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Brendan Keenan: Reduced deficits a no-brainer but little hope of it happening

THERE, the number is out, but good luck to you if spotted it, and even more if you are able to find it.



The number is a big one -- €3bn a year. It came out during the kerfuffle about the repayment of more than a billion in debts of the former Anglo Irish Bank to those who hold the bank's bonds -- its promise to pay.

I always thought it a bit unfair to call senior bondholders in the banks "speculators", or even "reckless speculators". Those who bought Anglo bonds were perhaps a bit more speculative -- certainly more gullible -- than others, but senior debt in regulated banks is where the safe money is supposed to go -- where one would hope the trustees and managers were putting one's pension contributions or investments in "carefully managed" funds.

But those who got paid last Wednesday almost certainly were speculators. In this instance, not so much reckless as highly successful ones. They bet that no eurozone government would default on bank debt and bought the bonds at maybe 30 per cent below the official price. Last week, they got paid the official price.

Naturally, it sticks in everyone's craw. The arguments and protests were along familiar lines: that it is wrong and immoral (correct) and that we'd be better off refusing to pay (very much open to debate).

Things have changed a lot since the guarantee was given and the first repayments made. The biggest change is that the European banking system is in serious trouble. With this is mind perhaps, the Taoiseach sought to deflect the Dail's attention away from the bondholder payment by pointing out that almost three times as much must be paid, mostly to the remains of Anglo, every year for the next 10 years.

These are the infamous "promissory notes", a kind of bond promising to cover the loss of the bank's capital in annual instalments. Mr Kenny's view seemed to be that, if you are going to complain about payments, let's talk serious money. What's another billion compared to the €30bn coming down the track?

The real difference, though, is not size but the fact that Mr Kenny thinks he might be able to do something about the notes, whereas the politics of doing something about senior bondholders, if they were ever plausible, are now impossible. The politics of doing something about the promissory notes look implausible too, but not entirely impossible.

The mathematics, I'm sorry to say, are virtually impossible. Remember the 30 per cent of GDP deficit which rattled round the business news headlines of the world in 2010, and probably into the Guinness Book of Records?

That was the promissory notes being swallowed in one go by the Brussels accountants. So, although the Government has to borrow €3bn each year, it does not count in the bailout plan. That will be deemed a success if and when the general government deficit falls to €5bn, even though the Government will actually borrow €7bn in that happy year.

The Government needs something which will reduce the general figure faster, to help it reach the target and claim success by 2016. The rest of us need something which will save us real money.

The opportunity arises to do both because the scheme was devised before the bailout and the interest rate was set at market levels of over 8 per cent. This interest cost does appear on the general deficit by which success and failure are measured, as well as being real money. A significant reduction could make a big difference.

The preferred solution would be a long-term €30bn loan, carrying something closer to German interest rates and repayable in the far future when €30bn won't be what it is today and the country might be in better shape.

It seems an obvious solution. Who needs an 8 per cent interest rate, except vulture funds scavenging in the bond markets? The ECB is accepting one per cent on its new three-year loans to help the banks. The promissory notes are part of the bank rescue process too. Otherwise, there would be no need to repay the bondholders.

The current Greek standoff should show everyone the difficulties and dangers of even negotiated default. One misjudgment of intentions on any side could mean disaster. The contagion is obvious, with three-year Portuguese bond rates at 20 per cent, which makes last Wednesday's actual replacement of Irish bonds at just over 5 per cent all the more impressive.

Anything which assists a return to sustainable deficits in Ireland would seem to be in everyone's interests. There were sympathetic noises out of Brussels and Frankfurt when Michael Noonan made his pitch on the promissories a week ago, but no commitments.

Just because it is what they call a "no-brainer" does not mean it will happen. On European form up to now, it may even make it less likely.

Sunday Indo Business