Ivan’s solution for Ireland – Debt write-off. or…………………… So long

Frankfurt’s way promises no hope for battered Irish economy

By Ivan Yates

Thursday, April 05, 2012

ENDA Kenny’s presidential address to the Fine Gael conference included
the obligatory sentence: “Ireland will not default on its debts”.

They refuse to get it. Ireland is marinated in debt at every level.
These debts are unaffordable. Whether it’s promissory notes, tracker
mortgages or Eircom, the solution will require, sooner or later, debt
restructuring. Debt deferral only buys time. For Ireland’s economic
recovery and societal salvation to be achieved we have to face our
problems with honesty. The same scriptwriters that convinced Brian
Cowen, that a sovereign bailout was avoidable, have persuaded the
cabinet that economic growth can lead us to debt sustainability. They
were wrong then and are wrong now.

In Greece and Portugal the official language, softly but subtly
changed. Instead of the ‘no default’ mantra it’s finessed into no
‘disorderly’ default. The difference being that it is done by mutual
agreement with the EU Commission, ECB and IMF. Of course, unilateral
reneging on our liabilities can’t be achieved. Bilateral renegotiation
on promissory notes has been underway for months. The prize for being
the best bailout boy in class, or the only PIGS state to re-emerge in
the markets, hasn’t impacted on the ECB. They have conceded nothing in
return for the Irish taxpayer recompensing senior bondholders in full
for bust closed banks — they failed to adequately regulate.

What was achieved last week by immediate non-repayment of €3.06bn of
IBRC liabilities? No discount, no burden sharing, additional costs of
€90m (an interest holiday was abandoned) this year and no agreement to
refinance the €31bn (plus €17bn interest) through the EFSF or ESM at
4%, rather than 8%. Other than very short-term cosmetics, this
face-saving exercise represents a complete failure to confront the
ECB. Marginal extra wriggle room on the cash flow drawdown of troika
funds is the only gain. Frankfurt’s hard line makes a mockery of FG
and Labour pre-election promises. The funny money solution involving
Nama and Bank of Ireland has no impact on our sovereign debt/GDP ratio
and offers no imminent prospect of reducing the overall size of IBRC
bailout costs. The ECB has signalled they won’t be taking their feet
off our throats any time soon.

Prof Morgan Kelly correctly predicted that the mortgage crisis
represented the next horror to undermine our financial institutions.
Yet again, his prophecy is on the money. 2011 annual accounts for AIB,
Bank of Ireland and Permanent TSB reveal glimpses of how the property
crash, with up to 60% house price declines, will destroy their balance
sheets. The Irish mortgage market is facing meltdown. One in eight
mortgagors failed to make any repayments in three months. AIB’s house
loans amount to €42bn, with €10bn comprised of buy to let house
purchases. B of I’s mortgage book is in overall negative equity, with
€15.3bn of asset collateral not fully realisable. Patrick Honohan says
banks should foreclose on non-owner occupiers through repossessions
and enforced sales. Codes of practice should be discarded. This will
drive house values down, but is unavoidable.

Tracker mortgages, many of which are based on interest only repayments
currently, are causing operating losses. Competitive costs of deposits
mean that there is a built-in negative differential between repayments
and costs of funds. The Irish Brokers Association recently completed a
study which indicates that the capital write down, if now
crystallised, on tracker losses is equivalent to 25% impairment on the
loan value. This means if IBRC was to take over the entire €40bn
tracker mortgage liability, banks would have to be recapitalised by an
additional €10bn. The worst case scenario postulated by Blackrock
consultants a year ago may have underestimated ultimate refinancing
needs of our indigenous institutions.

Negative equity mortgages, allowing families to trade up or down,
represent a palliative measure for perhaps only 2% of problem cases.
125% house loans to current market value means piling more debt on
over-indebtedness. Keane Report, mortgage to rent conversions,
personal insolvency legislation and mortgage/income tax relief were
advanced by Enda as his response to the mortgage crisis. Every
conceivable avenue is considered before the ultimate realistic
resolution. In the US lenders have no ability to pursue debts on
houses beyond foreclosing on the property. Return the keys and sell
the house. The balance is written off as debt forgiveness. Can’t
pay/won’t pay circular debates become irrelevant. You forfeit your
home, any renovations and original equity. It allows debtors and
creditors to move on. The market stabilises.

The High Court confirmed on Friday how entities that are too big to
fail, can overcome insurmountable debts. Eircom has 1.1m customers,
ownership of our nationwide telecommunications infrastructure, 3,000
suppliers and 6,400 employees. The dislocation arising out of its
demise is too great to countenance. Their gross corporate debt is
€4.1bn. They can’t repay interest costs and capital. Examinership
facilitates debt discounts of €1.76bn. Secured creditors, senior and
junior bondholders, had no choice but to swap debts for equity. After
100 days, the business can discard its past legacy debts. €1.3bn can
be invested in upgrading the fibre network to establish
next-generation communications. Ireland’s exchequer, also too big to
fail, needs a parallel to examinership.

The household charge debacle should have taught the cabinet a sobering
lesson in public resistance to tax base broadening. If 50% of
households demur from €100 annually, yielding €160mn, what prospect is
there of residential property taxes, garnering in excess of €1bn?
After seven tough budgets, we have maxed out on VAT hikes. Income tax
increases are red line issues. Yet 2012 fiscal arithmetic reads:
expenditure €51.7bn versus revenue of €35bn. Bridging the €15bn gap
remains to be resolved. Goodbody stockbrokers recently published a
table outlining a profile of future Irish sovereign funding. The state
needs cash as follows: 2012 — €29.4bn; 2013 — €22.6bn; 2014 — €18.5bn.
EU — IMF are set to provide us with €22.9bn this year, €10.1bn next
year and nothing thereafter. FG and Labour’s plan to raise €30.6bn
from the markets in 2013 and 2014 are not credible.

The national mission statement is entirely dedicated to saving banks.
The ECB believes rescuing European banks is more important than
sacrificing sovereigns. In return for what? There’s going to be
minimal credit in the economy. Accumulation of bank debt upon
taxpayers forced us into a bailout programme. The IBRC is fast
becoming Nama 2, a toxic skip for tracker mortgages on top of Anglo
and Nationwide manure. Another round of bank recapitalisations is ever
apparent, if they are to be presentable for outside investors.

Decades of austerity and intergenerational sacrifices are required for
hedge funds to buy bank shares at 10 cents and resell them for a euro.
Government strategy is not to seek a game changer. This policy of
containment is meandering up a cul de sac.

PS: This is my final Irish Examiner column, I wish to thank the editor
and staff for the wonderful opportunity over recent years to
communicate my views. Long may ‘De Paper’ flourish and prosper.