The Time for Proactivity
There have been extensive articles and columns written over the past number of years regarding the blanket guarantee on debt racked up by Irish banks. Ireland was lauded as the poster child of Europe and, with our need to maintain ‘respectability’, we took the debt obligations on the chin in order to stop the ‘contagion’ and guaranteed the bank debt for ECB loans.
According to renowned financial expert John Mauldin, if Anglo Irish Bank were a US institution, the equivalent debt would have been about $3.5-4 trillion. Yet the Irish government guaranteed this debt as well as that of Bank of Ireland and Allied Irish Bank.
Ireland effectively contributed to bailing out the entire European banking system and, in doing so, put huge financial pressure on its citizens that will continue for generations to come. The domestic political wrangling between our current and former government about the intractable burden that was put upon us all on that fateful day in September 2008 is rankling.
Democracy spoke loudly in ousting the previous government as retribution for the severe burden that was undertaken. Now is hardly the time to rehash what could or should have been done: we need to work out what we can do about it right now and quit spinning reports of what are frankly unsustainable GDP figures.
The misplaced understanding that whatever Greece gets in terms of debt relief will also be automatically be offered to Ireland is farcical. Yes, the ECB and Europe threw Ireland a bone and cut the interest rates on the bailout loan back in July, but we were left with no uncertainty regarding the possibility of any haircuts on our bondholders. However, it seems that we Irish believe that fulfilling our duties and targets put down by the IMF et al means we will be rewarded accordingly in this respect.
The problem with Euro-zone member countries being run by their own nationals is that the politicians lack the ability to be objective for fear of being voted out. Some say that a United States of Europe and the introduction of Euro bonds would be a solution to the crisis, but that theory is only that – a theory – and not a solution for the immediate problem at hand. Perhaps fiscal unity might be something to examine later down the line, but Germany and France are not prepared to accept higher borrowing rates, tax hikes and the more than probable credit rating cut that would come with such a notion. Not now anyway.
We have now gone beyond the Irish contagion issue: the banks need even more recapitalisation and the ratings agencies are back with a vengeance too, with Standard and Poor’s downgrading Spain yesterday citing heighted risks to growth prospects. Fitch ratings have also cut the long term issuer default grades of several UK banks and put many others on a watch negative.
Euro leaders are ‘working on a plan’ that may force banks to raise between €100bn and €300bn in additional capital by selling shares to private investors. Needless to say shareholders are resisting pressure to pump more money into the industry given that a failure to resolve the fiscal crisis could well send financial stocks even lower. This leaves the taxpayers/state funding as investors of last resort.
Thus, France is already at risk of losing its AAA rating anyway as the amount the Government will have to raise for French banks is huge. The fact is that the idea of AAA rated euro debt is fading fast, particularly when you consider the worst case scenario of how much might be necessary to bailout Spain and Italy.
Recapitalising the banks isn’t necessarily a silver bullet solution as it doesn’t address the real underlying issue of investor confidence in sovereign debt as one begets the other. Moaning about moral hazard is one thing. But it’s now time to question the prudence of these banks who lent vast quantities of money without adequate collateral.
It’s clear, and it’s always been clear, that the sophisticated European banks who kneel at the altar of capitalism will now have accept the wrath of the god of capitalism – that if you take a risk, you have to be ready to accept the consequences. Those consequences are a significant haircut anywhere between 50-80% on debt from fundamentally insolvent nations. Anything less is neither manageable nor realistic.
It’s possible to be both pro-Europe and proactive. Respectability is something that begins at home. Any self respecting country would look to be part of the EU decision process and actively seek relief on the debt guarantees that we gave. Simply wishing and hoping for a discount isn’t productive.
The ‘plan’ is due to be announced at a meeting of the G20 on November 3. Is it possible that the over used expression of the ‘kicked can’ may, ironically, find its final resting place in Cannes? The jury is still out.