderate national debt, but bank debt and the unquantified losses will destabilise the economy. Just as we did last year, the Spanish banks are undergoing independent review to establish the real size of the problem. It could take €30bn-€100bn to stabilise the Spanish banks, maybe a whole lot more. The financial crisis has highlighted the weaknesses in the European banking model. They had lofty ideals, but not everyone upheld them. Even those who did took advantage of the rest.
The common policy of financial regulation in the EU should have protected private citizens in every country. But when the flaws were identified, the financial regulators washed their hands of the problem and forced governments to fix their own broken economies.
The austerity measures that this required has cut spending power and weakened the affected economies even more. While individual countries don't have the resources to go on without help from outside, if the EU banks were taken as one, they would be stronger than those in the United States.
The stronger economies are sheltering their banks from international losses by forcing countries such as Ireland to accept bailouts subject to unreasonable terms. It was hoped that economic recovery would have made this sustainable by now. Those who are calling the shots are committed to this strategy until 2015. By then it will be too late for us. We have already paid back most of the unsecured bondholders. Our Government nationalised what was an EU-wide problem when it recapitalised the Irish banks so that they could meet their financial commitments.
The only thing holding us back is the unreasonable financial burden we are carrying for foreign banks. It is inevitable that the Spanish will get a better deal, and we might even piggyback on theirs. After 2015, EU banks may be forced to cover their own losses, without recourse to the sovereign or its citizens. Meanwhile, we are paying too high a price. The Government has been as impotent in its endeavours with the EU as it has been in its negotiations with the public sector. The Government is required to come up with at least €10bn in savings to rebalance the budget to acceptable levels. It cannot be done without creating undue hardship.
There is nothing more we can do to show our commitment to the EU. But at a national level, we need to get back control. Higher property taxes and water charges are already on the cards, and that is only the beginning. The Government's Jobs Initiative has fallen short of what we need. We might have the best educated unemployed workforce in Europe, but what's the point if everything we earn goes to pay back someone else's debt? Gold stars count for nothing outside the classroom. Spending on welfare, health and education will take a hammering in the next budget. It's a pity we didn't cut out the waste when we had the chance. The decisions are no longer ours.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning