Saturday, July 23, 2011

Ireland in Debt. Hostage to fortune, or just plain hostage?

We have been repeatedly told that "we" lost the run of ourselves, that "we" all partied, blew the boom, and now "we" are dependent on the "kindness of strangers".

This is a dangerous lie, designed to make us feel guilt rather than justifiable anger at the banking crisis.

The banks didn't fall apart because of people not paying their home mortgages, it was their reckless lending to speculators, and over-borrowing from the bond markets that landed them in trouble.  It's nothing to do with the average John or Mary on the street, the vast majority of whom continue to pay their mortgages even in these tough times.

Irish Examiner
Most of the deficit is caused by the fact that we borrowed money to help out the banks. These banks borrowed ridiculous amounts of money from the bond market in order to lend it out to the property developers who didn't know when to stop.


The banking system failed because of lack of regulation and sheer greed by private companies. Money from British, German and French banks poured into Irish banks as the likes of Anglo, AIB and Bank of Ireland continued to throw money at developers building houses like there would always be someone to buy.

The fact that these people, - all very well paid to make investment decisions - got it wrong, is not our problem. As we heard so often on the TV and Radio ads "The value of your investment can go down as well as up".  Or perhaps that is just for Joe Soap?
Rather than take their losses, the banks who lent these huge sums somehow got the Irish government to agree that the taxpayer should bear the burden.

So now, while already adjusting to seeing tax-paying construction workers joining the dole queues, the taxpayer was expected to fund truly massive government borrowings, in order that these international speculators shouldn't have to suffer for their own greed.
These boys were paid very well to 'lead' the country.

Indeed, it was decided to tell the people that it was our greed, and that we all partied. And therefore, we must all share in the tough decision. This was repeated time after time, and a surprisingly large number of people believed it.

In case you STILL don't get it. This was not about 'bailing out Ireland'. We were the ones doing the rescuing, and if you need it made into a simpler example, I'll give you one.

Imagine being forced to remortgage your house to pay off the debts of a local bookie. Not money you owe the bookie, but money the bookie owes to another bookie.  Only a fool or a madman would agree to this, but for some reason when the government does it, a lot of people think it must be okay, because they're in charge and they know what they're doing (supposedly).


To make things worse, the way it is financed, and the shameful lack of information given to the people, means that most people aren't even aware how bad the situation is.
Most of us are familiar with mortgages, which is what we think of when someone says 'very big long term loan'. But a mortgage is very different from a 10 yr government bond.



In a mortgage, (if interest rates are fixed or relatively stable) you generally pay the same amount of money each month. At the start most of this money is merely paying off the interest (shown here as the  red section of the slices) and less is going towards the actual repayment of the principle. Still, the payments tend to be fairly even over the life of the mortgage.

A bond is a totally different situation. If you issue a bunch of  10 yr €100 bonds, with a rate of 5%, then you don't pay the €100 back until the very end of the 10 years. In the meantime, you pay €5 per year to the bondholders.
So, nine years of paying €5 and then, boom in year 10, you suddenly have to come up with the goods. the last €5 plus the original €100.   It wouldn't be too difficult to 'not mention this' to the public, if you can get away with nine years of dodging and chancing before it blows up in your face.

This is the same way the banks borrowed. And what happened where their bonds came due for repayment? Well, the government paid it instead. How? Well, we issued our own bonds... therefore borrowing money at interest from some of the same people we had just paid off on behalf of the banks.

That's how the massive debts of the banks is being paid off by taxpayer funded borrowing. We've already done this for about 70 BILLION euros worth of bank debt. That means we borrowed 70 billion at interest, probably costing us well over 100 billion to pay back.
And that's only about half of the bank bonds. There are more out there due to be repaid over the next few years.  As they get paid off, our national debt goes up and up, and the interest payments alone are inflating our deficit, and forcing cuts upon services. When the actual repayment date comes up, we're completely screwed.

Apart from the crooks who lent us the money, to pay off their own bad loans to the banks, other investors also think we are fools.  Looking from the outside at a country that has agreed to cripple itself with debt, and then expects others to lend it money at cheap rates, we should not be surprised at the lack of sympathy from 'the market'.

As economists like Prof Kevin O'Rourke, David Williams, Constantin Gurdiev and others have pointed out, it is madness to expect that we could even afford to take on this bank debt.

It is because of these bank debts, that the IMF /ECB came into the country. It is because of these bank debts that we are being dictated to on cutting spending, so that we can go on our knees begging for money at high interest rates from the same shower we're rescuing in the first place.

As the Manic Street Preachers sang ... "If you tolerate this, then your children will be next".
Perhaps that should be our new national anthem?

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