In five years we have gone from being the ‘pinup stars’ for EU growth to being the ‘posterchildren’ for austerity and, like a nodding dog in the back of a car, our leaders are as clueless now as they were then about the road taken and final destination.
Some of that ‘clueless-ness’ can be seen in ‘loose talk’ going around at present about the relationship between Ireland and the EU and the other EU member countries. An awful lot of this loose talk revolves around how damaged that relationship would be if the Irish people choose not to join in the Fiscal Compact. A further chunk of the ‘chit-chat’ revolves around the question of where else we would borrow ‘the money’ from when (much more so than ‘if’) we need a further dose of ‘austerity medicine’.
I will skip over the blatant inconsistency of a Government that insists we are on the correct path with light at the end of the tunnel under a fully funded and committed financial program while at the same time hastening to arrange the paperwork on yet more borrowings. But not without pointing out that the Taoiseach has recently reiterated and reaffirmed that the existing borrowing program supersedes the envisaged ESM facility that may be provided by the Fiscal Compact.
I will also skip over the issue of whether the Fiscal Compact is a smart or pragmatic or sensible or even a ‘pro-European’ step to take.
I will skip over these things to state some boring, practical banking ‘facts of life’.
There is an ‘old saw’ from the banking world which states that if you owe the bank 400,000 you have a problem, if you owe the bank 4 million you both have a problem and if you owe the bank 40 million the bank has a problem.
By the end of 2012, all financial sectors of the Irish economy, its households, businesses and the State, will be massively in debt. The State particularly will have a debt/GDP ratio about 120%. This is the level at which it becomes a very dicey proposition for both borrower and lender to go any further into debt.
But the most important thing about this debt is that this money is ALL SPENT. It is not sitting on deposit in a Swiss bank account.
You can debate all you like about whether we did the right things with that money. You can argue until you are blue in the face about whether we can repay it and grow our economy at the same time. You cannot deny that the money is gone and that all that remains is our promise to pay it back.
Those who lent it to us have no lien on the State. There is no court they can turn to enforce any security or charge because there is no such court and they have no security. And, once again, the money is not on deposit somewhere where they can go and seize it.
The only choice our lenders have is on what terms to lend us any more money. A refusal by them would put us into default.
So the issue is not where we can borrow. The issue is on what terms we will continue to repay.
Now, that is the hard practical business reality of it. If that is an uncomfortable truth for you, you should be aware that this is the reality that confronts every lender to every State that gets into financial difficulty. It is not some uncharted territory or some nightmare of eternally shattered reputation and financial purgatory. The experience of Iceland proves that. In fact, the experience of Ireland after it’s 1993 devaluation proves that. And anyone who suggests that devaluation and default are different things betrays their hopeless ignorance of the mindset and disposition of the investment and bond trading communities.
One of three things will happen in our near term future. The happiest and least likely is that we will resume some solid growth in the economy and will slowly but steadily repay these debts over a fifteen to twenty year span. The unhappy probable outcome will be that we will have weak growth and the economy will move sideways for a decade or two. The unhappy possible third option is that there will be a default which may, or may not be, ‘graceful’ and ‘managed’.
If and when that day comes for Ireland, some people will seek refuge in economic theories, some hope in protection of laws and regulations, some will seek solace in the arms of supra-national entities and a few will still seek help from deities. But the reality is that bankers and accountants will sit down with the politicians and thrash out what can be paid and seek to extract as much as possible for themselves and their clients.
If a country has leaders who care about it and who have some ability and some understanding of how the real world works, when they sit down to negotiate at that post-default table, then a positive and helpful result can be achieved for the people while being fair to the lenders.
Before that day comes it is still possible for leaders to start us down the path of a more sustainable debt burden that will in the end be fairer to both the borrower and the lenders by simply starting to talk realistically about these overarching realities. But they have neither the ability, the expertise, the self-confidence nor the courage to rock the ‘European boat’ and are content to be errand boys for the apparatchiks and the bankers by continuing on the path to default while asking us to swallow ever greater doses of pointless austerity.
This column was first published by Progressive Economy @ TASC