Claims that bank debt is source of all woes untrue


THE BURDEN of bailing out banks and their bondholders on every man, woman and child in this State will be among the highest, if not the highest, of any financial failure in history on a per capita basis.

It is impossible to be human and not to be furious about this. But anger – righteous or otherwise – should not cloud analysis. However understandable, that has happened in the debate on bank debt.

Three claims are frequently made:

* Most public debt is a result of taking on banking debt;

* The economic and budgetary outlook would be transformed if banking debt could be offloaded;

* A bailout would not have been needed had it not been for socialised banking debt.

These claims are, respectively, plain wrong, wrong and debatable. Start with the proportion of the State’s borrowings used to pay for financiers’ mistakes. Everyone who pores over the figures interprets them in a different way. Making the calculation is not easy. This column asked organisations and individuals who have counted the beans to share their calculations. They include the Department of Finance, independent academic economists, financial sector economists and left-leaning economists.

Their estimates on how much accumulated government borrowing has gone on rescuing the banks differ, but not hugely, as illustrated in the graphic – ranging from a low of just over 21 per cent of all public debt currently outstanding to 27.5 per cent. In cash terms the estimates, as of the end of 2011, range from €37 billion to €46 billion.

These are enormous sums (and do not include monies on hand used to pay for the banks’ mistakes, including the emptying of the National Pension Reserve Fund) but they represent very much the smaller part of the total amount the State has racked up in debt.

The second claim is that if relief was secured on the banking proportion of the debts the State has taken on, a perilous situation would be transformed and austerity-created hardship would be alleviated. Would that it were so.

Even if all socialised bank debt disappeared overnight, the impact on closing the gap between day-to-day government spending and revenues would be small.

That gap has been, and continues to be, the largest of any of the 27 members of the EU. The outsized primary deficit – which excludes interest payments on all public debt, including socialised bank debt – is just as extreme, if not more so. It stood at almost 7 per cent of GDP last year. By comparison, the primary deficits of Greece and Portugal were, respectively, just over and just under 2 per in 2011.

If all public debt disappeared overnight and not one cent of interest had to be paid, the State would still need to borrow about €10 billion annually to meet existing spending commitments. (If the State ends up defaulting – and it may well come to that – the short-term impact would be much reduced if there were no primary deficit. For that reason, it is imperative that the primary deficit be closed as quickly as possible.)

The third claim – that a bailout could have been avoided if it had not been for the banking debt – is almost certainly correct as regards timing. But Portugal’s experience suggests it might well have happened anyway. The Iberian state was bailed out six months after Ireland. Its level of public debt is very similar when socialised bank debt is excluded. The markets lost faith in it because its debt dynamics look poor. So do Ireland’s – huge budget deficits are causing the State’s debt mountain to grow quickly and the economy has yet to return to sustained growth, as yesterday’s GDP/GNP figures show.

The point of all this is that, if the perception takes hold that all our ills are a result of the banks alone, the lessons of the crisis will not be learned. Ireland has suffered banking and fiscal crises. The lesson from the former is that finance should be shackled to contain its huge, inherent risks and bankers’ squawking about “excessive regulation” should be ignored. But the guardians of the public finances were as inattentive to the risks they faced as were the guardians of the financial system. They pumped out every cent that flooded into the exchequer with no consideration of the sustainability of revenues streams. The lesson is that politicians should be constrained in how they manage the public finances. Stronger domestic and EU rules – including the fiscal treaty – help to achieve that. They should be welcomed.