Friday 22 November 2019

Stephen Kinsella: Prom notes are gone but the legacy remains

THE eurozone's problems will not be fixed with a banking union, nor will they be fixed with a renewed wave of cross-border regulation.

As economist Paul DeGrauwe puts it simply: "The euro is a currency without a country." At some point, if the euro is to survive, the ability to directly tax eurozone citizens will become necessary.

No one outside of Europe's elites particularly wants this, least of all the people who live within the eurozone, many of whom already identify the eurozone's institutions as having a democratic deficit. Presumably, Europe's elites will want to continue the strategy of incremental integration towards this goal. But that won't work this time.

The euro is the embodiment of an internal inconsistency, the outgrowth of an economic solution to the political problem of repeated wars. It is no surprise that the euro's institutions were unable to approach a solution to the problem of Ireland's promissory debt until now.

Recent heroic interventions by the European Central Bank, personified by ECB president Mario Draghi, have bolstered confidence that the euro will survive in some shape or form. Yet the key decision makers have only bought themselves time.

The moves towards nearly unlimited liquidity for banks, coupled with the rollout of the European Stability Mechanism, has calmed fears of a contagion effect across the eurozone. And yet today's dramatic developments over Ireland's promissory notes, and indeed the curious fate of IBRC, shows just how unequal and inconsistent relations and outcomes within the eurozone can be.

As with Greece's monetary financing last August, when it needed €3.2bn to meet its creditor obligations, the ECB agreed to increase the treasury bill limit the Bank of Greece could accept as collateral for loans, essentially allowing the Greeks to issue worthless 'T-bills' in exchange for euro, which is monetary financing, or printing money to lend to the state sector. It's illegal under the ECB's rules, and the ECB felt that to do this for Ireland would open up the possibility of a precedent for other eurozone states to access funding in the same way.

At the scale of the eurozone, Ireland doesn't matter; Spain does.

Mario Draghi's decision to allow the conversion of the €28bn of promissory notes into a different type of government bond will allow the funding costs of the State to drop in the short-term. It will also increase the European authorities' sense of certainty about Ireland's budgetary position, and it will allow Ireland to borrow at lower costs in the future.

The promissory notes are gone, but the legacy they represented remains. The Government will be challenged because they allowed this odious debt to remain the burden of the taxpayer, but the realpolitik is that an extension of the repayment structure was the best deal the Government could get.

The extension of repayments will help in the short-term, while Ireland's borrowing requirements will be cut by €20bn over the next 20 years, along with a reduced funding cost from an average of 8pc to 3pc. But this interest rate reduction is a bit of a red herring: we paid a lot of that interest to ourselves, because the IBRC and the Central Bank is a part of the State.

Overall, the debt deal is to be welcomed, but in a guarded way.

The core principle is that Ireland will repay the full amount of this odious Anglo/INBS debt, but over a longer term. Within the parameters of the negotiations set by the Government and the EU authorities, the Government can convincingly claim a win. The Irish people, on the other hand, may think differently as they face paying €28bn plus interest and funding costs from today until the 2050s.

Irish Independent

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