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ECB must write-down this €75bn odious debt

The following opinion piece was published in the Sunday Independent on 16th October 2011

 
The Keane report on distressed mortgages was a missed opportunity to face up to reality. Households are drowning in debt and this is crushing our economy. This harsh reality will not disappear by ignoring it or putting it on the long finger. It can only be resolved by writing down mortgage debt across the board. We need to have an honest discussion about the levels of debt in Ireland. The central question that needs to be answered is this: How much debt is too much for the country to handle?
 
Central Bankers from across the world discussed the international debt crisis at a meeting in Wyoming in August. A keynote paper presented to the conference analysed the impact of the combined debt levels of governments, households and businesses on economic growth across a number of countries. It concluded that government debt in excess of 100% of national income damages growth; household debt in excess of 85% of national income damages growth and business debt in excess of 90% of national income damages growth.
 
These figures are striking because Ireland exceeds these levels for government, household and business debt. Government debt in Ireland stands at 137% of national income; household debt is 147% of national income and business debt is 210% of national income. The combined total for these three debt elements is 494% of national income.
 
The report continues by listing the combined debt €“ the sum of government, household and business debt €“ for eighteen developed countries. Ireland was not included on this list. However, the Department of Finance provided me with the Irish figures in a response to a Parliamentary Question. The debt league table is presented below, with the figure for Ireland included. This table really is shocking. It shows that combined debt levels in the Irish economy are almost twice those of the Greek economy. For every €1 billion of debt in the Greek economy, there is €1.8 billion in the Irish economy. If debt levels in Greece have reached the point that a sovereign default is imminent, what does this mean for Ireland and what should Ireland do about it?
 
It is even more disturbing to see that Ireland tops this league table ahead of Japan. Japan’s combined debt levels have flattened its economy to the point that the period since 1990 is frequently referred to as “the lost decades”. It is crystal clear that the current Irish combined debt levels will suffocate any chance of a robust economic recovery. It is clear that we must reduce our overall debt burden.
The Irish banks owe around €150 billion to the European Central Bank and the Irish Central Bank. Approximately €75 billion of this was lent to the Irish banks by the European Central Bank to enable the banks to repay bondholders in full. Clearly, this was inappropriate and therefore we can say with justification that half the money owed by the banks to the European Central Bank and Irish Central Bank is odious debt. Through a political chain of events it has ended up on the backs of Irish citizens and this is patently unfair.
 
At 494% 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 €75 billion on amounts due to the European Central Bank and outstanding bondholders. 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 we must persist until it is achieved.
 
Country Total Debt as Percentage of National Income%
Ireland                       494
Japan          456
Portugal  363
Spain          355
Denmark               341
Sweden  340
Norway  334
Belgium  328
Netherlands       327
UK                322
France                          321
Canada    313
Italy              310
Greece      273
Finland    270
USA            268
Germany               241
Austria    238
Australia232

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