Speaking in Blanchardstown at a public meeting with Fintan O’Toole, Assistant Editor of the Irish Times, on the theme of ‘A Second Republic’, Deputy Joan Burton this evening said:
“It is deplorable that, as the second anniversary of the blanket bank guarantee approaches, the government have not introduced the one measure that could mitigate the massive financial burden that the guarantee will impose by shifting at least some of the burden from taxpayers to the professional investors that invest in banks.
“When most companies go bust, they are wound up, and investors take a hit – first the shareholders, then any subordinated bondholders, and finally the senior bondholders to the extent that the firm’s liabilities are not covered by its assets, or the losses imposed on shareholders and subordinated debt holders. This happens every day of the week; it’s how markets work.
“Banks are different. Yes, they are private, profit-making businesses whose investors take a risk to achieve a return. But banks also play a valuable role in the wider economy. They take deposits. They make loans. They facilitate payments. In short, they are the important cogs in the machine of a market economy. For this reason, banks should be treated differently – but that does not mean that they should get a ‘free lunch’.
“Banks need what is called a ‘Special Resolution Regime’ which allows for the orderly wind-up of a credit institution which avoids broader economic fallout, but which imposes losses on professional investors in an appropriate manner. Such ‘Special Resolution Regimes’ have long been in place in the US, Canada and Japan.
“The Labour government in the UK took steps to introduce one there as soon as the banking crisis hit. In Ireland, there is some acknowledgement from officialdom that such a regime might be a good idea for fighting the next war – but they fail to sea that the timely introduction of such a regime could save us billions of euro, it’s not already too late. On this issue as on many others, the government appear to be at sea.
“During the most recent financial crisis, examples of orderly bank wind-ups where bondholders have shared the pain include Washington Mutual in the US, and Bradford & Bingley in the UK. So to all those Fianna Fáil Ministers that parrot mantras like ‘the only game in town’ or ‘we are where we are’, I would say this: There is an alternative – and the alternative costs less.
“Professional investors who take a punt on bank shares or bonds do so in the full knowledge that they are taking a risk. The blanket bank guarantee of two years ago turned this logic on its head. Holders of senior and subordinated bonds, whose investments were already locked-in, and who had ‘nowhere to run’ were given a ‘get out of jail free’ card, courtesy of Irish taxpayers.
“Professor Honohan, Governor of the Central Bank, made clear that, while some form of guarantee was needed, there was absolutely no justification for these two categories of investors to be guaranteed. As he correctly pointed out in his report on the banking crisis, published over the summer, this disastrous decision “complicated eventual loss allocation and resolution options”.
“Two years ago, Brian Lenihan and Brian Cowen presented the blanket bank guarantee as the cheapest, fastest way of solving our banking problems. Unfortunately, they didn’t realise that they were playing with fire. They didn’t appreciate the enormity of the risk they were putting on Irish taxpayers. They were proud as punch of their ‘bluff heard round the world’.
“Flash forward two years, and the original bank guarantee is set to expire in the coming days. If a ‘Special Resolution Regime’ was in place, it may be possible to wind-up Anglo Irish Bank in an orderly manner with appropriate burden sharing with bondholders. This does not mean a sovereign default, and some would have you believe. In fact, minimising the bank bailout cost for Irish taxpayers would more likely improve our standing in global money markets as it would enhance Ireland’s debt repayment capacity. This is what the all-powerful bond market is most concerned about – if they lend you money, are they likely to get it back.
“Even without a ‘Special Resolution Regime in place, it is still possible for savings to be made. As of this Friday, subordinated bondholders and those senior bondholders who invested prior to 30th September 2008 will no longer benefit from a government guarantee. When this ‘get out of jail free’ card is withdrawn, they are fair game for hard headed negotiation.
“At Anglo Irish Bank alone, subordinated bondholders amount to some €2.4bn, with senior pre-guarantee bondholders accounting for maybe another €4bn. A negotiated settlement on this amount may look like small potatoes when we are so used to talking about tens of billions of euro – but these sums are not inconsequential, particularly when viewed alongside the €3bn worth of tax increases and spending cuts that we are being told to expect in December’s budget.
“There are three things that bond investors look at when calculating repayment capacity: the size of the debt, the rate that debt is changing, and rate of growth in the economy that services that debt. The faster it grows, the lower the debt burden. If we can limit the cost of the bank bailout, reduce the deficit over time and, critically, return to growth, there is no reason why Ireland will not be able to borrow money again at rates not much higher than those prevailing in Germany.
“Last week’s quarterly accounts showed an economy that was no longer in freefall, maybe, but one that is bumping along the bottom. There are certainly no real-world signs that we have ‘turned the corner’, precisely because growing the economy is not top of government’s list of priorities – and this needs to change.
“As the Dáil resumes this week, politics must focus on the future. Ireland needs a balanced and coherent recovery strategy. It is not enough to focus on the deficit and on the banks, as Fianna Fáil have done for the past two years. We cannot forget the third and most important pillar of economic recovery: nurturing growth.
“We need a growth and recovery strategy that focuses like a laser on getting the country back to work. If we can grow the economy and create jobs, the heavy lifting of deficit reduction can be relatively painless, and the burden of Fianna Fáil’s bank bailout will become more manageable.
“In fact, a growing economy would to a great extent put a line under the potential bank losses that this government has signed Irish taxpayers up to underwrite. If the economy is growing, we can create a framework for progress in health and education. We can lay the foundations for a new Republic that cherishes all of its children equally. To achieve this, we must look through the turbulence. We have to overcome the short-term fixation with the banks, the budget and the bond market.
“If we can overcome these challenges – and I believe that we can if we set the right priorities and make the right decisions – then there is no reason why the Irish economy cannot be put back on track towards sustainable prosperity.
“Here are just four measures the Labour Party has proposed to get the economy moving again:
– Establishing a Strategic Investment Bank that would invest a small proportion of the resources of the National Pension Reserve Fund to provide for investment in innovative start-ups and small businesses and for strategic investment in the public infrastructure we need to boost competitiveness.
– Abolishing upward-only rent reviews.
– Creating a meaningful internship programme for recent graduates and qualified apprentices.
– Introducing an SME Working Capital Guarantee Scheme which would ensure that viable small and family businesses can get the loans they need.
“As the country gears up to celebrate our struggle for independence in 2016, it is ironic that Ireland’s hard-won sovereignty has been put in such peril by a Fianna Fáil led government.
“Their reckless handing of the economy and their bungling of the banking crisis has put us at the mercy of bond vigilantes on the world’s money markets. If we are to escape the bond markets’ death grip, some speculate that we will be left with no option but to seek help from the IMF or from the EU. Some even think that Fianna Fáil are so incompetent, that such outside intervention might actually be preferable. I do not share this view.
“What Ireland needs is a change of government, a fresh start and a focus on growth. The challenges ahead are immense, but they are not insurmountable, and, together, we shall overcome them.