Get best debt deal… or stop the repayments

 

IT’S PRETTY rare that a Government TD cries “hear, hear” during an opposition member’s speech.

 

But Fine Gael TD Peter Mathews did exactly that recently when Independent Stephen Donnelly was on his feet talking about our bank debt problems.

 

The occasion was the visit of European Parliament president Martin Schulz to the Dáil. Schulz, who is German, gave a well-received speech stressing the need for EU solidarity, particularly in the context of easing the burden of Ireland’s bank debt.

 

“Irish taxpayers are now paying the bankers’ bills to stop a domino effect that could have dragged the whole European banking system down. Therefore, solidarity with Ireland is to give something back. You took the burden on your shoulders to avoid the crash of the systems of other countries, including my country,” Schulz said.

 

Tánaiste Eamon Gilmore spoke next followed by Fianna Fáil leader Micheál Martin and Sinn Féin president Gerry Adams.

 

By the time it was Donnelly’s turn, a lot of TDs had left the chamber. But not Mathews. And it was when Donnelly made the point that “Ireland did not get a bailout” (ie, we got loaded with bank debt in order to protect the European banks) that the Fine Gael TD issued the cry of “hear, hear”.

 

It’s not that Government and opposition TDs never agree on issues. There’s a lot of agreement, on issues large and small, but usually it’s expressed in private. On this occasion, there was very public agreement.

 

To explore this further, the Irish Examiner asked both to do a joint interview. They readily agreed.

 

In some ways, they have plenty in common: both first-time TDs, both without previous involvement in politics, both analytical by profession €” Mathews is a qualified chartered accountant who boasts an MBA, two decades of working in specialist areas of banking, and several years as an independent consultant; Donnelly studied engineering at UCD and MIT before joining management consultants McKinsey and later completing a Master’s in Public Administration at Harvard. The banking and economic crises spurred both to run for the Dáil.

 

And while they don’t agree on everything €” they have different views on corporation tax, and differ also on their opinions of Finance Minister Michael Noonan €” they are on common ground when it comes to the bank debt.

 

Payback: Their language is slightly different but their end point is the same: the State pumped €64bn into failed banks in order to prop up the European system. We should get that money back.

 

But how?

 

“What I’d be suggesting is a forced creditor buy-in,” says Mathews.

 

The €64bn in capital pumped in by the Government includes the Anglo promissory note, which is effectively being funded by the Irish Central Bank through what’s known as emergency liquidity assistance (ELA) and then repaid by the State in annual installments. Mathews’ first step would be to “tear up” the promissory note as it is debt of “odious provenance”, saving around €32bn.

 

For the next €32bn, he looks at the €135bn in loans and ELA issued by the European Central Bank and the Irish Central Bank to the Irish banks by November 2010. That money was used both to repay senior bondholders in full and to replace haemorrhaging customer deposits. Again, Mathews argues it had an “odious provenance”, given the ECB’s insistence at the time that senior bondholders be repaid in full and no bank be allowed fail. Ireland was being used to prop up the rest of the EU, but is now on the hook for all the money. He argues it should be written down. A €32bn saving here, together with the torn-up promissory note, would provide the €64bn reduction in bank debt.

 

Were this to be done, Irish banks could then “get on with a much more efficient and effective writing-down of the loans of households and businesses, and with that release from an impossible debt burden, households and businesses will be in a position to get back to normal spending flows and investment flows”.

 

Donnelly puts it this way: Ireland got a €67bn bailout from the troika, and pumped €64bn into failed banks to recapitalise them. The banks, in turn, had to repay their senior bondholders, some €124bn of them. In Greece, there was a 50% write-down on such bonds, but that did not occur here. As a result, he argues, the Irish banks paid €62bn unnecessarily to senior bondholders €” almost precisely the same amount the State pumped into the banks. It should get the money back.

 

“The Central Bank fund €” the ELA €” writes it down by €64bn, and then we can take our money out of the banks. That’s the way to do it, I think.”

 

Default: Michael Noonan doesn’t appear to believe the €64bn approach is remotely feasible, given the ECB’s hard-line stance, and is instead chasing deals on separate elements of the debt €” lower interest and a longer repayment term on the Anglo promissory note, for example, and the use of the EU’s permanent bailout fund, the ESM, to shoulder some of the bank debt.

 

But he has never spelled out how much he is seeking to save, and that is the wrong approach, in Donnelly’s mind.

 

“Let’s figure out how much we need back. Because there’s something I’m concerned about, which is the danger of limited success.”

 

In other words, if Ireland got a bank debt deal, but it was insufficient, the country would remain financially crippled.

 

And then, there is the worst-case scenario, unlikely as it seems €” the EU saying no deal at all. “If they were to say, ‘You’re not getting anything back’, then you’re forced into a unilateral default,” says Donnelly. “And if you’re going to default, you’re only going to do it once, so you’re going to take the full €64bn down.”

 

He goes on to cite research that the long-term effects of default are not as severe as people may think, although it’s not a step to be taken lightly and the process would be “very, very painful” for a couple of years.

 

Mathews intervenes to agree on the technical point about recovery from a default. “The healing process is quite quick.”

 

But default is worst-case scenario. What both men want to see is a viable deal on the debt, and they share the view that it is time for the State to spell out a blunt message.

 

Mathews says the Taoiseach and Finance Minister “are men of integrity” who have “burnt a lot of shoe leather” trying to negotiate a deal and are putting “every ounce of effort” into it.

 

“But as Stephen has said, and I think we would both agree, you have to actually put a measurement, you’ve got to put figures on the target. Then you’re talking around something that is measurable and quantifiable and is explainable €¦ and therefore it becomes a better argued case.”

 

He acknowledges there may be a sense in diplomatic circles that being upfront about our demands would risk destabilising negotiations.

 

“But you know, in business, you don’t destabilise by bringing the crunch elements right up to the discussion. In fact, it’s like a spearhead €” you’ve got to have a point.”

 

To make the message clear, both men say serious thought should be given to not making the next Anglo promissory note repayment of €3.1bn due in March.

 

“We’re not in a position to pay it. We should press the pause button,” says Mathews.

 

Donnelly says that while French president Francois Hollande’s clear support of Ireland is “very significant” and therefore very welcome, “I don’t put any credence on what comes out of Germany €” I just don’t.”

 

German chancellor Angela Merkel can, in his view, say all she likes about Ireland being a special case, but in the end, only actions will count.

 

“If we don’t get any serious movement before the Anglo bond pro-note is due… I would pause the bond. Under no circumstances would I pay the bond.”

 

Deranged: Another of the things that Mathews and Donnelly have in common is that both have provoked the finance minister into rare flashes of anger more reminiscent of the 2002-era Michael Noonan when struggling desperately as Fine Gael leader than the genial, wise elder image he conveys these days.

 

At an Oireachtas committee meeting last year, when Mathews spelled out his solution, Noonan said people in Europe would think him “deranged” were he to propose it.

 

“The problem is that while the deputy’s analysis is absolutely brilliant, his solution is what Emmet Oliver described in the Irish Independent as a further kindergarten solution,” Noonan said.

 

Last month, it was Donnelly who got under Noonan’s skin when suggesting AIB bondholders should be named.

 

“A populist publicity stunt under the pretence you’re knowledgeable about these matters,” Noonan sneered.

 

So what do they make of their ability to provoke Noonan?

 

Mathews waves it off, saying “I’m not thin-skinned” and that the minister is “a terrific fellow” doing his utmost in a hugely difficult position.

 

A position inherited from the previous government, Mathews adds, which put in place the bank guarantee in reaction to all kinds of “neurotic” legal and financial advice. Although he speaks his mind on Government policy, nobody in Leinster House would class Mathews as a “rebel” TD. Unfailingly polite, he is loyal to his party and loyal to the coalition. But he was elected against the backdrop of the banking and economic crises, is fired up about them, and therefore calls things as he sees them €” but often at length and to the irritation of his colleagues. One of the dangers of the whip system in Irish politics, he says, is that it can “muzzle parliament” at a time when a clear message from the Dáil is never more urgently needed €” namely that Ireland’s debt is unsustainable and a deal is required.

 

Donnelly, for his part, is also frustrated about the weakness of the Dáil as a parliament, but, unsurprisingly, has a different view of the finance minister.

 

“I think he’s been given an incredibly easy ride by the media €” I don’t think anyone takes him on, and I don’t know why it is.”