DenOUement

October 28, 2013

Government debt as percentage of GDP globally....

Government debt as percentage of GDP globally. (2009 estimates) (Photo credit: Wikipedia)

Taoiseach Enda Kenny has been extended maximum leeway in his efforts to renegotiate a successful exit from bailout that will lead Ireland back into the markets returning Ireland’s sovereignty to where it rightfully belongs.

Bailout and NAMA were sold to us predicated on 3% growth rates making the bailout sustainable. We were also assured the FG/LB coalition would negotiate a new deal regarding unsustainable bank debt.

Trumpeted in glory with disdain shown to sceptics was the apogee moment in June 2012 when 27 EU leaders issued a statement of intent on the future recapitalisation of banks with a commitment towards a banking union and future separation of sovereign debt from bank debt.

The crucial word here is ‘future’. Kenny interpreted this to mean a commitment to separate dangerous legacy bank debt due to our guarantee and our ill omened bailout out of bondholders; we would be saved by the ESM in the future.

However, not once but many times singularly and in groups of Finance ministers Enda’s misinterpretation has been rebutted with statement after statement that ‘future’ excludes reimbursement of legacy banking debt. Future refers to a time when conditions favour the regulation of banks inside a banking union TBA and only after stringent conditions are fulfilled, …not in the next day or so, or year or so, if ever…!

So it was Enda’s protestations on the need for separation of Ireland’s legacy bank debt, fell on deaf ears, as he once again misinterpreted for short-term political reasons the communique of 2012.

Enda, again for short-term political reasons is good at conjuring something out of nothing. In the run in to the referendum on the ESM Enda let it be known Ireland stood to be a beneficiary of the ESM as it retroactively separated our sovereign from the legacy banking holes. Since then its been abundantly made clear that ESM would not be the source of recapitalising of our banking black holes.

Before the ESM canard there were eurobonds tantalisingly permeating discussion against the relative merits of default a la Iceland or bailout for Ireland. Eurobonds would suddenly drop from the heavens to save our sovereign taxpayers from odious debt.

But Angela Merkel quickly doused this fire with cold water and they were quickly taken off the table of political discussion.

Inside Germany there has been other discussion on the matter. One interesting proposal has emanated from

http://www.notre-europe.eu/media/debtcrisis-bankingcrisis_s.fernandes_ne_june2012.pdf?pdf=ok

The German Council of Economic Experts (GCEE)… for the creation of a
“European Debt Redemption Fund” .

The proposals for same would contribute
“to a rise in borrowing costs for those EMU
member states that are currently benefitting from
exceptionally low interest rates – thanks, in part,
to the public debt crisis – such as Germany and
The Netherlands (among the countries taking part
in the ERF)”.

Yes, there is added value vis-a-vis interest rate reductions when comparison is made between a truly awful economic scenario of 126% debt to GDP and a country keeping with the 1999 expected norms of 60% debt to GDP and annual deficits circa 3%, compared to the bad boys you will get a bonus.

EDRF conditionality would follow along these lines:

1. member states must adopt a budget consolidation strategy and a structural reform agenda;

2. debt up to 60% of gdp must be restricted through the adoption of a golden rule limiting structural deficit to 0.5%
of gdp (in compliance with the fiscal compact rule);
3. the cancellation of each country’s excessive debt will be ensured by special fiscal measures designed to generate revenue
earmarked for paying the debt, such revenue being directly paid into the erf without passing through national budgets;
4. each country must guarantee the debt that it transfers to the fund through a 20% deposit in the shape of international
(gold and currency) reserves, for use as collateral in the event of default on payment. the joint and several liability of
member states only applies after the use of the collateral.”

Its plain to see why the above has got little traction in debate towards a solution. If you don’t see why, please put S before the ERF.

Somehow a formula for the solution of Ireland’s debt profile along these lines is sought by Enda Kenny.

Here’s a summary of some options regarding the bringing safely into dock legacy debt in Irish banks a fall out of the Irish guarantee. It should be noted the guarantee has made it extremely difficult for European partners to help restructure Irish banks.

http://www.finfacts.com/biz10/Ireland_bank_debt_64_billion_Europe.pdf

If truth were told he’s been spinning propaganda for quite some time but shortly he’s due to fess up to the distorted black is white message and he’ll be forced to face the truth, failure is imminent on his efforts to negotiate a satisfactory and safe recapitalisation of Irish bank debt within the EMU.

This week he’s been to Europe loudly proclaiming the need for Ireland to be given retroactive burden sharing of its banking debt through the ESM preaching the mantra that such legacy debt relief had been signalled by leaders of EU in 2012.

Banking union has been offered as a panacea that will resolve legacy bank/sovereign issues. BU and ESM have been mooted as necessary conditions for a resolution but both, especially BU are mired in extraordinarily complex and tortuous negotiations facing insurmountable obstacles and little hint of any progress.

Basically, what Ireland has ceded vis-a-vis its sovereignty other states in the EMU are not prepared to cede. Germany does not want Ireland et al looking over its shoulders and telling it how to run its banks, economy, how much it pays its doctors, its politicians, its seniors in the public service, .25 million euros for a symbolic president, its richly paid legal servants all at expense of the bottom rungs of society….

Banking union is not the panacea that Europe wants. WW11 rejected a panacea by a former Third Reich, EMU means what it says, monetary union or fiscal union. The American Revolutionary War (1775–1783), the American War of Independence, or simply the Revolutionary War in the United States took a revolutionary act to separate the US banking system from that of the UK.

Europe is not prepared to give up sovereignty in favour of a nebulous Banking union gummed by bankers forged on the failure of EMU states already let down by broken promises inside a deeply flawed monetary design …

Realistically Enda Kenny needs to end the fantasy of Banking Union, Eurobonds, ERF. Why should the EMU support a deeply unequal, unjust and unfair Irish economy whose ability to succeed on its own economically is quite small given its unemployment and emigration stats.

Why can’t  Ireland’s legacy of personal, commercial and public debt  be dealt with in a combined red card reset outside the EMU in a write down of odious and legacy banking debt that should not have been foisted onto the Irish taxpayers?

Such is the story Christine Lagarde of the IMF and her officials should be giving to ashen faced Enda on his visit to the IMF this week. Actually, does he care enough to be ashen faced at economic bad news?  Don Quixote would not be ashen faced fighting windmills that he imagines to be giants.

Let’s out of the EMU asap, repudiate odious debt and set about bilateral arrangements through trade agreements with UK, EU, China, Bric and African countries based on the development of a real economy, not one financialised into a zombie debt state by debt zombies in the financial sector?

To read more about the banking union proposals some links…

http://www.irishtimes.com/business/noonan-to-press-imf-over-credit-facility-1.1575275

http://businessetc.thejournal.ie/enda-kenny-letter-bank-debt-sovereign-1144943-Oct2013/

Full Letter:

http://www.independent.ie/irish-news/in-full-enda-kennys-letter-to-eu-leaders-asking-them-to-honour-word-on-debt-29697004.html

http://www.standardandpoors.com/spf/upload/Ratings_US/could_ESM_and_a_European_Banking.pdf

http://www.notre-europe.eu/media/debtcrisis-bankingcrisis_s.fernandes_ne_june2012.pdf?pdf=ok

http://europa.eu/rapid/search-result.htm?quickSearch=1&text=june+12+2012

http://www.irishexaminer.com/ireland/kenny-pledge-to-separate-bank-and-sovereign-debt-irreversible-209411.html

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