The Stupid Economy: Debt Relief


It is hoped that this year Ireland will formally exit the Troika bailout programme and return to international bond markets. This will be a major victory for advocates of austerity and place Ireland as Europe’s poster child. Free of the bailout, Ireland will be able to finance itself by issuing sovereign debt. And the markets seem comfortable with this prospect, yields on Irish government bonds maturing in 2020 fell from 8.5% at the start of 2012 to 4.5% by the end of the year. Renewed appetite for Irish debt allowed the government to regain partial access to bond markets in 2012 and the NTMA plans to raise €10 billion by issuing bonds in 2013. However, while a return to the markets is in the interests of the entire European Union, it will need to be set in motion by a deal on relief for some of €64 billion in bank related debt. Why do we need a deal and why do we deserve some relief?

Irish banks began racking up monumental losses in autumn 2008 which over the next two years would bankrupt the Irish economy thanks to an ill informed decision to nationalise all bank debt. In November 2010, the government formally requested a bailout from the EU and the IMF, amounting to €67.5 billion. The Irish financial situation faces two major stand-offs this year: some €3.1 billion worth of promissory notes given to Anglo Irish Bank fall due in March (and will recur for the next decade) and official bailout loans fall due in November. The note is part of €31 billion of emergency aid promised to Anglo in March 2010, which represents almost a half of all funds provided to insolvent banks by the government and around 20% of GDP. The ECB insists that all of this be paid back and this year paying the €3.1 billion instalment will require some financial engineering in the form of longer maturity and/or lower interest costs.

At the World Economic Forum in January, both the Taoiseach and Minister for Finance pressed for some form of relief on the overall debt. In its latest review of the Irish bailout, the IMF recommends direct recapitalisation of AIB and Bank of Ireland by the European Stability Mechanism (ESM) to relieve some of the €64 billion bank debt. Basically, they call for the ESM to invest €500 billion in the two banks, in return for a promise that Ireland uses the money to pay off its EU bailout loans. In financial jargon, this is a debt for equity swap. The IMF even went so far as to suggest that it might provide extra money as a “backstop” to help reassure international investors about a country such as Ireland returning to the markets. As Minister Noonan pointed out: “We don’t want to go back into the market and fall back out of it again” – the issue being that if Ireland were to become self financing by the markets, should this money be poured into banks, investors would hike yields on Irish government bonds and Ireland would have to seek more assistance from Europe.

There are legitimate reasons why Ireland deserves some form of debt relief. As is constantly touted in the media, the primary beneficiaries of bank rescue funds were not local creditors and depositors. If the money was used to pay back local lenders to the likes of Anglo Irish or recover individuals’ savings accounts, then it is justifiable that Ireland should bear the brunt of the bailout. But unlike Spanish banks, many of the beneficiaries of funds were privately owned financial institutions in the EU. At the height of the boom, money was lent by many German banks to Irish banks, who then lent the money out to property developers. When property developers defaulted on these loans, this put banks like Anglo in trouble, but it was ultimately German banks which would take the hit. Hence the bailout of the banking system by the Irish government was to save Irish banks from the tyranny of their creditors in Germany. And this was supported greatly by Europe for fear that if German banks, amongst others, ran into trouble the effects of contagion could bring down the whole European banking system. According to Eurostat, Ireland has paid 42% of the total cost of the European banking crisis which amounts to €9000 per person in Ireland. And where the crisis has cost Ireland 25% of its GDP, it has cost Germany, by virtue of its larger economy and population, just 1.5%. What was ‘cheapest bailout in the world’ in the words of the late Brian Lenihan, actually ended up among the most expensive. Don’t we deserve to be cut some slack?