German Economist, Professor Hans-Werner Sinn of the Ifo Institute appeared on tonight’s Primetime. Professor Sinn has been the question to many answers and tonight was no different. Some of what he says make absolute sense, some makes a little sense, while more makes no sense at all.
He proposes, or seems to propose at any rate, a default on the Anglo Promissory Note, a default on liabilities of the other banks, and a default on Irish government debt – basically default on anything to ensure the German taxpayer is insulated. Right at the end he seems to suggest that the Target2 balances created as part of the process that saw the Irish banks repay over €100 billion of foreign deposits were some form of “public credit provided to Ireland at low interest rates”.
The preview to the show said that:
And in studio, we’ll be joined by top German economist Hans-Werner Sinn, who’ll tell us why he believes Ireland does not need a deal on its bank debt.
See for yourself what Professor had to say. Here is the transcript.
Pat Kenny: My next guest has been described by The Economist magazine as “the closest Germany has to a celebrity economist”. Bloomberg said he “can rally enough voters to actually influence Chancellor Merkel”. In 2011, The London Independent named him as one of “ten people who changed the world”. And last summer he caused a sensation by joining 270 other German economists who signed a letter opposing Chancellor Merkel’s Brussels agreement on direct recapitalisation of ailing banks. Professor Hans Werner Sinn you’re very welcome to the programme.
Now you saw the video we did in Rochfortbridge. People are feeling the pain. Almost one-in-three men out of work; almost one-in-five women…more than one-in-five women out of work. This cannot go on.
Hans-Werner Sinn: No, of course not. We have very difficult situations in quite a number of European countries. It’s even worse in Spain, in Greece as you may know the youth unemployment there is 50 percent. The total unemployment rate is approaching 30 percent, it is twice as large as Ireland’s. And Ireland’s is very difficult indeed. So let’s hope that the situation will soon improve and in my view it will.
PK: But why?
HWS: Why? Because you did have the austerity. That’s the difference between Ireland and all the other crisis countries. Ireland came earlier into the crisis than the others. In 2006 the real estate bubble burst already, and the others came into trouble after Lehman, 2008. So when Ireland was in trouble, no one was helping Ireland. The Irish people had to help themselves and they were cutting their wages and prices and increase their competitiveness with huge success. We still have let me say…
PK: But the prices…
HWS: …the price level relative to the other eurozone countries in Ireland has declined by 15 percent. No other country has achieved that and that has really…
PK: So we’re becoming more competitive? However…
HWS: Indeed. And it will create jobs. It has already improved the current account, the trade balance enormously and you see the results of this austerity programme. I don’t think there would another five years or even ten years of problems for Ireland.
PK: But we have a massive debt overhanging us. Much of it debt that we didn’t incur as a nation; individual banks incurred it and all of those banks were underwritten by the Irish government. Bondholders in German and France got paid when in a normal capitalist economy they would have had to take a bath.
HWS: Indeed. And this was a big mistake. Ireland gave guarantees of 240 percent of the Irish GDP. Incredible! For what? In order to help these rich people who had invested the money in Irish banks. The right thing would be…
PK: But we know the pressure was on the Irish government. On the night of the bank guarantee they were told “save the Irish banks” because if the banks go down, European banks will go down, German banks will go down, French banks will go down.
HWS: Well, they did go down. And Germany itself had a Promissory Note of 240 billion euros to save some of its banks. I think this whole business was handled badly and so far the problem is that some investors, rich people, gave the money to the banks and the banks can’t repay and then they say let’s ask the taxpayer to foot the bill. This is not right, it is not just and it is not the right incentive for the future because these banks will go on with their crazy business in the future.
PK: But what are we to do? Because we have already given those banks the money. They have paid the bondholders…
HWS: You should…there are still lots of bondholders, people, creditors of the Irish banks, you should deprive them of some of their claims. If the banks don’t have enough equity because they have write-off losses then someone has to bring in this new equity. Is it the taxpayer or is it the creditors?
PK: If, for example, we decide we are not going to pay the 3.1 billion on the Promissory Note which is due at the end of March. That means that the former Anglo bank will not have the cash to do what it needs to do – to wind down. The ECB will say “that’s a default”.
HWS: Why don’t you let it default? Default is the best way to solve such a problem. It doesn’t mean the bank comes to an end; it just means that the creditors have to forgive some of the debt and this is quite natural. They made the investment decision.
PK: The ECB will allow us to do this?
HWS: I don’t know what the ECB will say, but these economists whom you cite from Germany said that that should be done. And actually it was not just 270, it was a total of 480 professional economists in Germany who said it is much better to forgive the debt and ask those people who have miscalculated their chances to reduce their claims against the banks.
I mean we can’t have capitalism in the way that, if there are profits they are being distributed to someone and once there are losses that the taxpayer steps in and solves the problem.
PK: I think you would find many people here who would agree with you that the people who invested should have been burned, but they weren’t. Many of them have been paid from the very beginning and that debt is now being repaid by the Irish taxpayer. And people are saying…
HWS: No, that was a big mistake as I said.
PK: But what do we do to rectify it? Can we rectify it?
HWS: Well there is still lots of debt in the banking sector, including the Anglo Irish Bank, the follow-up bank, the bad bank. It has bondholders; it has creditors.
PK: So burn them?
HWS: Well, ask them to forgive some of the debt.
PK: What about the fundamental reason for our problem? Which was that we got lots of money here, very cheap money, at a time when our economy was booming. It didn’t suit us; it suited Germany and France perhaps at that time but it didn’t suit us. The euro was the child of France and Germany but the architecture was wrong. So the people who got the architecture wrong, perhaps we should all share the burden.
HWS: Yes, the architecture was wrong I fully agree. Too much money was flowing around in Europe under the euro. The excessive credit flows came to those countries which are now in a crisis, creating a credit bubble which meant a real estate bubble in Ireland, in Spain; meant basically a government bubble in Portugal and Greece. And that was a very artificial and unnatural development. Everything became too expensive and these countries lost their competitiveness. These countries are now stuck in a situation where their prices and wages are no longer competitive and they have to come down, but coming down through austerity is very difficult. You can increase the prices but you cannot cut the prices easily and that is the sort of trap in which some euro countries have ended.
PK: In our situation…
HWS: Ireland was the only exception escaping this trap.
PK: Alright, but we still have a massive amount of debt. Some say its around 140% of the hybrid of GDP and GNP. We don’t need to be technical about it, but its unsustainable for Irish taxpayers to reduce that debt anytime within the next ten years or even longer. So what to do?
HWS: Well that’s not true. I mean Japan has 100 percentage points more. It is difficult enough… Twenty years ago Ireland had 95% debt/GDP ratio. You may have forgotten. In the meantime due to the growth the debt/GDP ratio declined. It is difficult indeed, and so what has to be done? Ask those people who hold the debt forgive the debt if necessary but don’t ask the taxpayer to do that.
PK: The point is… I think what Hans Werner is talking about is also the European taxpayer, isn’t that so. You don’t want the German tax payer. [To audience] So if you thought you got home free here, no, no, no, no.
HWS: No taxpayer. Neither the Irish taxpayer nor the German taxpayer nor any taxpayer, because the taxpayers are not the richest people. Those people who have invested their money, they have lots of wealth and why should they not give up some of their claims.
PK: So it’s only the private investors we can hope to get some help from in your view whereas what we are hoping for is first of all a deal on the Promissory Notes and secondly some sort of restructuring of our deal. We’ll say “we’ll pay everything back but, like German after World War 1, a hundred years, a hundred years…”
HWS: But its the wrong… I think you have entirely the wring discussion. You keep those people who really have the wealth out of the picture. I tell you a number. Take the six crisis countries of which Ireland is one, including Italy. The total debt of the banking sector…sectors is 9.4 trillion euros. This is an astronomical sum of money. If some of that, these claims against the banks, cannot be satisfied how can you ask the taxpayers of any country of Europe to foot the bill. You can only ask these people who hold the claim. I mean a claim, a debt of a bank, is also wealth of someone who holds this claim against the bank. And only this group of people has the wealth to bear the losses. No one else in Europe has it.
PK: So there is no way in which Europe, the eurozone countries, the ECB can actually dig us out of this.
HWS: Well, the ECB has helped a lot and I find this appropriate. The ECB, don’t forget, has given Ireland an extra credit beyond the liquidity services at home of 150 billion euro. This is one GDP and then came the rescue packages through inter-governmental rescue operations, was another 50 billion which reduced then the ECB credit to Ireland. But still we are talking about a sum of 150 billion euros public credit being provided to Ireland at low interest rates so there is some help, there is some help. And quite so.