Why Fine Gael's "chicken little" act doesn't add up.

Brian Hayes, junior minister for propoganda

Does this sound familiar "If we don't do this, we'll be out of the EU,
and we'll be back to the days when we had nothing"?  
Nice? Lisbon? Yes, they trotted it out then, and before, and they are reheating this "chicken-little" scare tactic once more.

The latest is junior minister Brian Hayes telling us that we must
"clear the debts or go back under Britain's skirts."
Apart from the foolishness of playing the 'Britain card' so soon after
the visit of Lizzy Windsor, the threat was rubbish.
The Minister managed of course to present the only options as paying off all the debts, including those of the zombie banks, or leaving the euro, losing our sovereignty (as if it was being bravely defended now).
This is utter crap, which is nothing new from politicians, but it is also dangerous.
This country should not pay for bankers debts, and also CANNOT pay for them, not unless it is forever strung out, by 'deals' that piece by piece privatise everything possible, while reducing living standards to something similar to Poland or Turkey.   

The stringing-out option is actually the one most appealing to politicians, because of how they think. For them, burning the bondholders would be a brave/risky thing to do. Politicians do not like risk, even if it is the right thing to do.
They don't like to stand up for the people if it makes them unpopular with the powers that be. (This is why Enda didn't make his 'brave speech' ten years ago when the Church was much stronger in Ireland).
Kicking the can down the road, beyond the next election on the other hand is very tempting because then the crash, when it comes, can be blamed on something else. This, I suspect is the actual 'policy' in place at the moment.

Breaking the rules of investment 
It's been almost a decade since I worked in investment banking, but I doubt the rules have changed all that much (the biggest change seems to have been how easy it is to break the rules, and we should have no sympathy for anyone who does.)

Rule no. 1  -The value of your investments can go down as well as up.
Investing is risky and you may bet on the wrong horse. This happens every day, and investors, if they are not bankrupt, just take what they have left and find another investment to bet on.

Rule no. 2 - Diversify.
Because of rule no. 1, it's not a good idea to put all your eggs in one basket.
 Most funds would limit the percentage of the fund that should be in any particular sector, any particular country, (unless it is specifically a "country" fund) and any particular share, bond or derivative.  Eg. A fund might have 90% of it's value in shares, 5% cash, 5% in bonds.
Of the shares, 20% might be in aerospace 20% in pharmaceuticals etc, so the risk is spread across different sectors, and perhaps 5 - 10 different companies in each sector, so no more than 4% of the fund is
based on one single share. 
Likewise, the 5% in bonds might be spread evenly over 5 different bonds.

Just knowing these two rules about investment tells you something important.
First, that the bondholders are getting the best deal in the universe by having the downside removed from their reckless bets, and secondly, that the percentage of their wealth that was in our zombie banks, probably accounts for a few percent of their investments.
In other words, they could easily afford to take the loss.

Ireland cannot afford to be an insurance policy for reckless investors.
Unlike these investors who stand to lose a small percentage of their funds, the bonds are a huge burden for Ireland.
The amount of tax collected last year was about €41 billion euro.
That's a lot of money, but consider that we have not only pumped into billions into recapitalising the banks, but we've also started paying off their bonds. In September alone we paid off €55 billion of bonds
that reached their maturity date.
The Irish state, of course didn't have €55 billion handy. So, to pay off the banks bonds, the government issued Government bonds. The govt won't tell us who these bank bondholders are, even though Senator
Norris tried to read out a list in the Seanad. In all likelihood, quite a lot of the newly issued government bonds were bought by the same people who bought the bank bonds (probably including some of the
crooks who were 'managing' our banks). In other words, they'll get paid twice for lending recklessly to the banks, and at high cost of borrowing as well. 
When you consider that, the rate reduction recently agreed doesn't look like quite the great victory it is being hailed as.

What's a bond?
Bonds are a way of raising money for a fixed term. They are not like normal loans, where you borrow say €100 and pay it back in roughly equal instalments.  They are like an "I.O.U" that is auctioned off to the highest bidder. It promises to pay a fixed amount called a coupon at regular intervals, as well as a lump sum at the end (the maturity date).
The 'coupon rate' is a bit like interest, but there's an important difference, which I'll discuss later.

Take for example a 10 year €100 bond with 4% coupon rate. This "I.O.U' says, the government of ireland promises to  pay the bondholder a dividend or 'coupon' of €4  (that's 4% of the €100 "par value") per year.
This is usually paid out as  €2 every six months, for 10 years and at the end of the ten years, the bond issuer pays over the €100 "par value" as well as the final €2 coupon.
 So, you would pay out €140 overall - €2 every six months for ten years with the last €102 coming right at the end.
So, your payments are not evenly spread. There is a big shock at the end, for anyone who was barely scraping by paying the interest in the first 9 and a half years.

Compare this to a 10 year loan at 4% where to borrow €100 you would be paying 12.15 per year, with no big shock at the end, and it would cost 121.50 overall.

What's worse, is that when this "I.O.U" is auctioned, you don't actually get €100 .. you might be get €90
Remember the "€100" par value is what the bondholder gets, not what you get when you sell it.
Usually when a country is in trouble, its bonds sell for less than face value. Irish bonds are selling for less than the face value, and German 30 year bonds are selling for more than face value.
A recent bond issue by the Irish government issued an eight year €100 bond at 4.5% and the average price was €90.49 
So to raise 1 billion euros, instead of issuing 10 million of the "€100" bonds,  you actually have to issue over 11 million of them, about 11% more than if you sold them at the €100 par value.  
So that's 11 million interest payments, and 11 million times the par value at the end.
And remember, that 4% rate is not 4% of the sale price.

{skip this bit if you hate maths}So, if stick with our example of a 4% 10 year bond, selling at €90, 
To issue enough bonds to raise €1 billion today, you pay over €44 million per year in coupons for ten years (€444 million) , and over €1.111 billion at the end of the ten years. totalling over 1.55 billion
(€1,555,555,555)
If we'd managed to sell the bonds at face value, then we would have only paid over €40 mill per year interest plus 1 billion on maturity, totalling 1.4 billion, so issuing below par costs a lot extra to pay back.
{okay, it's safe again now.)

What's this about bond yield?
That's how the people buying the bonds look at how much interest they get on their money.
Bearing in mind that the bond pays a 'coupon' which is a percentage of the face value, if the bond sells for less than face value, then for the person buying it, the return on their investment is higher than
the coupon rate e.g 4% of €100 is €4, but if you only paid €90 for it, this €4 is a 4.44% return on investment.

If you buy a 10 year bond, you don't have to hold onto it for the full 10 years, you can sell it on to someone else, hopefully for more than you paid for it, but if it looks like a risky deal, and the price keeps falling, then you'll get a lower price for it, and the new buyer will calculate a higher yield.  Irish bonds are priced so low at the minute that the yield is almost 12% on a ten year bond, and almost 15% for  2 year bonds.

At the moment the government is not issuing any new bonds, so this hasn't increased the cost of our borrowing, but it tells us what the cost would be if we tried to borrow on the bond market today.

One of the prime reasons that our bonds are viewed so badly is that the 'market' does not have much faith in the countries abilities to repay what it owes, seeing as we have so heavily loaded ourselves up
with debt to pay off the money owed by zombie banks. Most of the money we're borrowing is for paying off the bank debts, but the increased cost of borrowing applies to all of our borrowing.

Kicking the can down the road.
I've already described how the way bonds are repaid helps to disguised the huge debt on the country by delaying the largest lump sum repayment until the end, and how this suits career politicians who don't like to be unpopular. Well, one way around being wiped out when the lump sum comes due, is to issue even more bonds, to pay off the
lump sum, but this of course leaves us with an even larger lump sum looming down the road.
This is called a rollover, and is common practice with smaller more manageable debt.
The problem with rolling over massive amounts of debt is that the market has you over a barrel and you can end up paying very dearly to roll it over, either through very high bond yields, or by being forced to agree to a new list of cuts and privatisations or both.

The logical solution in this situation, where most of our debt is actually bank debt, is to say that we won't pay back money we didn't borrow. The markets think we are idiots to do it, but of course, they will accept the money if we're obedient enough to pay it.
They try to scare us by saying nobody would lend us any more money, but this is rubbish, the european banks, cannot afford to let Ireland go down the tubes, because of the knock on effect it would have on the euro, which would wipe out a lot of value on their other investments, hurting them far more than the losses on the bonds ever would.
If we tell the bankholders that they have to accept the rules of investment, and accept that their bonds in zombie banks aren't going to be paid by the state, then our own level of debt will drop, the market will consider us less of a risk, not more, and we will be in a better position for economic recovery and therefore more attractive to
investors than we are now,which is on the road to financial slavery or bankruptcy.

So, while it may suit our politicians and the bankers to play chicken little. It does not suit the people of Ireland. Listening to the 'experts' lecture on this, will lead to more and more money going to bankers, and more and more cuts and privatisation for us.
It's time we took control of our own destiny, got out on the streets and demanded an end to this gigantic swindle that is being pushed on us.