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Ireland restructures Anglo-Irish Debt

by Frank Schnittger Thu Feb 7th, 2013 at 05:25:18 PM EST

Ireland has spent about €64 Billion on bailing out (mostly German, French and British) bondholders in failed Irish banks. To put this in perspective, this is more than any other EU country, including much larger economies like Germany spent on bailing out their banks, and represents c. 40% of Irish GDP. Whilst the Irish economy and population represent about 1% of the EU, the Irish people, have shouldered approximately 40% of the total cost of bank bail-outs within the EU, or about €14,000 for each man, woman and child within the country. It seems unlikely that German taxpayers would have tolerated a bank bail-out on a similar scale. Even the much criticized American bank bail-out constituted less than 5% of GDP, most of which has already been repaid by the bailed-out banks.

Much of this was, of course, caused by the seriously stupid Irish bank guarantee and a failure to regulate the banks properly. However it should also be remembered that the Irish property boom was caused in large part by inappropriately low interest rates maintained by the ECB (to aid German recovery) and by the EU drive for a single market in financial services without any adequate accompanying EU wide regulation of that market.

Many of the property deals concluded by the Irish banks involved finance raised from European banks to fund property deals in England and elsewhere throughout Europe and had little to do with the Irish people, many of whom had never even heard of the Anglo-Irish bank which had no retail presence in Ireland. and yet the Irish taxpayer is now on the hook, and a great deal of poverty has been caused to Irish families as a result.

For every imprudent borrower, there is an imprudent lender, and yet the lenders have been bailed out more or less in full. It has been one of the biggest transfer of resources from poor to rich in history. Banking profits are private property, but banking losses have been socialized. Irish policymakers claim they "took one for the team" - to prevent the contagion of Irish bank failures contaminating the EU banking system as a whole. If that is the case the ECB and European bankers and politicians have been singularly ungrateful, with the ECB insisting that all debts should be repaid even where the bank guarantee didn't apply. The Irish economy and Irish banks are critically dependent on the ECB for liquidity, and the ECB was reportedly not slow to threaten a withdrawal of liquidity facilities to Irish banks should the Irish Government threaten to default on any of the bank debts.

Now, for the first line, the ECB has relented somewhat, and allowed the Irish Government to restructure the very onerous promissory notes used to bail-out lenders to the Anglo-Irish bank to the tune of c. €35 Billion which were costing c. 8% p.a. in interest alone. Essentially a very expensive 10 year term loan has been replaced by Government bonds at about 3.5% interest (some of which will be refunded to the Government in the form of Central Bank profits) and with an average maturity of c. 35 years. This will result in a saving of c. €1 Billion per annum in interest costs and thus enable a less draconian budget next December.

In total, the Government will have to borrow c. €20 Billion less over the next ten years to fund capital and interest repayments. It will do nothing, however, to reduce the total national debt which will peak at about 120% of GDP this year. Essentially repayment of these debts has been postponed for a number of decades and the hope is that, in time, inflation will render the capital repayments less onerous. It will do little however, in the short term, to reduce Irish household debt of c. €180 Billion or an average of c. €40,000 per man, women, and child. Until the debt of the other Irish banks is similarly restructured, and Irish families whose finances are underwater with mortgage debt are similarly re-structured, it is difficult to see how any recovery in the Irish economy can be sustained.

For those interested, the Irish Times gives the detail of the Anglo-Irish bank debt restructuring here.

I have tried to post a link to this story on Facebook but the link doesn't work - the new tab just goes into an indefinite loop. Is this a bug with ET 2.0?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Feb 7th, 2013 at 05:44:14 PM EST
Could be. Will see what needs doing.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Feb 8th, 2013 at 05:15:22 AM EST
[ Parent ]
By my calculation, 2% inflation for 35 years will roughly halve the real value of a €35 Billion debt. If GDP grows by an average of 3% p.a. (nominal 5%), the the value of the debt as a proportion of GDP will reduce to c.18% of its current value as a proportion of GDP, or a reduction from c. 21% of GDP to 4%.

Of course if interest on the capital average 3.5% p.a. the total cost will be much more.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Feb 7th, 2013 at 06:34:44 PM EST

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