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David McWilliams: All bets are off, so why pay for costly Anglo gamble?

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TODAY we pay €700,623,555 to unsecured Anglo bondholders. This is a travesty because the Irish people do not have to pay this money under any circumstances. It is not covered in the EU/IMF deal.

The so-called investors have taken a punt and can't quite believe their luck that they are being paid. Anglo is not a bank. It has no deposits. It does not do any new business. It would not make any difference whether we pay or not. Events have overtaken us.

Before we talk about how the world has changed in the past day or two, let us just focus on the nonsense that is being peddled by certain people, the Government included, about paying the Anglo bondholders. Certain people suggest that if we did not pay this money to people who cannot be named, that there would be negative ramifications. What ramifications? We are paying back "professional" investors who gambled. What part of 'risk' do they not understand?

Do they seriously believe that the ECB, which is under enormous pressure right now to keep the entire euro project from imploding, would seriously cut off money to Ireland because of non-payment of unsecured bondholders? Give me a break. That is not how central banks work. Anyone with any knowledge of this field would know that.

So if it is not the central bank we should worry about, is there something in the way corporations are wound up that would oblige us to pay this money back?

Regarding the status of unsecured creditors in a bankruptcy, the clue is in the description "unsecured". An unsecured creditor is exactly that, he is unsecured. When things are going well, he is paid slightly more interest than anyone else because if things go wrong, he is "unsecured" and therefore only gets what he gets after everyone else has been paid. In the case of Anglo, he gets nothing. That's the meaning of "unsecured". When you are "unsecured" you are not secure. It could not be clearer.

Yet our Government is paying the money anyway. Worse still, the Government is borrowing to pay this and thereby breaking the golden rule of finance, which is that the way to improve an indebted balance sheet is with less debt, not more debt.

The only reason it can be choosing to do this is to remain the good boys in the class. But have they not seen that the classroom is burning down, the teacher has lost control and the rules are about to change so much so that anything agreed, even as recently as last week, is now conditional. As this column argued a few weeks ago, the Troika is dead. It is over and its mission has failed.

Remember, the Troika's job was to ring-fence Ireland, Greece and Portugal and thus ensure that Italy and Spain didn't come under any pressure. Well Greece has spun off into orbit and Italy's bond market is tanking -- despite last week's deal. So it is clear that the game is up for the Troika. The strategy that underpinned the Troika is in tatters and the plan must be reworked. With this new thinking will come new deals and possibly the break-up of the euro entirely, particularly as the Greeks' referendum decision may lead directly to the new drachma.

The world has been turned upside down in the past few days. Of all the financial changes, the following three are the most critical and will have enormous ramifications for our future.

First, yesterday US broker MF Global -- run by the former head of Goldman Sachs -- filed for Chapter 11. This is the eighth largest corporate bankruptcy in US history. It lost money due to its huge bets on the EU being able to get its act together. MF Global's $6bn in European debt was a gamble that the bond markets of Italy, Spain, Portugal and Ireland would rally. MF Global was one of the big buyers of Irish government bonds in the summer. Now this trade will unravel. In the US, it was the concern that this debt could be downgraded to "junk" status which led to its big bet going wrong. This proves that contagion from Europe is a very real threat to global stability.

If its creditors cut off funding to it because they thought its $40bn balance sheet was ruined by exposure to Europe's debt markets, which other financial institution might be suffering right now, trying to hide its exposure to European debt markets? Of course a sell-off of peripheral bonds will unravel the rally in Irish bonds and will rip away one of the central pillars of the Irish Government's spin that things are getting better.

The second event is obviously related to the first, and it came in an open letter to Italian PM Silvio Berlusconi by Ferrari chairman Luca Cordero di Montezemolo. In the letter, the man form Ferrari, one of "brand Italy's" industrial and design jewels, stated that Italy had reached a "point of no return". He demanded that Berlusconi leave now because he senses what many others do, which is that Italy can't be dragged back from the brink under Berlusconi's increasingly dysfunctional regime.

The yield on Italian 10-year debt yesterday moved above 6pc, while the interest rate on German bonds fell. Obviously investors are worried that if or when the euro falls apart, it would be better to own the government bonds of Germany rather than Italy because the new deutschemark will be worth much more than any new lira.

LAST night, the difference between Italian and German bonds was over 4.5pc as German yields fell and Italian yields rose. This is the largest gap between the two since the advent of the euro.

Remember that all the EU's efforts have centred on protecting Italy from contagion. This looks as if it has failed. When Ireland's bond yields hit 6pc, they quickly went to 7pc and 8pc and then it was over. Something similar happened in Portugal.

All this came against a dramatically changed background as George Papandreou surprised everyone by deciding to hold a referendum on the second bailout for Greece.

As we know here from the Lisbon Treaty referendum, the EU doesn't like real democracy. At its core, the EU 'rescue' packages are designed to bail out professional risk takers at the expense of taxpayers. That is the deal. And it is the dirty little secret our politicians don't want you to figure out so they shroud everything in complex language. But that is what is going on.

This isn't the kind of thing that goes down well with ordinary people. Polls show that 60pc of the population is opposed to the terms of the new bailout. So it is game over for this particular phase of the EU's efforts to save the euro, and with it go all the previous agreements.

Everything is up for grabs and we should not pay any more until there is clarity about what happens next.

After all, when there is no clarity, it is we who are the unsecured creditor, risking good capital on a hunch. Hardly the most prudent way to run a country.

David McWilliams hosts Kilkenomics, Ireland's only economics festival, from tonight until Sunday, November 7. www.kilkenomics.com

Irish Independent