That promissory note could literally be torn up

 

The last government agreed that the State should pay €31bn to IBRC (formerly Anglo and Irish Nationwide) over a 13-year schedule ending in 2025. The first payment of €3.1bn was made in March 2011. The next payment is due on March 31.

 

If the European Union and the European Central Bank force us to make this payment, it would amount to increasing the totally unjustified, odious debt burden on the people of Ireland. How is it unjustified? How is it odious?

 

Loan losses that occurred in the Irish banks following the financial collapse in 2008 were calculated in March 2011 at €75bn. In the 12 months since then it is becoming increasingly apparent that mortgage loan losses will get progressively worse. Evidence is mounting that the total loan losses in Ireland could rise towards €100bn.

 

Throughout 2008 and 2009 there was a slow motion run and controlled implosion of the Irish banking system. In response, the ECB advanced massive loans to the Irish banks and in turn the Central Bank of Ireland responded by providing Exceptional Liquidity Assistance (ELA) to the Irish banks.

 

Professors Karl Whelan, Brian Lucey and Dr Stephen Kinsella recently made excellent presentations to the Oireachtas Committee on the issue of the promissory notes and ELA. They showed how the Central Bank of Ireland effectively created €45bn ELA money “out of thin air”. The Central Bank of Ireland doesn’t owe any of this money to the ECB, they said. On a once-off basis, money was created and pumped into the Irish banks to keep them solvent. When the Irish banks repay these ELA loans, the Central Bank of Ireland simply retires them. The money literally disappears. Therefore, the €31bn ELA money created by the Central Bank of Ireland, and advanced to IBRC to cover promissory notes, can and should be written off.

 

Specifically, on March 31 next, the write-off by the Central Bank of Ireland of €3.1bn ELA would mean that the Government wouldn’t have to borrow that money to pay the €3.1bn promissory note. That promissory note could literally be torn up. The same applies to all the remaining €25bn ELA loans to IBRC and the remaining €25bn promissory notes on IBRC’s balance sheet.

 

There is nothing dubious or wrong about doing this. Losses which should have been borne by bondholders have, wrongly, been dumped on the people of Ireland. Normally, when banks collapse, their funders do not get all their money back. In Ireland, bondholders were redeemed all their money with interest at the insistence of the ECB.

 

Since the end of 2008, as payments to bondholders fell due, neither the banks nor the State had the resources to pay them. That is where the ECB stepped in. It lent approximately €135bn to our banks to enable them to repay the bondholders and also to replace lost deposits. The ECB became fully complicit in dumping this bill onto the people of Ireland.

 

Under normal capitalist principles, the ECB would not have shielded bond- holders from the consequences of their investments. They would have to accept that Ireland is “taking one for the team”. Taking all this into account, again under normal capitalist principles, the ECB could not object to writing off up to €75bn of the loans it advanced to the Irish banks.

 

If the ECB is unwilling to do this, then the Central Bank of Ireland should top up its Exceptional Liquidity Assistance loans to the Irish banks to €75bn (in the case of AIB and Bank of Ireland substituting ELA for ECB loans) and then write it off. The ECB has a limited ability to prevent the Central Bank of Ireland from doing this. It can only veto a proposal by the Irish Central Bank with a two-thirds majority of its governing council. There are 23 members of the governing council, including Ireland’s representative, Governor Patrick Honohan. So, if he and seven other members of the governing council support the proposal to write off the ELA money there is nothing Ms Merkel, Mr Sarkozy, Mr Draghi or anybody else can do about it.

 

But has Mr Honohan held discussions with ECB President Mario Draghi regarding writing off the ELA money? Has he lobbied other Central Bank governors? Has he lobbied the other eurozone countries in trouble so we can take a joint approach towards debt restructuring?

 

Writing off that €75bn would have a massive positive impact on Ireland. Firstly, this would allow AIB and Bank of Ireland to pass on these write-downs to mortgage holders and struggling businesses, providing a much needed stimulus to the Irish economy. Secondly, it would allow us to ‘tear up’ our obligation to redeem the €31bn promissory notes. Overnight, our national debt would fall towards the Eurozone average and substantially improve our prospects of leaving the EU-IMF bailout programme.

 

We have been damned with faint praise from the troika. But the current EU policy of ‘kicking the can down the road’ just prolongs the crisis. Our Government has shown willingness and fortitude in taking tough, necessary and often deeply unpopular decisions. It’s now time for the ECB to establish fairness within the eurozone. If the European political establishment really believes we’re doing such a good job, the best way to show it is to agree to lighten the debt load on the people of Ireland by €75bn.