Ireland's Financial Fat Man

"Fat Man" was the innocuous name given to the atomic bomb that decimated Nagasaki in the closing stages of World War II. On 25 January, only a few days from now, its financial equivalent will strike Ireland. The Irish taxpayer will very generously hand over €1.25 billion to unguaranteed, unsecured bondholders of the former Anglo Irish Bank, a private commercial operation that failed spectacularly, taking Ireland's financial sovereignty with it. This doesn't have to happen.

Singularly the biggest financial mistake for more than a generation

Remember, every teaching post that is cut, every notch that taxes are increased, every public service that is abolished or scaled back, is largely a result of these bond repayments. Cuts are still necessary to restore stability to public finances, but the austerity the Irish people are suffering is two-fold thanks to this reckless bond repayment policy. Even though many of the defunct bank bonds have already been repaid with taxpayers' money *, the few remaining ones still amount to enormous sums of money. We hope you can forgive us for over-dramatisation. In this case we believe that attention desperately needs to be drawn to this issue. We feel that this policy is singularly the biggest financial mistake made by any Irish leader for more than a generation.

Let us consider the sum involved once more - €1,250,000,000 - which is just one of many bonds being repaid. Do any of you have children who are forced to endure sitting in leaky prefabs day after day? Not exactly an environment conducive to learning, despite claims that Ireland has a world class education system. How many new permanent school buildings do you think could be constructed for €1,250 million? Do any of you have relatives suffering from a medical condition that should have been treated long ago, or have endured a torturous wait in a hospital corridor before being treated? How many new hospital beds could be funded with €1,250 million?

No legal basis

The Irish Democratic Party would oppose this measure and would require private investors to assume responsibility for any risks associated with their investment. We do not consider this bailout to be a legal requirement under the Memorandum of Understanding between the Irish Government and the EU. This has got nothing to do with sovereign default or the risk premium on Irish government bonds (bond yield spreads). In fact, the IMF even acknowledges the possibility of "burden sharing" with private investors. No legal document has been publicly disclosed detailing any such obligation, which prompts us to wonder what kind of undisclosed deal has been struck by the Government with its EU / ECB / IMF counterparts in this regard. The steadfast determination of the Government to go through with this bailout suggests that some agreement was indeed reached, but it would appear to have been very poorly negotiated by the Minister for Finance or his representatives.

The government, as the owner of the IBRC (former Anglo Irish Bank and INBS), would be well within its rights to place it in liquidation, and refuse payment at par value to bondholders. In any healthy capitalist system, a company that fails is declared bankrupt and investors lose part or all of their money. It could be legally wound up through liquidation, which is perfectly compatible with the legitimate measure of protecting depositors up to a certain threshold. Bear in mind that many investors gained handsomely in the past. So why is the Irish taxpayer willing to go along with this socialisation of losses considering that so much past profit was kept by these investors as private gains?

A muted response

In virtual silence (save for a few brave souls such as Morgan Kelly and the diligent team behind the NAMA Wine Lake blog), the former Fianna Fáil government handed tens of billions of euros of taxpayers money to the bondholders of failed commercial entities such as Anglo Irish Bank. Despite the election promises of the current incumbent parties, the present government now continues to transfer massive wealth from the people of Ireland to failed private investors. During the past few years we despaired at the use of this financial weapon of mass destruction.

This must stop. How may times have you called your local TD? Where are you going to be on 25 January? We commend the determination of the Ballyhea bondholder bailout protest and we watch with interest the development of the Anglo - Not our Debt campaign (although, while being well-intentioned, their proposals go too far **). Despite these efforts, the general public response has been muted. For reasons that we fail to comprehend, the protests against the €100 Household Charge are far more widespread and energetic, even though that issue pales in comparison to the gravity of the €1.25 billion bond repayment.

The facts are that the taxpayer-owned Irish Bank Resolution Corporation (formerly Anglo Irish Bank & Irish Nationwide) will redeem €1.25 billion to holders of an unsecured bond (ISIN: XS0283695228) that matures on 25 January 2012 and is not covered by the government guarantee. We must not allow this to take place.

* In fact, Ireland's "Little Boy", the precursor to "Fat Man", underwent its chain reaction in September 2010 when three bonds collectively amounting to €7.9bn were redeemed at par value by the Irish taxpayer (see NAMA Wine Lake post).
** The Ballyhea protest and the "Anglo Not our Debt" campaign both apparently call for non-payment of IBRC Promissory Notes, which differs from the Irish Democratic Party policy of renegotiation of the interest rate and repayment terms of the promissory notes. Considering that the ECB extended funding to the former Irish Government on request to rescue Irish banks, and continues to fund Irish banks, it would be highly irresponsible for the Irish Government not to honour its commitment with regard to the promissory notes.