Ireland must protect itself against economic relapse
Apart from the EU, a more direct backup could be provided by the European Central Bank’s OMT (outright monetary transactions) programme. Under OMT (which has not yet been activated), the ECB will intervene in secondary sovereign bond markets as required. However, the sovereign in question would need to have “strict and effective conditionality” either under a full bailout or a “precautionary” programme designed and monitored by the European Stability Mechanism and expected to also involve the IMF.
The ESM itself has two precautionary arrangements on offer. Version 1 (called the precautionary conditioned credit line – PCCL) seems fairly strict as regards conditionality (including a sustainable debt, a track record of access to capital markets, and absence of risks to euro area banking system stability). This arrangement could last for up to two years. Version 2 (the enhanced conditions credit line – ECCL) is essentially a weaker version of the PCCL but would still be sufficient to qualify for access to the ECB’s OMT operation.
To add further to the alphabet soup of options, the IMF also has two possibilities. The first, the flexible credit line (FCL), is intended for very strong performers who might be hit by exogenous systemic shocks. Three countries (Poland, Colombia and Mexico) have already pre-qualified for FCL but have not accessed it. More suitable for Ireland might be the second version, the precautionary and liquidity line (PLL) which can last for up to two years and is intended for countries with a good track record of implementing sound policies but which remain vulnerable.
Irrespective of the approach taken, any of the above precautionary arrangements imply some degree of external monitoring of Ireland’s performance beyond 2013. One objection to such monitoring might be that the markets might react negatively to the perception that Ireland was still not entirely ready to stand on its own two feet . However, this is unlikely since lenders tend to appreciate some degree of official backup which lessens the risk they themselves could face.
A second objection might be more political: compared to a 100 per cent “clean exit”, the whiff of continued visits by, for example, Ajai Chopra and his merry men might be seen to take the shine off the success in “restoring Ireland’s economic and financial sovereignty”. To my mind this objection is misplaced. On the contrary, precautionary measures can be seen as a tribute to, and not a sign of, weakness in the achievements to date. Besides, the idea of regaining full economic and financial sovereignty in today’s interdependent and globalised world is somewhat illusory.
It is likely that Christine Lagarde, who is known to be especially proficient in such matters, has made a strong case to Irish officials for some type of continued backup or precautionary arrangement. It is to be hoped that our leaders will respond positively to such advice.
* Donal Donovan, a staff member of the IMF from 1978-2005 before retiring as a deputy director, is a member of the Irish Fiscal Advisory Council
