Peter Mathews | Contributing Writer
On 28th November 2010 Ireland signed up to the Troika 3 year Programme of loans assistance. At the time the 6 Irish banks owed a whopping €135bn to the European Central Bank (ECB). This was an eye-watering ECB exposure to 6 Irish banks in a peripheral country with a population of only 4.5m people, with an open economy and a Gross National Product (GNP) of only around the same amount of €135bn. The rapidly mounting level of ECB exposure up to a whopping €135bn level was the alarming reason that brought the ECB, alarm bells ringing, post haste, to Ireland.
The Troika will continue to monitor the Irish economy and key economic indicators, albeit with less frequent visitations, in order to be satisfied with Ireland’s capacity to repay their loans
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Since then, over the 3 years up to December 2013 the economy continued to be ground down by fiscal adjustments, while a total of €68bn of assistance loans from the Troika (EU, ECB and IMF) as well as some smaller bilateral loans from the UK and Sweden were disbursed to Ireland. Direct close supervision by the Troika of compliance with the terms and conditionality of the disbursements came to an end along with these final disbursements. However, the Troika will continue to monitor the Irish economy and key economic indicators, albeit with less frequent visitations, in order to be satisfied with Ireland’s capacity to repay their loans. This is the true meaning of “we have successfully exited” the EU IMF ECB Bailout Programme.
Ireland now carries a Government Debt burden of about €205bn representing about 124% of GDP or 145% GNP – a better measure of debt burden on the indigenous economy. This is a massive load on our small open economy. As a direct result of the enormous credit bubble ending in the financial collapse of 2008, Irish households and SME’s (non-financial corporates) also carry massive legacy debts. Aggregating these 3 components of the legacy debt overhanging on Ireland represents a combined 450% of GDP, a truly over-burdening level of debt severely obstructing the prospects of balanced economic recovery and sustainable growth.
Bank of International Settlements economists Cecchetti, Mohanty, Zampolli, in an outstanding paper entitled “The Real Effects of Debt” presented in Jackson Hole, Wyoming, USA, in August 2011 to a conference of Governors of Central Banks of leading OECD countries, demonstrated that when the aggregate level of overall debt in an economy exceeds 300%, economic growth becomes undermined, resulting in economic under performance, stagnation and contraction. Ireland is at extremely high level risk of long term economic stagnation and decline, with the realistic danger of economic lost decade(s), because of our extremely high aggregate debt levels. So there is now a pressing imperative for negotiating structured Debt alleviation. The fact that the 40 year long term e28bn (Prom Note) Bonds, at present held by the CBI, have an odious unjustified genesis gives compelling support to our contention and undeniable insistence with the ECB for a fully justified cancellation of the Bonds.
Well researched recent assessments by experienced expert outsiders have noted that these banks are likely to require a further €20bn-€25bn capital to make adequate provisions for losses and write-offs on these legacy loan books
Even after the March 2011 recapitalisation of our 2 survivor banks, AIB and BoI, in July 2011, it has nevertheless become increasingly apparent that the credit bubble legacy mortgage loan books and the SME legacy loan books are far more problematic and in much greater arrears and unrecoverable loans trouble than originally known. Well researched recent assessments by experienced expert outsiders have noted that these banks are likely to require a further €20bn-€25bn capital to make adequate provisions for losses and write-offs on these legacy loan books.
The evidence of what went on in international banking and financial markets and the absence of regulation provides a compelling, indeed overwhelming, case that such further €20bn-€25bn capitalisation, needed for the 2 survivor banks to write down mortgage and SME non-performing and non-recoverable loans to realistically recoverable amounts, should be provided by euro-system.
Such additional €20bn-€25bn creditor compression capital from the euro-system would enable the banks to shake off their present operational paralysis, and to finally start writing down customer loans to realistic collectible amounts. This would allow bank customers (there’s over 100,000 households in chronic mortgage arrears) to return to normal economic functioning, with normal levels of consumer expenditure, savings and investment. This would allow the indigenous economy to recover properly and to return to normal growth. If it doesn’t happen we face lost decade(s) of stagnant economic existence. What a depressing prospect, but it needn’t be so.
The upcoming European Parliament elections pose a huge chance for Irish citizens to make their voices heard. It would be a very powerful statement to our European partners if each Irish candidate for the 11 seats on offer entered a pre-election pact to ensure that each of them would be part of a cohesive group, dedicated to advance the Priority Objective in seeking debt write-downs. Such a clear and bold strategy would not only command wide respect, but would also demonstrate justified, courageous leadership on behalf of the Irish people, while focusing minds in the European Commission and ECB as well as the Parliament. This is exactly the kind of resolve we need to guide Ireland’s return to economic prosperity.
