Decision day for Irish economy - Ireland to pay back €1.25 billion Anglo Irish Bank bondholders

A sign displayed in Dublin on Monday says it all

This Wednesday, Ireland is due to pay back €1.25 billion to unsecured and unguaranteed senior bondholders in the now defunct Anglo Irish Bank. The Anglo bonds in question were taken up in 2007 by investors who wanted the higher returns the bank was able to offer as the most reckless player in the hyperactive Irish property market at the time.

Even then, it must have been clear to the investors that there was an element of risk involved. That was why a higher yield was on offer.

Anglo was the new kid on the Irish banking block and was disregarding basic rules and taking huge gambles on property to grab market share from its much bigger rivals, Bank of Ireland and Allied Irish Bank. The Irish property market was near boiling point, and already some commentators were pointing to the steam rising from the overheated pool.

All of this was known, but these investors went ahead anyway. They took the risk, attracted by the returns.
Most of them were major players, investment funds and banks, mainly French and German. Being big boys, they knew there was a risk involved.
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That's capitalism. You can win big. You can lose everything.

Like the tens of thousands of Irish people who were small shareholders in the Irish banks and have now lost everything, the holders of these unguaranteed Anglo bonds should now be losing everything as well.
But they're not. In fact they're getting everything back, thanks to the policy being forced on Ireland by the European Central Bank and accepted by the gutless Irish government.

The bonds mature this Wednesday and, having enjoyed their high yield over the past five years, the investors are now to be paid their money back in full.

They're getting everything back, even though the bank is now defunct and is being investigated by the Gardai (police). It's not just unfair, it's ridiculous.

Thanks to the misguided state guarantee given by the previous government to all the Irish banks when the crisis hit in 2008, it's the ordinary Irish person who will have to pay the bill. The money will be sucked out of the Irish economy through higher taxes and cuts in state spending.

To understand the scale of this, bear in mind that €1.25 billion -- or  €1,250 million -- is equivalent to the total return that will come this year from all the tax hikes and spending cuts that were in the budget in December.

Those budget measures which will be implemented over this year will cause real hardship to the Irish people. There are higher taxes for everyone and cutbacks in all kinds of state spending and services like schools and hospitals.

Yet the same amount of money that all this agony will produce is going to be blown away this Wednesday because our government has decided that it must obey the EU/ECB/IMF position that Ireland has to pay back all its bondholders in full. Repayment of bondholders in full was one of the conditions under which we got the EU/IMF bailout money to keep the state going. Unless we repudiate these terms and say that we won't pay without a massive write down of our enormous debts, we will go on repaying until we are bled dry.

This week's €1.25 billion is only the start of the Anglo misery. The Anglo black hole is around €30 billion. We are going to be paying it back for years to come.

Then there is all the debt we have piled up through our €67.5 billion EU/IMF bailout, money that is being used to keep the state going until we can balance our budget again, and money that is being used to recapitalize the two main banks and allow them to meet their debts and avoid going bust like Anglo.

The total amount of our debt, including interest, will be way over  €100 billion and will take us decades to repay at a rate of a few billion a year.

As we said here last week, the immense scale of the problem means that the present way of dealing with it is not a viable solution. Apart from it being unfair to the Irish people, both this generation and the next, it's unworkable. If we try to do it, the Irish economy will shrink drastically and then remain in permanent recession.

The Irish people, in spite of the efforts of the government to play down the situation, are now beginning to fully understand what is going on. Listening to reaction here last week, it's clear that they think it's the greatest con job in economic history and that they are not going to accept it.

In particular, people were most unimpressed with the EU/ECB/IMF bailout team who were in Dublin last week and gave a press conference to pat us all on the head after examining the state's books.

These three-monthly reviews are part of the structure of the bailout; to keep getting the money we have to pass the quarterly examination which monitors our progress on budget reform.

These press conferences have become a routine matter at this stage -- but this one was different because the veteran Irish journalist Vincent Browne confronted the bailout boys on the absurdity of repaying the Anglo bonds.

Why should we repay them, Browne asked, since the bank is now defunct, the bonds were not guaranteed and the Irish people had no responsibility for the disastrous -- and at times illegal -- manner in which Anglo was run.

The three bailout boys from the EU, the ECB and the IMF who were taking the questions looked at Browne with the condescension common among senior economists. They smiled at him like the exasperated parents of a child who just doesn't understand the complexity of the grown-up world and came up with some non-answer.

But the famously cantankerous Browne persisted. After some delay, the man from the ECB, Klaus Masuch, suggested that the reason Ireland had to repay the unguaranteed Anglo bondholders was to preserve the credibility of other Irish banks. He emphasized that the decision was taken by the Irish government, although he made clear that this was the preferred policy of the ECB.
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What Masuch actually said was, "I can understand that this is a difficult decision to be made by the government and there’s no doubt about it, but there are different aspects of the problem to be balanced against each other and I can understand that the government came to the view that, all in all, the costs for the Irish people for the stability of the banking system, for the confidence in the banking system of taking a certain action in this respect which you are mentioning, could likely have been much bigger than the benefits for the taxpayer which of course would have been there.

“So the financial sector would have been affected; the confidence of the financial sector would have been negatively affected, and I can understand that there was a difficult decision but that the decision was taken in this direction.”

Did you follow that? This guy, God help us all, is the one of the top boys at the European Central Bank.
To be fair to him, English is not his first language and he was trying to simplify things for Browne. But that reply was rubbish.

The idea that giving a haircut to investors foolish enough to put money into a cowboy bank like Anglo would scare off investors from the two big Irish banks in the future is not credible.

The idea also that because Ireland guaranteed all the banks here we have to honor all the Anglo debt and that it would be seen as a state default if we don't is nonsense.

Let's remember that when we gave the blanket guarantee in 2008 the government was grossly misled by the banks on the scale of the problem. Now we know the truth and it's 10 times worse than we were told back then.

And that is why we are now entitled to modify the guarantee that we gave, especially in relation to unguaranteed bondholders in Anglo, among others.

The other side to this is that many of the original holders of these bonds probably sold them on some time ago to speculators at a big discount. And these guys are now going to make a killing when the Irish government, courtesy of the Irish taxpayer, pays them the full value of the bonds this Wednesday.

This is not just a one day problem. In the bigger picture it doesn't matter all that much whether (as seems certain) the government pays back the €1.25 billion to the bondholders this Wednesday. The trouble is there are a lot of other Wednesdays coming down the line.

We need to raise taxes and cut spending to balance our budget again. We can do it, although it's going to be very tough for a few years.

The problem is that even if we do this we are still left with a mountain of debt run up by our banks, the bill for which, including interest, will be a few billion a year for years and years.

Without debt forgiveness we will be sucked dry for at least a decade, maybe two or three decades. As we said in this column last week, it cannot be done without destroying Ireland.

This week, as Ireland plays the most obedient boy in the EU class again and pays back bondholders in full, the Greeks are getting a write down in their debt of 60% or 70% by being the dangerously disruptive kid in the EU class.

It's time we started kicking back.

Bailout boys from Europe are back in Ireland

A group of economists from the IMF and the European Union leave the Merrion Hotel in Dublin last week.

Our bailout lords and masters from Europe and the IMF were back in town last week to examine the state's financial books.

One newspaper here had great fun pointing out that although their job is to impose austerity on us poor paupers, they were staying in the most expensive place in Dublin -- the five-star Merrion Hotel.

The excuse is that it is directly across the street from the Department of Finance which means that they are literally a 30-second walk away from work.  But even so, it's a bit nauseating that the Counts of the Cutbacks are enjoying such luxury -- rooms in the Merrion run from around €200 a night to the penthouse at well over €2,000, and the full Irish breakfast delivered to your room costs a trifling €40 -- while us poor Paddies are being fleeced.

The IMF's Ajai Chopra, who has become the congenial face of the Irish bailout team, wasn't here last week.  Instead we had about six unfamiliar and unnervingly young-looking financial experts, including a Hungarian economist (given the economic mess in Hungary now was there not enough to keep him busy at home?)

The team was being led by Craig Beaumont, who is the IMF's mission chief for Ireland, and is from New Zealand.  He was still doing his degree in the London School of Economics (the famous LSE) in the early 1990s.

In fact the whole bailout team looked young enough to be our Minister for Finance Michael Noonan's grown-up children.  But these are the new masters of the universe, from the IMF, the EU and the European Central Bank.

They spent several days going over the books and quizzing ministers and officials, not just in the Department of Finance but in the Central Bank, the NTMA (the National Treasury Management Agency), Nama (our new national bad bank for bust property portfolios) and even the ESRI, the official economic think tank here.

We won't know their verdict for another two weeks  -- they're going back this week to start writing their report -- but they were smiling while they were crossing the street here.  Mind you, I would be all smiles too if I was staying in the Merrion and tucking into  €40 breakfasts.

Their job is to monitor how well we are sticking to the terms under which we agreed our  €85 billion bailout from the IMF and the EU. That is being drawn down in tranches to pay back bondholders and to keep the state going until we sort out our overspending.

To keep getting the money, we have to submit to these examinations every three months.  The one last week was the fifth since we got the bailout, and it will be interesting to see what our masters will say about us in two weeks in their report.

The word here last week was that they were very unhappy about the government's lack of progress in selling off state-owned assets to pay down some of our debt.  The government has already agreed to do this, but they're being so slow about getting started that the bailout team were pushing for a deadline.

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The state asset sale could include major entities like the national electricity company (the ESB), the Gas Board and Aer Lingus.

There are about 20 semi-state commercial companies here, and the government has drawn up a secret list of the ones that could be sold, as well as other assets like surplus state property (anyone out there want to buy an old army barracks or two?).

But the bailout team now wants the government and the NTMA -- which is supposed to be handling the sale of the assets -- to produce a detailed time frame and get on with it.

Various estimates of value have been put on what these assets are worth.  Even if you never went to the LSE (like Mr. Beaumont) you probably know that now is not a great time to be selling.

But the bailout boys won't wait and they want sales worth €5 billion, which will be an awful lot of the family silver. The government's present position is that they do not want to sell unless about half of that can be ring-fenced for job creation programs here.

What this would mean is that half of the money would be invested here, instead of vanishing overseas into the coffers of the French and German banks that speculated on our property boom and now want all the billions they lent to the Irish banks back.

I have to say that I, like most Irish people, find this situation both irritating and humiliating.  To see our ministers and officials being told what to do by a team of financial whizz kids from the EU and the IMF (several of whom began their careers in banking) is hard to stomach.    

But that's the way it is.  Despite the air of normality here, despite the pretence that we're still in charge, the underlying truth is very different.

We get occasional glimpses of the hidden reality, like the details of our last budget being discussed in the Bundestag before it had been revealed to the Dail (Irish Parliament).

The truth is we're on a financial lifeline. The truth is we've shown ourselves unable to manage our own economic affairs.  The truth is that Taoiseach (Prime Minister) Enda Kenny can puff up his chest all he likes, but the big decisions on our future are being taken by the countries that give us the funds.

They don't make it too explicit, of course.  There's no point in rubbing our noses in it because humiliating our politicians might spark a major public reaction here and they don't want that.

So German Chancellor Angela Merkel still meets Kenny like any head of government.  But if you look closely, there's something perfunctory about the handshake and her smile is barely there.

No wonder the bailout boys looked quietly superior as they crossed the street from their five star hotel in Dublin last week.  Behind the politeness and the pretence of normality here, do they see us as being all that different from some failing banana republic in South America or some insolvent and corrupt African state?   Probably not.  

Mind you, with the mess the euro is in right now, they have little to be superior about.  Nor, if they think about it, should they feel that their ideas on how to fix Ireland, never mind the rest of Europe, are superior to the strongly held views of so many Irish people, most of whom had nothing to do with the Celtic Tiger fiasco.

The fact is that the medicine they are prescribing for Ireland is killing the patient.  Even the IMF itself said a week ago that they were revising downwards their already feeble estimates of growth in the Irish economy for this year and next.  They said that whether we would be able to come out the other end of this bailout program as planned remains in question because the success of the program depends heavily on growth in our economy.

Growth is built into the bailout figures.  But the IMF said last week that the Irish economy is "fragile" and that the government should not make any extra cutbacks this year that would reduce consumer spending further, even if we fail to meet this year's budget deficit target.

That's quite extraordinary, coming from the IMF. It shows they believe that if consumer spending here goes down even more, the economy will get worse not better.  And behind that fear is the pressure to get us to sell assets sooner rather than cut spending more this year.

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In this situation the idea that we might be able to return to the money markets next year to raise funds is laughable.  And if we can't stick with the present bailout plan and can't get money from the markets that can only mean one thing -- a second bailout.

In this column last week we thought we were pushing the boat out in suggesting that Ireland was probably going to need a second bailout to keep going.  Since then, of course, various financial experts have said the same thing.  Kenny insists that it's not going to be necessary, but one of his ministers let the cat out of the bag last week by refusing to rule it out.

The problem is that the repayments we have to make on our bailout and borrowings are so vast that they are killing our economy.  For the next 10 years or so we have to suck around ***3 billion a year out of the economy to keep our banks going and repay bondholders and meet bailout repayments.

And we have to cut spending (or raise taxes) by about the same amount each year for between five and 10 years to wipe out our annual deficit and balance the books again.

Now everyone here knows we can't do that.   The IMF has more or less said it.   If we try to do it we will destroy the economy in the process and still fail.

And if we go the route of a second bailout and put off the day when we have to face the full scale of our economic disaster, we will be paying back billions every year for the next 30 or 40 years.

In the meantime, the government stumbles on with the faint hope that everything will be all right eventually.  Well it won't.

The IMF knows it.  The EU must know it too.  The only thing that will work is debt forgiveness.   And if the bondholders and the European Central Bank don't want to give it to us, we have to take it.
And selling our best state assets for a paltry €5 billion is no solution.  That only scratches the surface.

The tears of Irish emigrants and predictions for Ireland's economy in 2012

Travelers prepare to leave Dublin airport after the holiday break

There were the usual tearful scenes at Irish airports over the past week as emigrants who were home for Christmas headed back to their new lives in the U.K., the U.S., across the Eurozone and around the world.

So many seemed to be going back to Australia and other faraway places. A nephew of mine, for example, is gone back to Shanghai where he is teaching English. (Teaching English in places like South Korea, Japan, or China is the latest adventure for young Irish graduates of all kinds who can't get a job at home.)

The emotional scenes were captured by the TV cameras for the news and the interviews, as always, would give you a lump in your throat. The youngsters always put a brave face on it and make a joke; the parents try not to get emotional, usually unsuccessfully. The quick final hugs and the choked goodbyes reveal the reality.

It's not as bad as it used to be, of course. In these days of cheap travel and global communications, there is not the same feeling of immense distance and separation. These days they Skype each other from the other side of the world, shrinking the globe.
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But there is no denying the pain and the disappointment. Most of the young ones, especially the couples, don't really want to be away. They would rather be here, playing for the team, socializing in the local bar, sending the kids to school here, being close to extended family and familiar places.

Of course they can Skype, but it's not the same. Just ask the parents at home, missing their grandchildren, knowing that a return any time soon is unlikely.

Their grandchildren will grow up in faraway places and will have accents when they come back on visits. It's another lost generation.

There has been a lot of anger here about this situation over the past few years, leading to the dramatic dumping of the last government. The anger is still there, but this Christmas I detected a change in the way people were talking at the airport. These days the anger has started to subside into a kind of depressed resignation.

They've changed the government, but nothing else seems to have changed. The Irish economy is on the floor, unemployment is huge and all the signs are that we're in for a slump that will go on for years.

So no one at the airport last week was pretending that all these emigrants are just gone for a year or two. That's what gets the parents of the young emigrants so upset. They know that it's more or less permanent.

It really is a lost generation. You can Skype all you like, but it's a tiny glimpse of lives being lived far away. It's not the same as having them here.

So what hope is there for the future? The outlook for 2012 is not encouraging.

The new government tries to be positive, because that's what governments do. Our senior politicians tell us the austerity measures are working, that we are sticking to our budget deficit targets and getting the approval of the EU and the IMF for the way we are implementing the bailout plan.

All that is true, of course, but it is being achieved at a terrible price. The price is a severely depressed domestic economy and planes full of our young people who can't get jobs at home.

In spite of the huge cost in monetary and human terms, not that much is being achieved in sorting out the country's finances. The latest figures published last week gave us the full picture for 2011, and they show that tax revenue for the past year was slightly below the target set at the start of the year.

This happened despite the heavy extra taxation that was applied during the year, including a new tax called the Universal Social Charge and a levy on all private pension funds.

The decline in tax revenue was a direct result of the further slowdown in the Irish economy, with revenue from both income tax and VAT (sales tax) falling.
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Despite this fall in tax revenue, the budget deficit reduction target for 2011 in our EU-IMF bailout plan will be met. It will be met because the government has continued to cut state spending.

A fall in tax revenue simply means that even more cuts in spending have to be implemented. It's a downward spiral, of course, but we are told there is no alternative.

Overall tax revenue for 2011 was just over €34 billion, but overall state spending in 2011 was €25 billion

More than that. To be fair, that €25 billion overrun does include €9.5 billion we pumped into the banks in 2011 to recapitalize them even more.

And it does include the cost of servicing the national debt at €5.4 billion, which is around a billion more interest than we paid in the previous year. Our actual day to day state spending was €46 billion, which was around €2 billion (or 1.6%) lower than in 2010.

These figures show that although we are starting to get our state spending under control, there is still an enormous gap to be bridged. Progress is slow because it's so difficult. One reason is that the record number of people out of work means that welfare spending is huge.

Under our bailout program, the target for the underlying budget deficit in 2011 was 10.1% of GDP. The figures released last week show that the deficit for the year will be about 9.8%, so we are slightly ahead of the game.

But there is no reason to feel pleased. It's getting harder to cut state spending each year as the squeeze goes on and what the politicians call low hanging fruit are picked.

It will be even harder at the end of this year to reach the deficit target of 8.6% of GDP that has been set for 2012. Under the bailout plan, we have to get the deficit down to 3% by 2015.

One thing that stands out from the state finance figures for 2011 is the heavy burden of our borrowing and our bailout money. Yes, we're still borrowing to bridge the budget deficit for day to day spending. But we're also borrowing and using the bailout money to pay back the bondholders in the Irish banks, and that is costing us billions in precious tax revenue each year.

To save a few tens of millions or even a few hundred million in day to day state spending, we are now enduring heavy cutbacks that impact on the lives of ordinary citizens. One of the main hospitals here last week said it might have to close for a month. This week there is a dispute about an attempt to take more tax from old age pensioners.

Every day there are examples of hardship being suffered by people who depend on state services and payments. A sense of fear pervades the land about what cuts may be next.

And while all this is going on, we are paying back billions to the bondholders who took a gamble on Irish banks during the boom. We're paying them back in full because that is one of the conditions under which we are getting the bailout money from the EU and the IMF.

Obviously this is unfair, but the EU/ECB/IMF troika are more worried about the stability of the financial system in Europe than they are about the effects of cutbacks in Ireland. They fear that if we don't pay the bondholders back in full it could destabilize the system across Europe, so we have to keep paying.

Here's a few predictions for Ireland in 2012:
•The Irish economy will continue to stagnate in 2012 (and 2013), mainly because growth in the U.K., Europe and the U.S. will be feeble.

•Our ability to stick with the bailout plan depends on modest growth in our economy, driven by exports, and this will not happen in 2012.

•Our hopes of returning to the financial markets over the next year or so to sell Irish government bonds and begin our exit from the bailout will turn out to be a pipe dream. (This is indicated by the current price of 10-year Irish bonds at around 8%, a level that is not sustainable.)

•Despite Greece this week talking about a 50% haircut for bondholders, the EU will continue to deny us any debt restructuring.

•Requests for a further reduction in the interest we pay on the bailout funds will also be denied. (We got the interest rate reduction last July not because of lobbying by the taoiseach, but because the EU had to give it to us when they gave it to Greece.)

•A mini-budget in 2012 with further cutbacks/tax increases will be necessary to keep us on track.

•Despite this we will not be able to meet the requirements of the bailout program.

•Growing unrest and opposition to the austerity program here will scare the government into seeking a second bailout from the EU/IMF.

•Lack of faith in a future in Ireland will lead to ongoing substantial emigration among the young.

•January 2013 will be even more tearful at Irish airports as the lost generation heads back to their new lives around the world after spending next Christmas “at home” in Ireland.
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