Ministers bark but ECB leash still holds
Over the weekend we had a pantomime we have seen almost as often as reruns of Mrs Brown on RTE.
After weeks of Government Ministers hyping up a solution on the promissory note repayments the European Central Bank comes out and says something unhelpful like ‘No’.
And then Irish Ministers come out with a mixture of threat (Gilmore) and reassurance (Rabbitte and Varadkar). The question is will it get them anywhere this time?
There are two separate ways of getting relief (or sustainabilitity to use the buzz word) on Ireland’s debt relief: either by getting a deal on the promissory note, or getting some payback for the €64 billion Irish governments have pumped into the performing banks. You always know that talks are failing on one of those solutions when the Government starts talking up the other solution.
How many times since August of 2011 has this newspaper reported that the Government was on the brink of a breakthrough or a deal on debt relief, only for everything to evaporate?
This time it’s a little different. There’s a looming deadline on March 31 for the next repayment of €3.1bn. What would be almsost as bad for the Government as no deal would be some kind of three-card-trick on the €3.1bn that would alter the form of repayment but still leave the Government on the hook for it within a relatively short time period.
And in any instance, the three bodies in the Troika arrive in Dublin today to begin the latest quarterly reviews. Ironically one of their concerns is that the Government has become obsessed with the debt question to the detriment of all the tough fiscal decisions that remain to be taken.
There are two narratives on Ireland’s performance under the bailout programme. There is the one given by Micheal Noonan and Brendan Howlin at the end of each quarterly review. Invariably, both hand out gold stars to themselves for being the best students in class.
Then there is the less gilded narrative of IMF and EU Commission staff. It’s slightly harder to decipher, because it’s heavy on jargon and nuanced. But it’s clear that its message is: not paying enough attention in class and must try harder.
As officials arrive today to begin the ninth review of the programme, it is clear the gap between the Government and the Troika on the expectations for recovery have widened measurably despite the continued success in meeting the programme targets.
Analysis based on the latest staff reports from the Commission and the IMF, as well as from well-placed sources, shows there is real concern that radical Government reforms have slowed down and may even hit the buffers.
The first criticism is the Government has portrayed a deal on bank debt and promissory note as some kind of panacea when it’s not. Then there is the recurrent theme that the public sector pay bill has not been tackled sufficiently; that not enough has been done to tackle the growing problem of long-term unemployed people; and measures to address over-runs, especially in health, have been inadequate.
The net outcome of that is the Government will not be in a position to hit the magical 3 per cent of national debt target by 2015 if it continues to pursue current policies. Its own figures are €1.2 billion more optimistic than that of the Troika.
In its staff paper, the Commission drily notes that the current plans “may not be sufficient to reach the (3 per cent) deficit target”.
“We express doubt that Ireland will get to under 3 per cent before 2015 with the triple lock (the Croke Park agreement protecting pay; no cuts in basic social welfare; no increases in income taxes)”.
“That is why Croke Park Two has to be more ambitious…
“The political point is it’s very hard to say to other countries you should help Ireland if there is evidence that Ireland is not doing enough,” said one source who spoke on condition of not being identified.”
While acknowledging programme implementation, the Troika has a sense that the huge emphasis placed on debt sustainability has meant that, as one source puts it “the reform momentum may have slowed a little”.
A deal on debt sustainability is not the solution to all Ireland’s problems, says the source. The separate fiscal crisis, with the collapse of 30 per cent in tax earnings, posed a huge challenge to public finances. Massive permanent increases in spending were financed by transitory tax revenues.
“Even if your fairy godmother arrives and in one stroke all the bank debt is gone, there is still a huge amount of austerity to got through [on the fiscal side],” the source said.
That said, the IMF and Commission staff reports underlined the importance of a deal on bank debt pointing out that otherwise the fall in spreads on Irish debt could be reversed. Both reports suggest that expectations were raised too quickly after the June 2012 summit that a deal could be struck.
Perhaps that sentiment has been borne out this weekend as Government ministers have tried to ‘spin’ bad news from ECB sources. It happened last autumn too when Enda Kenny had to place a personal phone call to Angela Merkel to get her to contextualise comments she made that there would be no retrospection (ie money paid back to Ireland for propping up its banks) when the new European Stablity Mechanism came into being.
Troika staff have focused to an inordinate extent on the public sector pay bill in recent months. The core argument is that cutting numbers isn’t enough.
The Commission noted that Irish medical consultants were the highest paid in the EU for their public work, being paid twice the rate in the UK. The IMF noted: “Public pay is elevated in Ireland especially for teachers and medical professionals.”
It has honed in on medical consultants in particular. One example is of the consultant who described a proposed public salary (€205,000) as ‘Mickey Mouse money’ [six years ago].
“Some of these guys don’t realise the party is over,” said the source.
Other unpublished figures showed that Ireland had the largest increase in public wage bill between numbers and wages since 2000 but that public sector pay cuts since then have been markedly smaller than other programme countries such as Portugal and Spain .
Its net argument: the Irish public service has suffered less than other programme countries. It accepts that it has brought industrial peace but asks is Ireland paying too high a price for it?
Troika officials are also cool on universal payments and make the point that they end up going to too many people who don’t need them. The health over-runs, the Commission suggests, reflects the lack of binding targets for departmental spending ceilings. An “escape clause” may be evoked.
They are also worried about the lack of detail of how the Government will achieve further cuts in 2014 and 2015.
They want the Coalition it lay its cards on the table now – the IMF suggests reforming tax relief on private pensions; greater use of generic drugs and (controversially) an “affordable loan scheme” for third level students.
Other criticisms: the slow pace of progress of Irish Water; the scrapping of rent supplement to be replaced by a payment based on level of income rather than employment status. This is designed to incentivise (with a stick rather than a carrot) people to look for employment. With its continuous pressure on the Coalition to improve job activation measures, the Commission has recommended private sector involvement in activation programmes.
The supposed irreconcilable nature of Ireland’s approach is summed up by an official: “Ireland wants Sweden’s welfare State and an American tax rate.