Despite all the talk, deal on bank debt not on the cards

ECONOMICS:'A DEAL on the bank debt." This phrase is repeated 1,000 times a day by politicians and those of us in the media.

The basis for seeking such a deal is twofold. First, the socialising of Irish banks’ debt prevented additional euro zone-wide chaos. As there was a benefit for the entire bloc, taxpayers in other countries should contribute proportionately, rather than leaving the entire bill to Irish taxpayers.

The second part of the argument is that part of the debt was directly imposed by Europe when the authorities here sought to impose a haircut on some senior bank bondholders. The case for Europeanising any debt heaped on Irish taxpayers against the will of their elected representatives and at the insistence of foreign and unaccountable actors is particularly strong.

Alas, when both arguments are subject to scrutiny the inevitable conclusion is that a transformative deal is not on the cards.

Most of the big decisions on bank debt were taken in the early days of the crisis. Consider the context at the time. In the days and weeks after the collapse of Lehman Brothers in mid-September 2008, governments and policymakers everywhere were in blind panic.

Those in positions of power were making it up as they went along. As always in times of real crisis, national self-interest trumped all other considerations. Ireland was no different. Decisions taken then were taken because the government of the day believed them to be in Ireland’s best interests. Keeping the Irish banks standing, rather than avoiding disruption to the European senior bank bond market, was the reason for the actions taken.

If there is evidence from that time that outside actors had obliged the government to take the decisions it took, or prevented it from taking actions it wanted to take, where is it? If such evidence existed one could be quite certain that the Irish authorities would have put it into the public domain, either directly or via a leak. Such information would do a lot to strengthen the case for Europeanisation of bank debt. That no such evidence has become available suggests that it does not exist.

It is therefore difficult to make the case now that decisions taken voluntarily and purely out of self-interest, but which subsequently and as a by-product benefited others, should be paid for by others.

The second part of the case for a deal on bank debt relates to the direct imposition of bank losses against the will of the Government. This case is much stronger.

As the situation became “unmanageable” in 2010, the then government began looking at ways to push more bank losses on to bondholders in a way that would not further undermine confidence in Ireland and its still viable banks.

The only bank debt it ever seriously pushed to impose a haircut on was unguaranteed senior bonds in the two failed banks. When the original guarantee expired in September 2010, the outstanding amount of senior bonds in this category was less than €5 billion.

It is not in question that the European Central Bank played the central role in preventing the government imposing losses on these bondholders, thereby placing the onus on Irish taxpayers to cover private debt that they had no obligation to repay.

Given that the current administration did not widen the front – only the seniors in non-viable banks were seriously pursued when it took office – the maximum amount of bank debt that can be said to have been imposed from without is less than €5 billion.

Now put that figure in context. The Irish State has put approximately €65 billion into the banks, €45 billion of which was borrowed (the rest came from the National Pensions Reserve Fund). Total public debt stands at €170 billion. Even if the imposed €5 billion was retrospectively Europeanised in full, the impact would not be transformative. That is not for a moment to say that the Government should not continue to pursue the issue vigorously, but to do so on the basis of an exaggerated sense of grievance could be counterproductive. Better to appeal to others’ self-interest and/or wait patiently for an opportune moment to move.

Incidentally, last week’s referendum may suggest that most people are not as aggrieved at Europe as public discourse might suggest.

As the chart shows, in six of the past seven referendums on Europe almost exactly one in five eligible voters said No. That there was no significant increase in the proportion of naysayers last week is remarkable.