Thursday, 26 January 2012

Oh dem bonds, in layman's language

ELVs, Promissory Notes, senior/junior/secured/unsecured bondholders – if it’s all too much for you to get your head around, here is a summary of what’s happened to us, all in very simple straighforward language.

In the early years of the Noughties Anglo Irish Bank burst onto the Irish banking scene in a big way, began to make massive profits. In doing so, however, it was bending/breaking the most basic rules of banking. It gave out loans recklessly, not just by the hundreds of thousands but eventually by the hundreds of millions; it borrowed recklessly, not just by the tens of millions but by the tens of billions. Soon even the most established of Irish banks followed suit, and we had ourselves a property bubble.

Well, the bubble burst, as bubbles do, and when it did Anglo and the other Irish banks were left exposed, very exposed; in fact they too were burst. Also left very exposed, however, were those who had loaned the money to those Irish banks, the institutions we now know as the bank bondholders.

When the ECB, which had slept its way through the bubble years, woke up to what was happening the alarm bells went off. The bank bondholders – German and French banks especially – weren’t just exposed to the Irish banks, they were also exposed to Greece, to Portugal, to Italy, to Spain. If the Irish bank bonds weren’t paid, the whole house of cards could come tumbling down – one by one those countries would fall, would fail to pay their bonds, and one by one the big German and French banks would be in trouble, big trouble.

Oh, what to do? The ECB decided there was only one thing for it – they would hold back this tide, and the first line of defence would be the Irish banks. 

But, there was a problem – where in all the other nations the debt was sovereign, bonds taken out by the governments, in Ireland the debt was private. Those bonds were deals done between consenting adults in private for-profit arrangements and under normal commercial practice the bondholders would now suffer a hit, a haircut. They had been blinded by the possible rewards, they hadn’t properly assessed the risk, hadnt done appropriate due diligence (in many instances deliberately evading their own more assiduous regulator by setting up a little office in Dublin to close the deal, under the far softer Irish regulator); under another basic rule of banking – WARNING: YOUR INVESTMENT MAY FALL AS WELL AS RISE – they were now faced with the consequences of their failed investment. It didn’t happen – they were bailed out.

The ECB, now the European Canute Bank, stepped in, and to protect those big German and French banks placed a dam across this rising tide of bad debt. WE are that dam, we, the people of Ireland, have been blackmailed, bullied and betrayed. The ECB has used its financial muscle to blackmail a weak government of a weakened member state into making public what is a private debt; the EU – the twin-headed monster Merkozy especially - has used its political muscle to bully a weak government of a weakened member state into accepting this deal; our own governments, this one and the last, has betrayed its own people and bowed to the demands of the ECB and the EU.

IF we had never been burdened with this bank debt the probability is that we would never have needed intervention from the IMF or anyone else. We had a budget deficit, we had problems with massive waste in our public spending (too many politicians for starters, and obscenely overpaid), but we also had massive savings in our National Pension Plan. Without that additional bank-debt burden we would already be growing our way out of this mess; with it, we are crushed.

Our governent must end these payments now, immediately. Playing with the terms of repayment – interest rates or duration – is not the answer. It’s like the cartoon of the big fat man on the small thin man’s back – ‘I’ll do everything I can to lighten your load, but I’m not getting off!’

The ECB were the ones with the problem if those bank bonds weren’t repaid; the ECB should have taken over those bonds themselves, should have built a mechanism (we know how good they are at ‘financial engineering’) whereby they assumed responsibility for payment. Imposing them on the people of Ireland was wrong from the start, and wrong at every level conceivable.

If our government won’t act, then for the sake of ourselves, for the sake of comign generations, it’s up to us. Act. Follow our lead in Ballyhea and Charleville – march, protest.

Diarmuid O'Flynn.