Monday 23 September 2019

Stephen Kinsella: How -- not if -- we repay debts is the key issue

Stephen Kinsella

In complex negotiations it may be very difficult to figure out which side has won. Sport doesn't have that problem. You have two teams, a simple point-keeping system, and we know if one side or the other has won, lost or drawn.

Ireland is currently negotiating with the European Commission, the European Central Bank and the International Monetary Fund, over the repayment of €3.1bn of 'promissory notes' due at the end of March from a total of €31bn. These are the most important negotiations taking place in the State at the moment. At issue is not whether Ireland should repay this money, but how it repays the money, and when it repays the money. So what does success look like in this negotiation?

Promissory notes aren't complicated things. They are simply IOUs written by the Finance Minister that allowed us to continue to fund Irish banks when no one else would. No prizes for guessing that the taxpayer has to pay these notes back, either with taxes or borrowed money. As they are repaid, the balance of the exceptional liquidity assistance, the funding the banks borrowed from on the Irish Central Bank, will be reduced over a 15- to 20-year period.

Remember: the only reason the banks are solvent and liquid in the technical sense of those words is because of the largesse of the Finance Minister.

The taxpayer must underwrite the repayment of €3.1bn each year. Ireland's debt to gross domestic product ratio stands at 107pc, and is projected to stabilise at 119pc in 2013 by the National Treasury Management Agency, very close to what many macro-economists consider unsustainable levels. Without the borrowings to bail out these bust banks, our debt to gross domestic product ratio would be around 85pc, far better than most European nations. It's worth repeating the point: without the banks on our backs, Ireland would be in a much better position to return to the bond markets in early 2013.

The troika knows this, and wants us to succeed in getting through the programme, because if their austerity policies don't work in a small, open economy like Ireland, they won't work anywhere.

I'd say they don't fancy giving us any more money, either.

So, there are a few options in the negotiations. Do nothing, and make Ireland pay back the €31bn plus interest. Find a way to defer or defray some of the interest cost, defer the payment for a few years, or write the principal down somehow. The first and last options aren't really runners.

Only deferment and interest cost writedowns are on offer, I'd say. The balance sheet of the IBRC (formerly Anglo Irish Bank) would have to be changed significantly for any of this to happen.

So if a minister comes back from Frankfurt with a deal whereby the interest cost on the promissory notes -- some €17bn -- has been reduced somehow, is that success?

It is not.

The interest costs essentially boil down to one part of the State -- the Department of Finance -- paying another part of the State -- the IBRC. So we should focus on the total capital reduction, and not a writedown in interest payments.

Success means the State borrowing less in the medium term to fund the repayment of promissory notes written to heal the balance sheets of speculative investment banks.

It is also very important in negotiations to note the divergence at times between what your opponents say, and what they do. For example, the ECB said on May 6, 2010, that under no circumstances would they intervene in government bond markets.

On May 10, they were in the market buying Greek bonds under the securities and markets programme. Similarly, the ECB has mooted a range of divergent treatments for peripheral nations, including Greece, Portugal and Ireland.

Our ministers must define for themselves what they mean by success in this debate.

Stephen Kinsella is a lecturer in economics at University of Limerick

Irish Independent

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