Why is Ireland in debt and who holds the debt?

dimcoin

Hi yall,

I enjoy reading up on the Irish news from time to time. However, I am continually perplexed by this huge debt issue that seems to be afflicting the country. I am confused as to who the debt is owed to and how it came about. Is it similar to the home loan bubble that burst in The States? If so, how did this translate into German Banks loaning money to Ireland, why did the Germans even get involved?

I have done some research on this, but with each article I read, I get more confused. There seems to be a million fingers pointing in a million different directions, but no clear answers.

srsly78

The debt belongs to anyone that wants to buy it. Also it gets traded around on the secondary market too.

http://en.wikipedia.org/wiki/Government_bond

Primary market = Irish govt sells bonds
Secondary market = Holder of bonds sells to someone else

Despite what you might read in the papers, it is not "ze germans" that own a lot of the debt. More like investors from the UK, USA etc. Govt debt never get paid back really, governments just issue new bonds to pay the old ones. During the Celtic tiger period our debt did not decrease, instead our economy grew and the gbp to debt ratio fell.

Some official info here: http://www.ntma.ie/business-areas/funding-and-debt-management/debt-profile/ownership-of-government-bonds/
As you can see a good chunk of govt bonds are owned by Irish institutions, this is what the fuss about promissory notes is over (see note at bottom).

Pro Hoc Vice

dimcoin wrote: »

Hi yall,

I enjoy reading up on the Irish news from time to time. However, I am continually perplexed by this huge debt issue that seems to be afflicting the country. I am confused as to who the debt is owed to and how it came about. Is it similar to the home loan bubble that burst in The States? If so, how did this translate into German Banks loaning money to Ireland, why did the Germans even get involved?

I have done some research on this, but with each article I read, I get more confused. There seems to be a million fingers pointing in a million different directions, but no clear answers.

Most moderne countries have debt. There are in effect 3 types of debt Goverenment debt usually bonds, household debt that's credit card debt and home loans etc and finally the debt owed by business in Ireland's case like other small open economy's this is skewed as many large companies are officially irish and so their debt is recorded here.

Our national debt or Goverenment debt was very low upto 2008 in reality pretty much zero. The country then hit two problems 1 a broke banking system that so far has cost about 60 billion to sort out, secondly the cost of running the country is costing more than tax take each year adding approx another 60 billion. In effect total debt is 110 billion and rising.

Who is owed the money well almost half of it is owed to ourselves through pension funds, banks and the central bank, just over half is owed to international institutions the ECB And EU banks being the biggest also insurance companies, pension funds etc., if the banks that we bailed out return to profitability then that 60 billion has some chance of being paid back, but we wait to see. If the Goverenment get the books balanced then the debt should start to shrink.

http://www.centralbank.ie/press-area/press-releases/Pages/HoldersofIrishGovernmentBonds.aspx

AlekSmart

dimcoin wrote: »

Hi yall,

I enjoy reading up on the Irish news from time to time. However, I am continually perplexed by this huge debt issue that seems to be afflicting the country. I am confused as to who the debt is owed to and how it came about. Is it similar to the home loan bubble that burst in The States? If so, how did this translate into German Banks loaning money to Ireland, why did the Germans even get involved?

I have done some research on this, but with each article I read, I get more confused. There seems to be a million fingers pointing in a million different directions, but no clear answers.

Hi dimcoin...hope all is well in DC

You've alread gotten a few highly detailed responses and I'll wager this thread will grow & grow like topsy.

However I'll give you a somewhat cruder and less scientific possible reason for us Irish being in debt.

In my work as a Busdriver (Operator ?) I deal with a wide range of people.

We currently have a newly introduced Smartcard which gives approx 20% discount off of a Cash Fare...The Card itself is FREE,with only a €5 refundable deposit as the initial start-out cost.

After 12 months of operation,I still have many Irish customers who continue to pay cash fares every day, and when advised about the availability of a 20% discount will respond along the lines of.....

" Ah I could'nt be bothered with those oul things "
" They're too much trouble "
"I don't like using plastic cards"
" My name begins with a Z"
" I have one,but no credit on it"

The response from my German customers (I operate past a German Government funded Educational Establishment) is.....

"20% discount ?..Where do I get one of those Cards"

Simplistic I know,but nonetheless indicative of an attitude to spending which can be extrapolated from to perhaps set you thinking on How exactly we,as a people,managed to amass this debt you speak of ?

back_tracker

dimcoin wrote: »

Hi yall,

I enjoy reading up on the Irish news from time to time. However, I am continually perplexed by this huge debt issue that seems to be afflicting the country. I am confused as to who the debt is owed to and how it came about. Is it similar to the home loan bubble that burst in The States? If so, how did this translate into German Banks loaning money to Ireland, why did the Germans even get involved?

I have done some research on this, but with each article I read, I get more confused. There seems to be a million fingers pointing in a million different directions, but no clear answers.

debt ( for sale ) is a goverment or corporate IOU , its a gamble buying debt but if the debtor defaults , they cannot complain if their are consequences , perhaps ireland should have defaulted in 2008 but it would be foolish to think their were no downsides

Sand

dimcoin wrote: »

Hi yall,

I enjoy reading up on the Irish news from time to time. However, I am continually perplexed by this huge debt issue that seems to be afflicting the country. I am confused as to who the debt is owed to and how it came about. Is it similar to the home loan bubble that burst in The States? If so, how did this translate into German Banks loaning money to Ireland, why did the Germans even get involved?

I have done some research on this, but with each article I read, I get more confused. There seems to be a million fingers pointing in a million different directions, but no clear answers.

As already noted, practically all countries are in debt to some degree. Its not really an issue for most as they can easily service the debt. Prior to "The Cataclysm" Ireland's debt to GDP was among the best in the Eurozone...as low as 25%. Basically, using an unrealistic but indicative measure, Ireland could pay off its entire national debt using about 3 months national income.

Where Ireland's now horrific debt comes from is down to two factors: one - tax revenue collapsed in from 2007 onwards as the credit fuelled property bubble failed. Tax revenue is fairly elastic, politically driven spending is less so. Especially as social welfare obviously ramps up when more and more people are unemployed. So Ireland ran huge budget deficits for several years as the system struggled to adjust. I believe the 2011 deficit of -31% of GDP is a record for any modern country in peacetime. When you're spending more than you are taking in you rack up debt fast.

Ireland's debt also comes from the banks, and the ECB. Back in 2008 a truly stupid government, led by Brian Cowen and Saint Brian Lenihan, decided to guarantee a banking system of 400 billion in assets in a single late night get-together. Ireland's GDP is a little over 170 billion euro by comparison. The Irish banking regulator had been completely captured by the banks for the prior 10 years so no one had any idea whatsoever how big the problem was.

If that level of incompetence and lack of accountability sounds scary, the scarier thing is *absolutely* nothing has been done to prevent the government of Ireland from doing the exact same thing tomorrow. In fact, they made exactly the same sort of stupid decision on the much celebrated "promissory note deal".

Ireland's deficits were pretty horrific from 2009 onwards but even so, 2011 was a standout year. Back in 2010, the ECB began to get worried about the state of the Irish banks and that they were on the horns of a dilemma with regard to funding them which they didn't want to do - but they also didn't want to have the Irish banks default on debt held throughout the Eurozone, spreading problems. They needed to find some mugs to pass the problem onto.

So they began to brief against the Irish government (who didn't help themselves with stupidities like the Croke Park Agreement) leading to issuing more Irish sovereign debt becoming non-viable. One of the amusing myths of the past few years is that government never pay back debt - they just issue more. That's only true for as long as they can issue more debt. Ireland hit that particular ceiling in November 2010.

At that point the ECB bullied the Irish government into paying off the debts of Irish banks, in exchange for a "bailout" program. Despite their misgivings and wish to explore "burning the bondholders" the Irish government - gutless and incompetent as always - agreed over the objections of the maligned IMF. So Irelands spending ramped up to that aforementioned horrific 31% GDP as they were forced to recapitalise the Irish banks and pay off the bondholders.

The ECBs threats to force a political course on the Irish government is quite dodgy under EU treaties - they have no rights to do so, or to abuse their powers to influence a particular course of action. The ECB is itself very prickly about national governments trying to influence it. There have been calls from respected Irish economists like Colm McCarthy that the ECBs role should be referred to the ECJ to see if it was lawful under the treaties.

As this grew and a court case was taken against the legitimacy of the original 2008 banking guarantee under the Irish constitution, the Irish government would celebrate a great triumph by taking the promissory notes (essentially a promise to pay) that funded the banking bailout and converting them into bona fide sovereign bonds. This was rushed through by an overnight Dail session because, as we all learned from 2008, the best decisions are the ones rushed through without any debate or review.

So that's where Irish debt comes from - the typical spending deficits through a recessions, plus private bank debts converted into Irish sovereign debt by a mixture of incompetence and stupidity.

Still, apparently people in the EU today acknowledge Ireland was treated "unfairly". That just mean anything concrete.

srsly78

Still, people blame ze germans for our mess - and the american interference is overlooked. Lots of american bondholders escaped burning, and exposure via credit default swaps. Very effective misinformation.

https://namawinelake.wordpress.com/2011/06/13/there%E2%80%99s-no-mystery-to-us-treasury-secretary-timothy-geithner%E2%80%99s-intervention-in-the-irish-bailout-wikileaks-has-already-revealed-the-reason/

Lots of interesting reading there, including references to leaked diplomatic cables: https://namawinelake.wordpress.com/2012/01/11/did-the-us-secret-service-investigate-michael-noonans-sexual-proclivities/

hmmm

dimcoin wrote: »

I am confused as to who the debt is owed to and how it came about.

The government pays out more than it takes in from taxes. About 9 billion this year, but 20+ billion a few years ago. Government spending has remained the same(ish), but taxes have fallen drastically because much of our tax income came from boomtime taxes such as taxes on property sales.

chopper6

hmmm wrote: »

The government pays out more than it takes in from taxes. About 9 billion this year, but 20+ billion a few years ago. Government spending has remained the same(ish), but taxes have fallen drastically because much of our tax income came from boomtime taxes such as taxes on property sales.

The Govt has hitched it's wagon to the construction sector once again...they're already promising jobs in construction and that would tend to indicate they're planning another property/construction bubble to reignite the madnesss of a few years back.

The only real surplus this country ever enjoyed was as a result of Stamp Duty etc and they're going to go back there as soon as they can.

johnnyskeleton

My view is that the suggestion of German bank involvement in Ireland is largely overplayed. Sure, depha bank was a big mess, but I don't think it cost the Irish state very much. German banks may have had interbank loans/deposits with Irish bailed out banks, so benefitted from the guarantee, but I'm not sure that they forced or even encouraged the guarantee. Wasn't there something about how lenihan assertion that the Europeans forced him to bail out the banks was nothing but a brazen lie?

In any event, why spin this story? Because we want free European money, and in Ireland Europe really means Germany. Our nation must seem very foolish to the rest of the world as we try to use a combination of flattery and blame to get the Germans to help us. In many ways it's a kind of national victim blaming - thanks for saving us Germany, but really you messed us up in the first place, is the slightly demented political refrain, at home and abroad!

Sand

In many ways it's a kind of national victim blaming - thanks for saving us Germany, but really you messed us up in the first place, is the slightly demented political refrain, at home and abroad!

Who thanked them for saving us? Germany hasn't given Ireland a cent. Ireland on the other hand has given German banks many cents. At interest.

Conas

There is a video from 2009, with Federal Reserve Chairman Ben Bernake saying that he was for a 'Global Currency' and wanted to move in that direction. Go to 2:15 in the video below.

Can someone explain this to me more. Does anyone thing that this decade or the next one that there will be no more dollar, or Euro, but instead a global currency.

If so, would this be a good move, or a very bad one? Thanks.

https://www.youtube.com/watch?v=8SXpGV1HLZk

srsly78

Imagine all the arguing over who would control the "global currency". Maybe better to have something similar to bitcoin that isn't controlled by anyone? Lots of threads about bitcoin already, arguably it is a real global currency in use today - just not very stable!

Conas

srsly78 wrote: »

Imagine all the arguing over who would control the "global currency". Maybe better to have something similar to bitcoin that isn't controlled by anyone? Lots of threads about bitcoin already, arguably it is a real global currency in use today - just not very stable!

But is it really possible for the USA to ever payback their $17.5 trillion dollar debt? Is it possible for us to pay back out €177 billion euro debt?

If it's run like the Federal Reserve. Which is an Independent, rotten, corrupt and secret identity. Then we really are screwed.

Pro Hoc Vice

Conas wrote: »

But is it really possible for the USA to ever payback their $17.5 trillion dollar debt? Is it possible for us to pay back out €177 billion euro debt?

If it's run like the Federal Reserve. Which is an Independent, rotten, corrupt and secret identity. Then we really are screwed.

You don't ask the right question who is our debt owed to. Well almost half is owed to our own banks and the central banks. Who owns those institutions well funny that we do. The remaining half is owed to mostly banks of the EU.

I remember in the 1980's our debt was out of control, by mid 80's heading to 110% of GDP, we had no way we could pay back the money owed. But a funny thing happened by 2007 debt had remained static (there is the secret it's never paid back it turned over) at about 40 billion, but in fact we had at that time a pensions reserve fund of 20 billion, see never pay back the debt. Debt in 2007 was very manageable interest payment low and largely offset by interest in on the NPRF. In 20 years time it won't be a problem but we will do it all again, and persuade ourselves we need to borrow money from ourselves to keep the show on the road.

hmmm

Conas wrote: »

But is it really possible for the USA to ever payback their $17.5 trillion dollar debt?

The US could print 17.5 trillion in the morning if they wanted to, this is a complete red herring. As is anyone going on about Japanese debt levels.

sock puppet

Pro Hoc Vice wrote: »

You don't ask the right question who is our debt owed to. Well almost half is owed to our own banks and the central banks. Who owns those institutions well funny that we do. The remaining half is owed to mostly banks of the EU.

I remember in the 1980's our debt was out of control, by mid 80's heading to 110% of GDP, we had no way we could pay back the money owed. But a funny thing happened by 2007 debt had remained static (there is the secret it's never paid back it turned over) at about 40 billion, but in fact we had at that time a pensions reserve fund of 20 billion, see never pay back the debt. Debt in 2007 was very manageable interest payment low and largely offset by interest in on the NPRF. In 20 years time it won't be a problem but we will do it all again, and persuade ourselves we need to borrow money from ourselves to keep the show on the road.

Now that we're a modern developed country we likely won't see nominal GDP growth above 4% for a sustained period again, well until at least the next technological revolution anyway. So if debt peaked at 120% and the government ran a balanced budget it would take 18 years for it to reduce to 60% and 36 years to reduce to 30% of GDP. So it'll likely be a problem for longer than it was before anyway.

But sure, once the robots take over we won't have to worry about any of that anyway.

AlmightyCushion

sock puppet wrote: »

Now that we're a modern developed country we likely won't see nominal GDP growth above 4% for a sustained period again, well until at least the next technological revolution anyway. So if debt peaked at 120% and the government ran a balanced budget it would take 18 years for it to reduce to 60% and 36 years to reduce to 30% of GDP. So it'll likely be a problem for longer than it was before anyway.

But sure, once the robots take over we won't have to worry about any of that anyway.

18 years isn't bad to get it down to 60%. Plus, it'll drop a little bit quicker when we sell our remaining shares in BOI, AIB and PTSB. If I remember right we still have a lot of bonds out at high interest rates (at one stage we were borrowing at about 10%), once we roll those bonds over we should be able to get a much better interest rate. The national debt would remain the same but the cost of servicing it would be lower.

Conas

hmmm wrote: »

The US could print 17.5 trillion in the morning if they wanted to, this is a complete red herring. As is anyone going on about Japanese debt levels.

Isn't that part of the problem in America though? The Federal Reserve printing non-stop. If that's the case then no one would have to lift a finger to work anymore. The Fed will just print it and hand it out. Sounds good to me.