At midday on Wednesday, one billion dollars was paid by Irish taxpayers to unguaranteed bondholders in the now non-existent Anglo Irish Bank. Less than one year ago Michael Noonan described such an act as "indefensible" and "obscene". Next year he intends to pay another €2.7bn, with the first €1.25bn coming up in January, straight after the Budget cuts.
The reasons for not paying these bondholders are well known. So let's take a look at the background to these bonds and the reasons given for paying them.
In November 2006, Anglo Irish Bank issued a five-year bond for $1bn (€725m). Professional investors should have known that Anglo was a risky bet. The IMF warned in 2004 of the "possibility of an abrupt unwinding of the housing boom". The Economist magazine and the OECD warned that Irish property was seriously overvalued. By September 2006, even the Irish Central Bank was warning that the economy was "overdependent on the construction sector". So why did they buy them, rather than buying safer sovereign bonds? Profit.
Anglo paid more interest on its bonds than sovereign bonds, because they were riskier. After Anglo was nationalised, many of those bondholders sold their bonds to speculators at a loss. This is critical: the bondholders have already been burned. It is the speculators who we paid $1bn to last Wednesday, and they pocketed vast profits.
Why did so many bondholders sell on at a loss? In large part, due to speeches by the government-in-waiting. Here's what the then Deputy Noonan said in the Dail last December: "What legal or moral compulsion is there on Ireland to honour in full debt incurred by Irish banks when there was no State involvement in the arrangements? These loans were entered into freely by willing lenders and borrowers with absolutely no State participation. The interest rate charged represented the risk at the time and there never was a State liability. It is obscene that the liability for these loans is now being transferred to the Irish taxpayer, in many respects to the poorest of the Irish taxpayers... What a disaster and an obscenity... The position has now become indefensible that the Irish taxpayer, even the poorest taxpayers, should be required to underpin the speculation of hedge fund investors. There must be transparent, open, negotiated burden sharing of bank debt."
Several times in the Dail last week, I challenged Kenny and Noonan as to why they had changed their position so completely. Five reasons were given, only one of which carries any credibility.
1. Contagion: Noonan argued that a default on the Anglo bond would amount to a "second front" being opened on the euro, which could "bring the whole thing down". Emotive stuff, but complete nonsense, and dismissed by himself in opposition. The losses had already been incurred by the original bondholders and fully factored into the market. What was paid last Wednesday was unexpected windfall profits to speculators.
2. Reputation. "Default would mark us out as a country that "won't" rather than "can't" pay our debts", wrote Kenny last week. This, he said, would "kill off" foreign direct investment (FDI) and result in higher borrowing costs for the State and Irish businesses. Both untrue. Firstly, there is no evidence that FDI would suffer. International corporates know that this was never our debt. Secondly, paying these bonds is what causes the higher borrowing costs -- it is why we were locked out of the markets in the first place, again, as argued by Noonan in opposition.
3. The ECB. It has been repeatedly asserted that, should we impose discounts on bondholders, the ECB would savage our banking system by pulling the emergency funding it provides. This is the 'no money in the ATMs' line that so many Government TDs are fond of. However, in an exchange with me last Wednesday, Noonan revealed that no such threat, or anything like it, has ever been made by the ECB. This makes sense, as carrying out such an action would cause exactly what the ECB is so desperate to avoid -- more instability in the European banking system. So that's the ATMs taken care of.
4. The Troika. To the astonishment of many, Noonan last Wednesday suggested that the EU/IMF funding could be stopped if we didn't pay the bondholders. As such, he explained, he didn't want to take Ireland "over a cliff". His evidence was a line by the late Brian Lenihan, who told the Dail in December 2010 that if bondholders were not paid, "there would be no (IMF) programme". The arguments against this are overwhelming. There is nothing in the EU/IMF agreement about paying unguaranteed bondholders. The agreement goes into excruciating detail on a wide range of topics. Had this been a condition of the funding, it would be in there. Cancelling an IMF bailout because of a non-existent clause would destroy the credibility of the IMF.
5. Rewards. This is the "softly, softly" argument: that, by continuing to do as we're told, we'll be rewarded in the future with concessions more valuable than the cost of paying the bondholders. This, I believe, is the only argument that carries any weight.
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So, is this argument enough to validate committing "indefensible" and "obscene" acts? Noonan conceded on Morning Ireland that no concessions have yet been agreed. In any event, the Government will claim any future concessions as vindication of their U-turn. In reality it will be impossible to identify what, if any, concessions were made specifically due to paying these bonds.
Ultimately, Noonan said that paying these bonds was "a judgement call", and "the lesser of two evils". I believe he and Kenny to be men of integrity, but many factors suggest that their judgement here is flawed. Three years ago, they both voted for the disastrous bank guarantee. Less than one year ago their judgement was that the bonds should not be paid back. In the past few months they failed to buy the Anglo bonds when they were trading at huge discounts. Had they done so, we could have avoided paying huge profits to speculators last Wednesday. Last week, they suggested that paying Wednesday's bond was not really costing the State anything, as it was being paid out of Anglo resources. Even the chairman of Anglo was astonished at such flawed logic.
As I see it, the best-case scenario is that paying the Anglo and other bonds will contribute to unspecified future savings such as lower interest rates. But at what cost? There is the cost of paying the bondholders of course. But there are other, fundamental, costs.
These payments amount to a corruption of capitalism which, for all its flaws, has led to unprecedented advances in our quality of life. This Government was elected to stand up to the bondholders. How much damage has been done to democracy in Ireland by this extraordinary U-turn? By using taxpayers' money to gift vast profits to anonymous speculators, this Government is undermining the social contract.
Finally, there is a clear public perception that Ireland is committing this "indefensible and obscene" act at the insistence of a European bureaucracy. This seriously undermines the European project, which has helped maintain peace and prosperity for more than 50 years now.
Only time will tell if their judgement call is the right one. For me, the evidence pretty overwhelmingly says that it is not.
Stephen Donnelly is an independent TD for Wicklow