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Brendan Keenan: Facing truth can set you free, but at what price?


THE truth shall set you free, the saying goes -- but it doesn't necessarily make you feel better. Even if yesterday's figures on the banking costs are, finally, close to the truth they come as a dreadful shock.

Not everyone will agree that even the gross total of almost €50bn (before any savings) is the truth. The opinion which matters, though, is that of the banks and investment funds who will have to lend us almost €50bn over the next four years -- not to rescue the banks, but to keep the country running.

They may be inclined to believe the figure. It is close to that calculated by the credit ratings agencies, and by those economists who were regarded as hopeless pessimists.

It recognises that the development loans being take over by NAMA are worth not much more than a third of the value which the banks originally put on them. But the truth is also expensive. The worse the losses at the banks, the more capital they need now to keep them solvent.

Not all of it goes in at once. Anglo may collect its government money over 10 years or more. But there is more truth-telling in the Budget figures, where Brussels has insisted that the costs appear at once on the book.

That gives the literally incredible figure that the deficit this year will be over 30pc of economic output (GDP) and that national debt is almost 100pc of GDP. It may be an accounting convention, but it is going to be quoted with amazement around the world as an all-time record, which does not help.

One can understand why the Government wished to spread both the cash and the statistics over as long a period as possible. Perhaps the biggest shock yesterday was that, in the case of AIB, it still did not know the true picture until this week.

The final trawl of its property development loans revealed a further shortfall of €3bn. It was the final straw. The last thing the Government needed was a demand for more cash. If the bill got too high, it would trigger another downgrade from the ratings agencies. The decision was taken to nationalise AIB and fire its top brass.

Assuming that our lenders -- the infamous "markets" -- reckon this figure is close enough to the awful truth a second, equally critical, question arises: will the country be able to pay for both the cost of the banking collapse and a budget deficit currently running at almost €20bn a year?

The belief that it cannot is the reason lenders are demanding more than 6pc for 10-year loans in the form of government bonds. There can be no doubt that it will be difficult. Even a fairly optimistic scenario sees national debt rising to just over one year's economic output. Such a figure would require the taxpayer to find around €10bn a year to cover the interest on the national debt. Such a figure is not unique among EU countries, and a similar debt burden was borne in the 1980s, but it allows no room for slippage.

That is why the Government has heeded calls from the markets, the EU and bodies such as the IMF and OECD to tell us how they can avoid slippage. To meet even that target, they have to find more than €7bn in revenues and spending cuts over the next four years.

The plan is to set out the basic details of the Budgets for those years. Lenders can judge if the plans are credible. More importantly for them, they can judge if the public and the political system will bear it.

It may well be a game-changer in Irish politics. Opposition parties will oppose, as is their duty, but will have to provide similar levels of detail in saying what they themselves propose. They are also aware that they may not be the opposition parties for much longer.

A NEW government will have little or no room to change the debt trajectory in its plans. Debt could be stabilised with a slightly bigger deficit than the 3pc of GDP laid down under EU rules. So perhaps the timetable for reaching 3pc could be extended beyond the current 2014 target date. But not before the general fiscal correction is seen to be going to plan.

This multi-annual budgetary statement will represent another bit of unpalatable truth, but perhaps it will widen a debate that has been narrowly focused on the banks and ill-informed about the choices facing the country.

One paradox is that if Ireland had to go to the IMF for emergency loans, the conditions imposed would not be much different from those already in the budgetary arithmetic.

Brian Lenihan or Dominique Strauss Kahn (head of the IMF) would not make much difference.

Going to the EU emergency fund -- as would be expected -- could be different. All kinds of conditions are being talked about, including even an enforced increase in Ireland's attractive corporation tax.

The truth is that, hard though it may be, the easiest option is to deal with it ourselves.


Irish Independent