The Debt Trap

Sinéad Pentony: The dust has hardly settled from the Troika’s departure when we are facing the repayment of €1.25 billion in unsecured bonds that are not covered by the bank guarantee to Anglo bondholders today.

Last week the Troika asserted that the “front loaded fiscal consolidation is on track, with the 2011 deficit significantly below the programme target”. Recent growth has been on the back of a strong performing export sector, but as forecasts for global growth are reduced, this channel for growth will diminish and it is going to become increasingly difficult to achieve the deficit reduction targets set out in the EU/IMF Programme of Financial Support for Ireland.

The deficit stood at 10.1 per cent (€16 billion) in 2011 and Budget 2012 is intended to reduce this to 8.6 per cent (€13.5 billion). In an attempt to reduce the deficit by €2.5 billion, cuts of €3.8 billion are being imposed. In the absence of strong growth domestically and globally, the government will have to face the prospect of having to cut more to achieve a smaller reduction in the deficit.

This is before we factor in the servicing/repayments of (sovereign and banking) debts, which includes today’s repayment of €1.25 billion in unsecured bonds and a further €3.1 billion in Anglo promissory notes at the end of March. Given the current state of our finances, these repayments will have to be financed through borrowing, which adds a further cost – interest.

The Anglo–Not Our Debt campaign which TASC is supporting has been raising awareness and generating much-needed debate on the issue. These debts are strangling our economy and we cannot begin the process of recovery until they are re-negotiated and re-structured.

We are borrowing to pay/service debts and we are borrowing to run the country, but repayments all come from the same source – government revenue (mostly taxes and charges). If we continue down this road we will see an ever-increasing proportion of taxation revenue being diverted to service/repay debt. This will result in further reductions in the revenue used to maintain and upgrade our infrastructure, finance health services and provide schools and housing – unless of course taxes and charges are increased.

Increasing tax revenue can only be achieved if the economy is growing and more people are working, but we are missing one essential ingredient - investment. The Troika identified “subdued” domestic demand and lower GDP growth projections of 0.5 per cent as the major challenges facing Ireland in 2012, both of which can be solved through significant investment in physical infrastructure and human capital. The question that is always asked is ‘where will the money come from?’.

There have been lots of creative proposals and suggestions put forward on where finance could be found. A quick look at the 2010 European Investment Bank (EIB) Activity and Financial Reports show that EIB lending reached €72 billion in 2010 and it made a net profit of over €2 billion in 2010. The EIB is a triple A-rated bank and can therefore borrow at very low rates of interest.

Member states are required to provide matching funding averaging 50 per cent. But given the scale of the crisis, it would make sense to reduce the level of matching funds required. This would facilitate increased lending and much great leveraging of EU resources, particularly by the countries utilising the EFSF (Ireland, Greece and Portugal): while our scope for investment is much more limited, such investment is essential for recovery. However, this will require the agreement of member states.

The latest report from the International Labour Organisation (ILO) on Global Employment Trends 2012 should provide all political leaders with much needed motivation to start coming up with policy responses that will put struggling economies on a sustainable path to recovery.

The ILO report is called “Preventing a Deeper Jobs Crisis” and it states that the world faces the “urgent challenge of creating 600 million productive jobs over the next decade in order to generate sustainable growth and maintain social cohesion.”

The report also calls for fiscal consolidation efforts to be carried out in a socially responsible manner, with growth and employment prospects as guiding principles. Budget 2012 and the decision to repay unsecured bondholders today, provide ample evidence that these guiding principles are not being applied in Ireland.