What If Ireland Defaults? (30 page)

Concern has been expressed by some observers at the levels of leverage by Germany's Deutsche Bank and France's Credit Agricole. In fact, they are leveraged to an even more dangerous level than Lehman Brothers was when it collapsed. It is worth pausing and reflecting on this point: French and German banks have been run as recklessly as Lehman Brothers. Numerous other French and German banks are in trouble to a lesser, but still very serious, extent. These are the banks that provided the funding to Irish banks to drown the Irish economy in debt. These are the banks that the Irish government is forced to repay under duress every time it ensures that the bondholders in Irish banks are repaid in full.

Neither Germany nor France is in a position to bail out its banks. The assets in Deutsche Bank are very questionable. They contain government debt that is likely to be written down and loans that could go sour. Deutsche Bank's assets are the equivalent of 80 per cent of Germany's GDP. German national debt is already close to damaging levels. It is very questionable to assert that the German government is capable of bailing out Deutsche Bank in the event of a crisis.

France's situation is even more dire. Its three main banks have assets that are twice as large as the entire French economy. It is simply impossible for the French government to bail out these banks. The French economy is just too small and their government debt is already at levels that are damaging to the French economy. The truth that Europe dares not speak is that there are Anglo Irish type banks everywhere which could bring down their countries and the clock is ticking.

The German people and government are terrified that this crisis will lead to what they call ‘a transfer union'. This means that German taxpayers will provide annual transfers of cash to
flathulach
members of the Eurozone. However, the harsh reality is that the only transfer union that has been created is from Irish taxpayers to the worst behaved and most insolvent banks in the world. The Germans are adamant that solutions to the Eurozone crisis must not contain ‘moral hazard' – they must not reward countries or banks for bad behaviour. Surely the transfer union from Irish taxpayers to some of the world's worst banks is moral hazard at its most extreme. This is law-of-the-jungle politics with every country fending for itself. It is precisely the type of narrow nationalism that the European Union was established to eradicate. The Euro currency remains a worthy and worthwhile ambition but the tendency towards narrow nationalism must end swiftly if the currency is to be saved. Realistic solutions must be found for all of the countries in difficulty.

The Irish economy needs two simple things to bring it back from the brink. We need a functioning bank and a huge stimulus to the economy. A functioning bank will provide credit to the economy and a huge stimulus will give people the encouragement that they need to start spending again. Standing up to Europe by enforcing write-downs on the amounts of money our banks owe the ECB and remaining senior bondholders across the banks will provide both of these medicines. Reckless lending by Irish banks only began this century. Moving the outstanding loans from the last century into a new bank will provide the first building block to a stable, functioning Irish bank. These assets are safe, secure and reliable. Writing down the odious debt to the ECB, and in turn, passing this write-down onto struggling mortgage holders and also to businesses under severe, unsustainable financial pressure will provide a huge stimulus to the economy. The cost to households of servicing loans will plummet, allowing people to spend again and create jobs in the domestic economy.

Greece is on the brink of collapsing because its government debt levels are impossibly high. Ireland is on a slippery slope to becoming Greece. The Irish economy cannot take as much austerity as the Greek economy because our private debt levels are too high. The growth targets in the bailout programme are very ambitious and may not be achieved. This, combined with inevitable losses from the National Asset Management Agency debacle later this decade, will force our government debt levels to unsustainable levels and we will end up in a similar position to Greece with a high probability of default. This would be a tragedy. Instead of defaulting on bank debt for which the state bears no responsibility, we would have a sovereign debt default that would damage our international reputation for decades.

At 494 per cent of national income, Irish combined debt levels are the most crushing in the world. We must resist being forced to bear impossible levels of debt overhang which expert economists have shown to be the main cause of contraction and stagnation in an economy. We must insist on write-downs totalling around €75 billion on amounts due to the ECB, the Central Bank of Ireland and outstanding bondholders across the banks. These write-downs must in turn be passed onto households and businesses. This would provide a huge stimulus to the economy. Write-downs of €75 billion may appear large and suggest that Ireland in some way is being let off the hook. This is far from the case. It would result in Ireland moving only one place down the league table, putting us just one place below Japan. We would still be carrying a huge load but at least it would be somewhat more manageable than where we stand at present. We must insist on putting this case forward to the ECB and unilateral action must not be ruled out if a sensible, workable, realistic agreement cannot be reached.

16

A Financial Journalist's Perspective on Debt and Default

John Walsh

John is editor of
Business & Finance Magazine
.

A default on either sovereign or bank debt would be a disaster for Ireland. Those advocating such a move are a bunch of snake-oil salesmen who either don't fully understand the facts or are cynically exploiting an emotive and complex issue for self-serving reasons.

If the country doesn't default on at least some of its debt obligations, then the country faces at least a decade of stagnation or sclerotic growth at best. The social consequences would be devastating; mass emigration, stifling taxes and endemic levels of social exclusion. Not only is a default inevitable, it should be welcomed.

These two narratives are at the extreme ends of a debate that is likely to convulse the country over the next few years. Ireland is facing into one of its most challenging periods since independence. A credit bubble and property bust has lumbered it with a debt burden that may or may not cripple the economy. This chapter will deliberately not take a position on whether it is in Ireland's interests, or not, to default. There are plenty of economists and other commentators who will slug it out on this issue in other chapters. But the media will play a crucial role in shaping public opinion. In an era of soundbite culture is that possible given the complexity of the issue?

Former Taoiseach Bertie Ahern has made some very withering comments about the state of the Irish media. In July 2007, during an address to the Irish Congress of Trade Unions, Ahern took a swipe at journalists and commentators who were wondering aloud whether the economy was about to hit the buffers. In an unfortunate turn of phrase, the then Taoiseach said, ‘Sitting on the side-lines, cribbing and moaning is a lost opportunity. I don't know how people who engage in that don't commit suicide because frankly the only thing that motivates me is being able to actively change something.'

Ahern subsequently apologised to families bereaved through suicide for his injudicious comment. His hostility towards journalists lingered, it would seem. In an interview with Dublin City University (DCU) student radio in October 2011 Bertie had some choice words for the media and in particular its role in the financial crisis:

There should be an investigation into it. They [the media] should have been following the economy from August 2007, but they weren't, they were following me. I think a lot of these guys really should have looked at themselves.

The government were following the economy but the media weren't. It was a very poor job by the media really. They were shown to be incompetent and that was the trouble – everything was on me.

The former Taoiseach's comments are most revealing in many different ways. In September 2006, the
Irish Times
' journalist Colm Keena reported that the Mahon Tribunal was investigating payments made to Bertie Ahern. It turned out to be one of the most important scoops in this country for a decade or more. In a subsequent interview on RTE's
Six One
news programme with Bryan Dobson, an emotional and sometimes tearful Taoiseach offered a series of credulity-defying explanations about his labyrinthine personal finances. Moreover, Ahern blithely dropped into the interview that he appointed people to state boards because they were friends, not because they had helped him with ‘dig out' payments. It was a comment that underscored how much cronyism had become embedded in the highest office in the land. Indeed, it is not too much of a leap of faith to argue that cronyism as much as anything else stopped the Celtic Tiger in its tracks.

Investigations thus far into the cause of the banking crisis have revealed a world where the Financial Regulator did not have an objective and arms-length relationship with the institutions under the watch of that office. There was no proper risk management and corporate governance practices in the banks. Non-executive directors didn't seem to be doing their job. But as dismaying as it may be to the members of the Irish media, does Ahern have a point about the journalists not meeting the standards traditionally associated with the fourth estate?

The Irish banking crisis is one of the biggest in the history of the world economy. It is a small country. How could this have happened? How could possibly the biggest story since independence unfold before the mainstream media, yet hardly a coherent analysis of why the country was heading to financial ruin emerged when it really mattered? It is true that it wasn't exclusively domestic factors that caused the crash.

In August 2007, the US financial media reported difficulties in the banking system. The US had experienced a building boom for much of the previous decade. Less creditworthy citizens had been granted access to mortgages through the subprime sector. These subprime mortgages were securitised and given AAA ratings by the credit rating agencies. These products had been hoovered up by investment banks. When the property market turned, the assets that backed these securitised products were in some cases not worth the paper they were written on. If there is one thing markets hate it is uncertainty. Yet it was impossible to tell the scale of losses sitting on the balance sheets of banks because of the opaque nature of these asset-backed securities. Uncertainty reigned.

The global economy was on the verge of the biggest financial crisis since the Great Depression. But not only did the mainstream media not pick up on this story well before it became a crisis, even the most prominent financial commentators were caught wrong-footed about the nature and scale of the problem when it became obvious that the banking system was under serious stress.

The economist Nouriel Roubini earned the derisory soubriquet ‘Dr Doom' when he estimated that subprime-related losses could reach $1 trillion in the banking sector. Initially this was dismissed as alarmist scaremongering. It would prove to be a conservative estimate. Six years ago, Ireland was the fastest growing economy in the Eurozone. It had one of the soundest fiscal positions and one of the lowest debt–GDP ratios. The fact that there is now a debate about whether the country could or should default is testament to the reversal of fortunes for the now lamented and once mythologised Celtic Tiger.

But how could the Irish financial media get it so wrong? Journalists in the US can point to the truth lying beneath a maze of extremely opaque credit instruments that nobody seemed to understand, including the regulatory authorities. In Ireland, the story was much more straightforward. The banks had access to a plentiful and cheap supply of money. Surging population growth caused a demand for houses. The government played its part by offering massive tax concessions to property developers. The traditional banking model of scaling the loan portfolio in proportion to the deposit book put a brake on the almost limitless lending opportunities to the property sector. The short-term wholesale money markets provided a lucrative alternative source of funding to the banks. As it now obvious, not only did Irish banks have a massive sectoral exposure to one asset class, the collateral backing up these loans was not properly drawn up and very often completely inadequate.

Investors were lured by the enormous returns generated by property deals. The more leverage in these deals, the bigger bang for buck invested. The regulatory authorities did nothing to stop the party. One
aperçu
that I can personally volunteer involved the developer Sean Dunne's acquisition of the landmark Jurys Hotel Ballsbridge site in August 2005 for €375 million. I wrote an editorial for
Business & Finance Magazine
at the time asking whether this represented the top of a dizzying and unsustainable market. I made an analogy with the dotcom bubble and Japan in the 1980s. I had recently returned from seven years in London. Many things about the Irish economy just didn't seem to add up – not least people on average salaries getting access to mortgages that made no economic sense. Yet less than a month after penning that editorial I was in a corporate box in Croke Park watching the 2005 All-Ireland Hurling Final between Cork and Galway with David Drumm and most of the senior management team from Anglo Irish Bank.

There seemed to be an intimacy between journalists and senior businesspeople in Ireland that didn't exist elsewhere. The objectivity I had brought back from London would soon desert me.

The closeness between journalists, bankers, politicians, economists and market sources militates against what John O'Sullivan, a lecturer at the School of Communications at DCU, describes as the ‘holy grail of neutral, balanced, objective information'. When in 2007 market volatility pointed to potentially big problems coming down the tracks, the Irish media did take notice. In March of that year the well-respected journalist and deputy editor of the
Sunday Business Post
Richard Curran fronted a seminal documentary, called
Futureshock
, on RTE One, which posed extremely uncomfortable questions about the soundness of the property market and the wider economy. He concluded that it was all a house of cards.

For his efforts, Curran was subjected to a sometimes personal and vitriolic backlash. The chorus from the banks, in particular, was that this was no time for this sort of scaremongering. Green jerseys were needed to get through this temporary rough patch. Large parts of the mainstream media answered this clarion call. But by 2007 the damage had been done. The Irish domestic banks had mortgaged the house on the Irish property market remaining buoyant for the foreseeable future. Why had the Irish financial media not been much more critical of the reliance on property and the banks' dangerous over-exposure to this sector in the years leading up to 2007? That is not to say there weren't any dissenting voices. There were, but they were very much on the margins of the debate.

The failure of the media to put any brake on the frothy excesses of boom years points to systemic problems that don't augur well for the future. The print media has come under intense pressure in the age of the internet. Newspapers and magazines are no longer the only medium through which news, opinion and analysis can be disseminated. Far from it. There are a plethora of low-cost online news portals and blog sites that vie with traditional media outlets for readers.

The consequence for the print media sector has been declining readership and a marked deterioration in advertising revenues. Now the future of the print media sector is under threat and the type of journalism that goes with it. Should anybody care? Paul Starr, a lecturer in media studies at Princeton University penned a lengthy analysis of the impact the crisis in the print industry was having on US society for
The New Republic
in an article called ‘Goodbye to the Age of Newspapers (Hello to a New Era of Corruption)'. He concluded that without the proper investigative journalism that newspapers specialise in there will be huge and damaging implications for US democracy because it removes a vital source of information needed to make informed decisions.

Over the past twenty years, stories about the economy and business have become much more prominent and important in the Irish media. The former
Guardian
journalist Nick Davies has popularised the pejorative term ‘churnalism' to describe the state of mainstream journalism and in particular financial journalism. He argues that most financial journalism is now PR driven. The news agenda is shaped by journalists rewriting press releases. This is in part explained by the financial pressure experienced by news organisations. There are not enough resources to fund in-depth investigative journalism. Staff positions are steadily being replaced by contract workers, who are very often employed on a shift basis. Consequently many of the skills and knowledge acquired through full-time positions are lost. In other words, where will the Colm Keenas of the future come from?

‘One view is that the media is owned by large businesses which have a conservative agenda. It is a reasonable position to take but it is far too simplistic. What we have in Ireland is a very monotone media. There is very little divergence from the central thesis', says DCU's O'Sullivan.

‘It isn't just about where journalists and reporters come from – it is about how they work. If you look at any economics, finance or business story, the people mediating these stories are business journalists. They have come centre stage over the past twenty years, but they do not grow up knowing what a credit default swap is. They rely on bankers and stockbrokers and market analysts for their stories, so there is a circular flow of information.'

There is also intense competition between media outlets, which means the scramble to attract readers and viewers has introduced an entertainment dimension to the news-gathering process. Contributors are judged on who gives the best soundbite. Very often, it is not about who can give the most nuanced and balanced account of the issue, but, rather, commentators who are the most headline grabbing. Yet many of these commentators, while very good at generating publicity for themselves, are often unburdened by in-depth knowledge of the issue at hand. And that is not to say that it was a peculiarly Irish phenomenon. Kevin Hassett wrote a book called
Dow 36,000
in 1999. His argument was that the Dow Jones was on an ineluctable rise and would hit 36,000 sometime in the early 2000s. The Dow Jones subsequently crashed to below 2,000 when the dot com bubble burst in 2001. Yet Hassett continued to remain a TV pundit in much demand by mainstream US business channels. In fact he found his way onto 2008 US Republican presidential candidate John McCain's team of economic advisors.

So, what role does the media play in the default debate? Is it there to shape public opinion or reflect it? O'Sullivan argues that the financial crisis in this country is discussed in very narrow terms:

The paradigm of the debate is that we must be good boys – we have to be the best in class in Europe. There is almost an infantile mantra about this. Nobody says why? We are still concentrating on being the best boys and girls in Europe because we are not Greece. We have a very conservative dumbed down mainstream media, complemented by voices in the wilderness. … It is not a point of view that will find favour with the markets or advertisers but I think we need to rethink public sector journalism – whether it exists and whether we want it? We don't have any money so it is a vicious circle. Moreover, is there an appetite for it? Is it about what sells or is it about journalism itself?