Austerity riots in Athens may easily spread

History shows us to forgive unaffordable national debt, argues Bill Hobbs

Owing more than we can afford to pay, should we agree to consign ourselves to years of austerity? Lessons from history demonstrate just why unaffordable national debt should be forgiven. The cost of First World War reparations beggared the German Weimar Republic and sowed the seeds of another war. Once likened to a post-war economy, Ireland’s reparations bill for self-inflicted damage requires the state to borrow over €100bn at a cost that will sustain unemployment levels, starve ordinary people of quality public services, force tens of thousands of young people to emigrate and leave the economy languishing in the boondocks for years to come.

The Germans and other financiers want all of their money back at today’s values plus interest. It is money willingly lent to fuel unsustainable consumer spending and asset bubbles across Europe. If they get all of their money back it’s said middle Germany will then risk its savings to fund European economic recovery. Will it?

The collective €110bn lifeline to Greece buys some time. Tremors from its debt earthquake continue to reverberate driving the risk premium demanded by government’s bankers, the bond market, through the roof. Last week a flight to quality literally froze this market. The ECB will unfreeze it by buying risky sovereign bonds from banks allowing them to continue to trade. Illiquidity may be solved but not sovereign insolvency. The inability to repay debt remains. The bond market has priced in individual EU nation state sovereign risk, and called the EU to account. Greece was a test. Sovereign debt providers do not believe the EU response is adequate and realise that eventually real action will require its leaders to usher in an era of controlled inflation to pay down debt. Either that or some countries will have to go it alone and default and restructure their unaffordable debt.

Weekend Franco-German fighting talk of seeing off “bond speculators” harkens another time when faceless bond investors were blamed for causing ruin. It’s nonsense to suggest that those charged with protecting savers capital will not act accordingly and refuse to buy dodgy debt. Realising they may have to take a bath, bond holders will want the water to be warmed up first.

But for tens of millions of ordinary people, theirs will be a ten year ice bath as they are frozen out of participating as productive members of society. Austerity riots on the streets of Athens may well be repeated across other European capitals within the next year. The underlying political systems so carefully crafted to maintain economic and social cohesion are threatened, which is why European stability will now be tested. As Germans don’t elect Spanish politicians, rising nationalism could sunder EU cohesion.

Without fundamental reform in how the EU member states collectively order fiscal as well as monetary affairs, the prospect of chaotic sovereign debt default looms large. Unless that is it’s decided to risk inflating away the real value of unaffordable sovereign debt - in short printing money to pay down debt. This may start with the ECB issuing its own bonds – building its own printing presses. Some argue that deflating the value of the Euro and inflating away debt over time is required. But this carries the risk of hyperinflation unless backed by real job creating sustainable economic growth.

Absent a believable EU response, its member states have their own nuclear option and that is to default on their promise to repay – more especially default on rogue banks promises to repay. If Brian Lenihan or Brian Cowen knew in September 2008 what they know now, would they have considered Anglo Irish Bank of such national systemic importance? Would they have decided to risk sovereign debt default all for one rogue bank? It’s not too late to undue the damage done in guaranteeing Anglo’s bond holders. It’s not too late to force debt restructuring on them. In September this year the fateful guarantee, that will cost this state at least €24bn, will expire. Why should the state continue to guarantee Anglo’s bond holders and what would really happen if it did not? As it stands holders of Anglo paper are being treated to a free lunch.

Just who are they? And why should their decision to invest in an asset bubble be any less open to loss than others? Government Ministers imply Anglo’s bond holders are predominantly Irish pension funds and credit unions. Yet credit unions are said to have only €99m invested in Anglo bonds. What of Irish pension funds? Surely pension fund managers should clarify how much invested and why? Doubts over Anglo emerged in November 2007, a full year before it imploded. Many wise investors pulled out at the time. It’s likely the actual Irish pension exposure is significantly less than Government would prefer people believe. It’s high time to reveal the identity of Anglo’s bond holders. Just who holds its tax payer guaranteed paper? Who are the free loaders who have bought this dud banks junk bonds since it was nationalised? Are they are to be provided with a one way bet at the expense of ordinary people?

Bashing Greeks for creative accounting and Germans for wanting their cake and eating it, conveniently ignores the fact that the consumer spending boom and asset bubble generated wealth for a generation of older Irish people, principally those over 40 - its net beneficiaries. Irish banks external borrowings funded an inter-generational transfer of wealth from a young to an older generation. In his poem September 1913, Yeats wrote of a nation of shopkeepers “fumbling in the greasy till, adding the halfpence to the pence”. Do the Nama and Anglo strategies reflect a desire to protect the value of the “greasy halfpence”? Like the Germans, an older generation of Irish savers demand the value of their savings is protected. Yet the productive assets backing this wealth are worth less than their face value, which is why billions are being borrowed in the vain hope future economic performance, will finance its repayment.

A version of this article appeared in the Irish Examiner, Business Section, Monday 10th May 2010