Friday 22 March 2019

Paying €1.1bn to bondholders is con job

Paying off private investors who took a risk while the State cuts funds for training disabled teenagers is obscene, writes Stephen Donnelly

THIS week, we're all going to be taken for mugs. Again. Over the next four days, €1.1bn will be paid to senior unsecured bondholders in the former Anglo Irish Bank and Irish Nationwide Building Society. Last year's election was meant to put a stop to this type of grand theft. Sadly, nothing has changed. If this Government is ever going to get a significant deal on the debt, it should act like its debts are unsustainable, and take a look at the credit history of our European partners.

The Government won't ask who this week's bondholder winners are, but there are some things we do know. The bonds were bought from Anglo and INBS in 2007, at the height of the property bubble. They offered higher profits than buying Government bonds, as they didn't come with a Government guarantee. If the people buying these bonds did their homework, they would have noticed that Anglo and INBS were massively exposed to the Irish property market. They will have read the IMF's warning of the "possibility of an abrupt unwinding of the housing boom". They would have known that the higher potential profits offered by Anglo and INBS came with the clear possibility of losses.

Indeed, some of the bonds will have been sold on by the original purchasers at a loss. When this happened, the European financial system did not collapse, the ATMs did not stop working. Instead, speculative investors bought them, gambling that the mugs of Europe would pay up. This week their gamble pays off. Yet again the Ferrari showrooms in London, New York and Tokyo will toast the Irish.

We will borrow the €1.1bn to pay these investors. At the troika lending rate of 3.5 per cent, this largesse will cost us €40m in interest payments, every year, forever.

This comes at an enormous human cost. Recently, the HSE told the parents of disabled young adults in Wicklow that there was no longer any money to fund rehabilitative training for their children. In previous years, when the teenagers graduated from school, they spent one or two years with a rehab provider. The provider, Sunbeam House, has places available, but the HSE no longer has the €14,000 per teenager required. I spoke with the father of a teenage girl graduating this summer. I saw a report, by an educational psychologist, as to the level of support his daughter needs. It makes for sobering reading. We no longer have the €14,000 she needs. But we'll find the €1.1bn, and we'll pay the €40m every year in interest. As of last Monday, there were 19 young adults in this situation in the Dublin/Mid-Leinster region. The €40m would pay for their training for the next 150 years.

The Government has reduced welfare payments to single parents, cut support to the disabled, removed staff from Deis schools and introduced regressive charges. At the same time it incurs enormous interest payments to cover the losses of private sector investors who knew they were betting on a risky venture. We thought we were putting a stop to this in the last election. Here's what Michael Noonan said about it in the Dail just two months before becoming Minister for Finance: "The Minister for Finance (Brian Lenihan) reduced social welfare payments, punished the blind, disabled, widows, carers and the unemployed and he taxed the poorest at work, and for what? It was so that the taxpayer can take on liability for debts the country never incurred and arose from private arrangements between private institutions. What a disaster and an obscenity."

Why then is it going to happen again this week? Because this Government believes the cost of not paying the bondholders would be far greater. That the European powers would cut off the troika funding and collapse our banking system. This Government asked for permission to impose losses on bondholders, and Europe said no. The Government has long since stopped asking. They have stated publically that they intend to cover in full the invested capital of senior bondholders. Having failed on bondholders, they are now trying on the promissory notes.

If we are to achieve a deal on the debt, be it through bondholders or promissory notes or a Greek-style writedown on the total debt, we need to understand why Europe continues to say no. Why did they force Ireland to take on so much debt that we ended up in an IMF mission? Why did they so utterly distort the market-based system, and force us to socialise massive private sector losses?

Nobel laureate Joseph Stiglitz commented last year that "Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks. Ireland's done all the wrong things, on the other hand. That's probably the worst model." Dr Stiglitz is a smart guy. Why force a country into what he describes as 'the worst model'?

Partly, it's because our European partners probably don't believe our debts are unsustainable. When they look at Ireland, they see a government which this year is awarding €180m in non-performance-related pay rises to its employees. They see a wide range of state agencies increasing their spending. They see a government paying some professions twice what they pay them in their own countries. In the past four years, about €1bn has been awarded in pay rises to state employees. How can we credibly argue that we can't afford to pay the bondholders when we keep giving ourselves pay rises?

Partly, it's because we've been conned. We've all heard the stern line taken by the 'core' European countries and the ECB -- you must pay your debts, moral hazard cannot be tolerated. Our leaders have bought this hook, line and sinker.

A few months ago at the Finance Committee, it was put to Michael Noonan that he should seek a €75bn reduction in Ireland's debts. He replied that in Europe they would think him 'deranged' if he made such a request. Would they? Germany defaulted in 1932, 1939 and 1948. Austria defaulted in 1938, 1940 and 1945. Russia defaulted on $40bn in 1998. It also defaulted in 1918, 1947, 1957 and 1991. Icelandic banks defaulted on $85bn just four years ago. They now have half our unemployment rate and enjoy solid economic growth.

Michael Noonan is correct on one thing: paying €1.1bn to anonymous investors, while at the same time cutting funding for disabled teenagers, is "an obscenity." If we are to stop this madness, we must convince those we are negotiating with that we are not needlessly spending money. And we must stop stating that we will pay all of these debts. In extreme crises, writedowns of debt are the rule rather than the exception. Our European partners can only agree -- it's exactly what they did, when faced with the same situation.

Stephen Donnelly is an independent TD for Wicklow and Carlow East

Sunday Independent

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