Published in the Evening Echo today:
A Citizens’ Assembly is a forum where people get to inform themselves on particular subjects, deliberate on them, decide a course of action, and perhaps see that decision implemented. Citizens’ assemblies have worked in British Columbia and Ontario, Canada, in Iceland, and in Australia.
Part of any citizens’ assembly will be a discussion of the economy: how we got here, what our biggest challenges are now, what decisions we can take, and the likely outcome of those decisions. It will take the citizens’ assembly about 43 seconds before someone mentions burning the bondholders. This article looks at both sides of that argument.
A new IPSOS MRBI Poll conducted for the UCD national discourse project has shown that a fairly even distribution exists between the 31% of respondents those who would like or very much like to ‘burn’ the bondholders, and the 25% of respondents who think Ireland should honour its debts to maintain its reputation abroad. Fully 41% of respondents didn’t come down too strongly on either side. This reaction is in contrast to the respondents’ clear preferences for expenditure cuts rather than taxation increases in the same survey.
Uncertainty around what to do is understandable. In fact, uncertainty is the key problem we want to address. But first, let’s inform ourselves.
What does ‘burning the bondholders’ mean? A bond is a legal contract where you promise to pay back money you’ve borrowed today at some point in the future, usually with some payments of interest in the meantime.
Governments, banks, and businesses often issue bonds. When banks and businesses get into trouble and become insolvent, and can’t pay back their creditors, the business is either wound up or put into receivership, or restructured. Part of the restructuring involves writing down the value of the assets of the company. Writing down assets means the people who lent the business money don’t get all of their money back.
Sovereign nations – unlike businesses and banks – can’t be liquidated. Defaulting, or restructuring, enables debtor countries to reduce the size and/or lengthen the maturity of their repayments. When governments, banks, and businesses do this, they are burning bondholders.
‘Burning a bondholder’ means not paying people back everything you borrowed from them in the form of bonds. You can pay them back, say, 80%, or 20%, or nothing at all. It depends on how bad things are.
There are two main types of bondholder. A senior bondholder has a higher credit rating than a subordinated bondholder, meaning if things go wrong the senior guy gets paid first, the subordinated guys might lose out.
Today in Ireland senior bond debt is regarded as the same as deposits in banks, and almost the same as sovereign debt. When you burn AIB’s bondholders, it will have an effect on Ireland as a whole, because the Government of Ireland guarantees the liabilities of most of the banks.
What would be the effects of burning the bondholders? On the positive side, Ireland wouldn’t have to pay back the debt it has guaranteed. There are roughly 43 billion euros worth of unsecured senior and subordinated debt out there now. Say we only pay back 50% of that 43 billion euros. Ireland can spend the other 21.5 billion euros on increased social services, or lower taxes, or paying back some of our other debt. There is an element of social justice at play here as well, in that people who took risk in the hope of return don’t get their investments back, and aren’t rewarded for their failures by taxpayers. The act of burning the bondholders would reduce uncertainty about how Ireland is going to pay these people back. With the total stock of debt fully known, Ireland can go about paying down that debt over the next decade or so.
On the negative side, any restructuring or default of bank debt might exclude Ireland from future borrowing, and would, at the very least, result in higher borrowing costs from international markets. Remember that Ireland needs to borrow to make ends meet. Markets have a fairly long memory when it comes to sovereign debt, and so Ireland might face a decade or more where it would be difficult to borrow money from abroad. Argentina and Ecuador still find it hard to borrow. The Irish economy would stagnate as credit dries up even more.
There are also broader costs to default. Investment from abroad might fall because investors are uncertain about future trade with Europe. A default would trigger another banking crisis, and probably weld us further into the EU, as we would become a ward of the European Central Bank. Overall, economic output might fall further. There is the worry of a contagion effect, where Ireland’s actions have knock on effects in other EU countries, collapsing the Eurozone banking system.
A citizens’ assembly would hear all the arguments for and against a default on bondholders. Whatever they decide, it would inform policy, and create a set of highly informed citizens. The initiative is to be welcomed, mainly because it wouldn’t leave the economy to the economists.
Stephen,
to put this into some perspective, I might offer you an example related to your town of residence at the moment, and also related to another profession, other than economics. Take something, that I know a little bit about. Architecture. The Architects are those who mentor and administer the profession of architecture. In the same way that economists are those who mentor and administer the profession of economics. Although, economics is less of a profession and more of a discipline, than can cross many professional boundaries. I am more than a little bit jealous about that.
Here is my point, put simply and briefly I hope. Take your town of current residence, Limerick. Unlike other cities in Ireland, Limerick city has the characteristic for people who really know it and live there, of being a town or city of enormous amenity and leisure opportunity. You only have to witness the behaviour of its citizens during this warm, dry month of April in 2011, to realise how much care and respect the inhabitants of Limerick city have for their health and well being - mental, physical and spiritual.
You move about different parts of Limerick city, old parts and new, and you are aware each evening of how much the inhabitants use their public spaces and routes for their own pleasure. Limerick city inhabitants really do take possession of their spaces and places, in a manner, that is much more pronounced than in Dublin city, which I know fairly well. Don't get me wrong. Dubliners like their city and use it, and enjoy it. But Limerick city inhabitants bring it to a very high level, which any other town or city in Ireland would find difficult to match. Unfortunately, this does not come up in newsprint about the place.
The thing is though, given the nature of the population of Limerick, that behaviour and sense of civic awareness and participation should inform the planning decision making process much more strongly than it does at the moment. But here is where the profession comes into play. Here is where the profession becomes the roadblock, rather than being the enabler of progress and positive change. Here is where the figure head of the private company, the professional's limited company or whatever it is, inhibits the development of good public policy.
The problem is, the planning of Limerick in documentation and in spirit should have contained long ago, the acknowledgement of what is a very spontaneous and positive response on behalf of citizens to the environment. But the documents and the planning statements fall very short in that regard. Why?
Because in order for the documents and the visionary statements to contain the above mentioned, would require also, for some private consultancy group or company to put their logo on the same. This is where it gets tricky. What we require in professions such as architecture, and in areas such as economics is a new business model. The company of professionals needs to become a human resources supplier of sorts. The company of professionals needs to supply to the public agencies, the human resources required in order to 'render' the statements necessary, the statements which will represent for the longer term, the true spirit and the real vision.
In other words, the 'logo' that goes on the printed media should be the logo of the public agency, and not the logo of the private consultant. But that is not going to happen, if the consultants in Ireland have anything to do with it. Because each and every policy statement, each and every vision is viewed by the professional as another opportunity for self promotion and market domination. Hence why we have in Ireland, a vast excess of trained human resources, which are not employed, because of the structure in the way we do our business. BOH.
Excellent comment, thanks Brian.
I would like to see a map of Limerick city done from the observation of how people in the different areas, use their place for amenity purposes all year around. Which they do. But this is the diagram that never gets drawn up, and never is fed into the mix, when planning development or just spit-balling about 'the next ten years' in planning. The reason for this, is that we have two many mappings of critical infrastructure and systems, zoning areas, constituency maps, populations per constituency area and what not. Not to mention traffic oriented planning maps. But too little on how people use the places and spaces created in between all of the rest. Even, how people seem to use the Shannon itself as a transportation lane, or an amenity corridor, from Castleconnell down to the Shannon tunnel. A lot of the reason for this, is this form of analysis is proprietary to those who profess to be 'spatial planners'. It is a kind of analysis that hasn't been exposed for public usage, through any program or any effort, ever. In any city in Ireland. But in particular in Limerick, because so much space is used for amenity. More than any other in Ireland.
That is only one example however. One could also argue for additional work on the mapping of 'energy resources' by county, conducted by Clare County council for instance. As opposed to keeping that info proprietary again, and sealed inside every set of planning files for each and every tiny site in the county/country. Although, I noticed on local radio recently, how the surfers in Doolin pier I think, have great concerns over a planned new project there to build some new bridge, pier or something. In that, the waves may bounce back in the wrong way and ruin their existing surfing wave resource. It just goes to show us, how many things, which require careful observation and acknowledgement today, that we would never have seen as having 'value' to anyone.