Feb 2013

The Anglo Promissory Notes

Still busy busy busy with work, but I’ve got just enough time to post a few thoughts here.

Today, over at On This Deity, my article on The Maastricht Treaty has come around again. I’m not sure whether it’s appropriate or entirely inappropriate that, on the anniversary of the treaty that probably did more for European political and economic integration than any other single act, the Irish government have passed the Irish Bank Resolution Corporation Bill 2013 (PDF).

supplicationThis Act of Parliament is being hailed by the government as a great success. And they expect it to lead to a deal with the ECB on the issue of the Promissory Notes. All of which probably sounds like gibberish if you’re not familiar with the Irish situation. So here’s a brief crash course:

In 2007 the Irish banking system began to creak. But everyone involved – bankers, regulators and the government – all insisted that nothing was wrong.

In 2008, the Irish banking system collapsed. The only thing that surprised me about this was the fact that lots of other people seemed surprised by it. The response of the Irish government was to issue a blanket Bank Guarantee. This was a massive mistake and I still believe the people responsible should be in prison. They’re not.

At the time Ireland had several banks, all of which were in serious trouble. The two main retail banks – Bank of Ireland and the Allied Irish Bank – were taken, in large part, into public ownership and the government is still propping them up. These are costing the Irish people quite a lot of money, but I can just about understand the argument in favour of the government’s course of action with these two banks, even if I think it’s wrong.

There was another bank, however, called Anglo-Irish Bank. This bank was responsible for massive loans to Irish property developers and – although we’re unlikely to ever get to the bottom of how this bank was mismanaged – the whiff of naked corruption coming from its direction is overpowering. Together with another failed financial institution (Irish Nationwide Bank) Anglo was renamed Irish Bank Resolution Corporation and effectively moth-balled. It ceased trading as a bank, but remained a trading corporation (or “zombie bank”, as it came to be known).

The reason for this was that the corporation owed upwards of €34 billion euros to European banks and investors who had pumped money – via Anglo-Irish Bank – into the Irish property market. Just so we’re clear; private investors and private financial institutions speculated on the Irish property bubble and when the bubble inevitably burst (as anyone with an IQ higher than that of a brain-damaged bumblebee knew it would), they demanded they suffer no losses as a result of their speculation. Instead, they exerted a huge amount of pressure on the Irish government to cover their losses. And – spineless gombeens, every last one of them – the Irish government acquiesced… transferring those gambling losses onto the shoulders of the Irish people.

This transfer was done using a mechanism called “Promissory notes”. In essence, our government promised to pay more than €3 billion to the zombie bank, on March 31st every year until 2023. The observant among you will note that €3.1 billion per year, every year between 2009 and 2023 comes to quite a bit more than the €34.7 billion owed by Anglo-Irish Bank. This is because the gamblers whose losses being covered by the Irish people are also demanding that we pay interest on their losses. You could make it up, but people would think you were high.

Anyway, this €3.1 billion per year is just for the Anglo mess. The Irish government is in all sorts of other financial and economic trouble without that particular millstone hanging around their neck. So ministers have been appearing on our screens for the past couple of years insisting that “a deal on the promissory notes” is just around the corner. It’s a hell of a big corner.

Because rushed, late-night decisions always turn out well

Last night, during a last-minute, rushed sitting of The Dáil (the Irish parliament) – in a move that eerily echoes the night of the blanket Bank Guarantee back in September 2008 – the zombie bank was finally wound up. Part of it was transferred to NAMA (the National Asset Management Agency), which was a structure set up to handle the bad debts of the banking industry after the collapse of 2008. And the promissory notes have disappeared for good.

CapitalismExcept they haven’t of course. The plan is to replace them with government-issued bonds. Perhaps 15 year bonds… perhaps 20 years… perhaps 30 years… who knows? Our government is awaiting instruction from the European Central Bank. Because heaven forbid the Irish people be permitted to have a say in the repayment terms for private debts they shouldered at the behest of the ECB.

As I say, this is being portrayed as a victory by our government. In reality it’s nothing more than the final step in the transformation of the private debt into sovereign debt. Up until now the mechanism of the promissory notes provided a barrier of sorts (albeit a very weak, almost invisible one) between the Anglo-Irish Bank losses and Irish sovereign debt. The Irish government – if it actually had any principles – could have cancelled those notes without triggering a sovereign default (though in all likelihood the markets would have reacted in much the same way as they would have done in the case of such a default). There would have been a short-term crisis, certainly, but this time next year the Irish people would have weathered that crisis and we’d have shrugged off €32 billion of debts we never incurred.

Of course, we’d still have billions of private debt on our books thanks to NAMA and the other banks, but that particular weight would have been lifted.

Instead, our government has basically mixed all that Anglo debt in with our other debt. It is ours now, and refusal to pay it would constitute a national default. Our finance minister, Michael Noonan, has managed to summon the awesome power of all twelve of his brain cells and sunk us even further into debt than we already were. As he did so, our glorious leader (Enda “The Irish People Went Mad Borrowing” Kenny) insisted that extending the terms of repayment represents some kind of triumph. I’m expecting to see a photo of him stepping off a plane waving an ECB document in the air. “Growth in our time” he’ll exclaim. And then trip down the stairs.

It strikes me that portraying a repayment extension as a victory is about as insidious as it gets. Ireland is like a man being forced to pay off someone else’s mortgage. “Look”, say the ECB, “we realise you’re having some problems paying this debt as fast as we’d like you to. So we’ve decided to let your kids help you pay it off once they’re old enough to work. Can’t say fairer than that!”

Except you can. Pretty much anything else you say would be fairer than that.

[The issuing of long-term bonds] is using posterity with the utmost cruelty; because it is leaving them the great work to do, and a debt upon their backs, from which they derive no advantage. Such a thought is unworthy a man of honor, and is the true characteristic of a narrow heart and a peddling politician.

Thomas Paine | Common Sense

Posted in: Opinion