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We can't pay this burden of bank debt, so let's start talking default


RELUCTANT CONVERT: Even Brian Lenihan has shown signs that he is slowly coming around to accepting that bondholders have to share the burden. Photo: Gerry Mooney

RELUCTANT CONVERT: Even Brian Lenihan has shown signs that he is slowly coming around to accepting that bondholders have to share the burden. Photo: Gerry Mooney

RELUCTANT CONVERT: Even Brian Lenihan has shown signs that he is slowly coming around to accepting that bondholders have to share the burden. Photo: Gerry Mooney

THE elephant in the room is slowly coming into focus. Up to now, there had been a bizarre situation whereby most of the international community, from left to right -- excluding those who work for the EU and the IMF -- and a huge majority of the Irish people, knew the level of debt facing this country was not just immoral but also impossible.

Even our great god the markets believed it, the evidence being that they were increasingly pricing in a default of Irish sovereign debt. Our other great god, the EU, probably believed it too, but obviously it couldn't say so. But our politicians, even in a general election, were unwilling to articulate this widely held belief.

We were constantly told we needed to put aside the moral part of it. Apparently morality is not important in these things. Everyone agreed it was wrong in a capitalist society that the debts incurred by a small number of people in the private sector should be turned into crippling public debt. We were just told that this is how it had to be.

But it's very hard to try and sideline right and wrong. These things run deep with people and make them angry and irrational. And irrationality, as we know to our cost in this country, is a far more potent force than logical argument. Suggesting that we put aside morality in one particular case also creates a danger that people will stop obeying the basic rules of right and wrong in other areas.

As we know from our political system, once the moral order is breached, it spreads like cancer.

But even if you manage to put aside the issue of right and wrong, it is much harder to put aside the issue of impossibility. If it is impossible for us to pay this debt -- and practically everyone who knows seems to agree that it is -- then not only is it desirable to do something about it, it is absolutely imperative.

In fact, you could argue that an impossible mountain of debt is actually causing to happen the very things we are told we are avoiding by killing ourselves to pay the debt.

We are told that if we don't stand by our debts, then no one will lend to us any more and the markets won't believe in us. This has already happened. We are told if we don't pay off our bank debts then we won't have a functioning economy and banking system. Already happened.

It was extraordinary that none of the major political parties made debt-restructuring the core of their election campaign. If we look after the billions, the millions will look after themselves. Essentially, the vast mountain of debt this country has, including banking debt, has gone from being the solution to all of our problems to being the cause of them. Our politicians had given no compelling argument to counter that of the collective wisdom of the international economic community, left and right, who overwhelmingly believe that we simply cannot function under our current debt situation.

So clearly they didn't disagree that it was an unsustainable system. And it is certainly a populist issue. But they seemed to shy away from it. All apart from Sinn Fein, who had a fairly radical version of debt restructuring whereby we just stopped paying anyone and became Cuba, a rogue state living off our pension fund, until that ran out. Then we would go back and borrow again or else just stop paying social welfare and nurses' salaries and so on.

But in a strange way, thank God for Sinn Fein and thank God for this election. Because it is slowly forcing our politicians to change their mindset and accept that maybe they need to put the interests of the people of this country ahead of being popular with their eurocrat friends. They are reluctantly accepting that maybe they need to be prepared to be seen by their friends in Europe as being a little bit irresponsible.

So slowly but surely, the wall of silence on debt restructuring is being broken down. While Labour has been short on detail, it seems to be moving from a position of saying we need a better interest rate to saying there needs to be some "burden sharing". This is a healthy journey for them.

The Colm McCarthys of the world all seem to agree that getting down the interest rate in itself is not going to do much for us. But burden sharing could radically change our financial outlook.

Fine Gael has had a slightly more convoluted journey but it too is getting to the right place. When Michael Noonan was safely in opposition, he was making noises about burning bondholders. Then he became a member of a government in waiting and seemed to roll back a bit and took Enda to Europe to talk only about interest rate reductions.

Noonan is now getting with the programme again and Fine Gael too is moving towards a broader definition of restructuring.

However, the party seems to have a way to go on it yet, given that Fine Gael castigated Brian Lenihan on Thursday for deciding not to hand over the cash from the pension reserve fund to further recapitalise the banks. Torn between probably agreeing with what Lenihan was doing and the need to have pops at all costs, Noonan came across as a bit muddled on the issue.

Which brings us neatly to Lenihan.

Lenihan was the last man to come around to making noises about restructuring. You can see why. The bailout was his deal, however reluctantly he had it imposed on him, and it was hard for him to turn around and admit that we could do better.

But some of the exhilarating recklessness and audaciousness that appears to have afflicted Micheal Martin has clearly rubbed off on Lenihan. So Lenihan, in that inimitable Fianna Fail/Lenihan way, didn't talk too much about debt restructuring, he just started doing it.

In fact, he was saying one thing with his words and another with his actions last week. He kept the responsible party line that you can't just go to your bank manager and try to change the terms of your debts, while at the same time, acting downright unilaterally, he started a sneaky default, or at least he opened the door for one.

Defaulting has got a bad name these days because when people mention default they invariably put the words 'ATMs not working' and 'tanks on the streets' into the same sentence. And there's no doubt that to just decide unilaterally to have a full-scale default, as Sinn Fein seem to be suggesting would be cracked.

But there are different ways to skin a cat. Goodbody's stockbrokers pointed out during the week that there is €21.5bn in unsecured senior bank bonds still out there to be paid and that we should pay 50c in the euro on them.

Another option, they said, would be to allow the European Union's rescue fund, the European Financial Stability Facility, to directly recapitalise Irish banks.

Goodbody's pointed out, not unreasonably, that: "If the Irish banks are systemic to the European banking sector, then collective responsibility must be taken for sorting the problems. It is in Europe's interests, as well as Ireland's, that the problem is solved."

Goodbody's also made the point that defaulting on some bank debt could be the lesser of two evils because the longer bank debt remains the sole responsibility of the Irish government and people, the more chance we will be looking at a more radical widescale default on actual sovereign debt, which everyone seems to agree would not be ideal.

Lenihan, in another moment, seemed to agree with Goodbody's and claimed that he was looking for a substantial discount on the outstanding bonds but that the ECB was having none of it.

It seems that two things have to happen here. Firstly, politicians need to start articulating clearly and consistently what they think about restructuring and burden sharing. For example, it seems right now from all the polls and also from this paper's fascinating constituency polls, of which we have more today, that the wind is behind Fine Gael right now.

It is clearly the only party that could potentially form a government on its own and whether Enda inspires us or not, a stable government, rather than a messy coalition of people with nothing in common, is what this country needs now.

If Fine Gael really want, as they say, to form a government on its own, rather than with a lefty rump tacked on, they should perhaps get on the burden-sharing issue with more gusto. Perhaps it should articulate a clear and bold policy about this impossible and unjust debt, bring it to the people, and ask, in return for this promise, that the party be given a clear mandate for a stable single-party government committed to renegotiating our debt.

It could basically make this election a referendum on the bailout and then go to Europe and say: "Look, this is the will of the people of this sovereign republic. This is what they voted for. We are a strong government with a mandate to do this." And then it needs to be unreasonable in the negotiations with Europe. Because being reasonable has got us nowhere.

Secondly, in conjunction with all this, we need to stop accepting this notion of "Oh, you can't default. Full stop". And we need to start getting creative.

Other people are finding their way around things. Kazakhstan, which you may have read about, gave bank bondholders haircuts but sweetened the deal by offering to share with them the spoils of law cases taken against the kind of fraudulent lending that went on in the latter days of their boom, as it did in ours. Growth there is now running at about five per cent.

Denmark let a bank go down recently and the world didn't stop spinning on its axis. Regardless of what they keep telling us, there are ways out of this. We just need to get smart and we need to get smart quick.

Sunday Independent