First, the good news. Swapping the debt from a promissory note to a long dated government bond will mean that, in the short-term, the State won’t have to find so much money to pay for the sins of Anglo. My back of the envelope calculation suggests that the savings will be substantial. Had Ireland kept paying the promissory note over the next 10 years, we would have had to come up with €30bn in a decade. That’s a huge figure, more than 20pc of GNP. Clearly, this was not on. This new arrangement means Ireland will have to come up with about €5.8bn.
Paying over a longer period is good news for all of us relative to paying the lot over 10 years. But it is not good news relative to paying nothing at all or to extending the promissory note out for a few hundred years. After all, we could have set the terms of our own promissory note schedule had we the inclination to do so.
More interestingly, we could have paid nothing at all, let the Central Bank continue to finance Anglo and positioned ourselves on a collision course with the ECB. The Government didn’t have the stomach for this scrap and so the ECB’s sweetener for taking the debts of Anglo on as sovereign debt is a long-term horizon to pay the stuff.
The ECB has got what it wants. The pesky promissory note, which it never liked, is gone. Ireland has more debt but at low rates of interest.
Now let’s focus on the downside.
There is a massive bubble building in European bond markets at the moment and Ireland’s deal yesterday will feed it. This will blow up as all bubbles do. Debt issued at the top of the debt boom, just like houses bought at the top of the housing boom, will eventually come crashing down because we know that you never make a balance sheet with too much debt better with yet more debt. You make it better with less debt.
Countries with huge debt/GDP ratios — such as Ireland — which add to their national debt in a cavalier way, will default in huge and dramatic fashion. Not unlike the banks that became ludicrously exposed to the property market, countries that become overdependent on these debt markets will find the markets shut off to them in short order.
David McWilliams’ new book The Good Room is out now.