Ireland urged to play ‘hardball’ to get a deal on legacy bank debt
Citigroup economist Willem Buiter suggests Government should withhold support for euro area bank resolution authority
Willem Buiter: “Ireland took one for the team because Europe decided it was not ready to handle the contagion effects. It was not in the Irish national interest to do that.”
Negotiations over the proposed single resolution mechanism – a key plank of the EU’s banking union plan – provided the perfect opportunity for the Government to play “hardball”, he said.
This is something successive Irish governments have singularly failed to do in their negotiations with Brussels, he said.
Mr Buiter, a respected economist and former member of the Bank of England’s monetary policy committee, was speaking in Dublin yesterday as Citigroup raised its growth forecast for the Irish economy to 2.1 per cent for 2014 and 2.2 per cent for 2015, up from 1.4 per cent and 1.6 per cent respectively.
He said that in 2010, the then Irish government had sought to “bail-in” senior bondholders in Anglo Irish Bank by making them share the bank’s losses. However, strong pressure from Germany, the US and then ECB president Jean-Claude Trichet blocked that move.
Mr Buiter said Ireland had been “cajoled, coerced, you might even say, extorted” into a deal that saw €30 billion- €60 billion of bondholder debt lumped on to the taxpayer.
“Ireland took one for the team because Europe decided it was not ready to handle the contagion effects. It was not in the Irish national interest to do that,” he said.
He said Ireland had a compelling case to be given retroactive debt relief despite the current noises coming out of Brussels.
Last month, European Commission president José Manuel Barroso strongly hinted that Ireland should not necessarily benefit from further debt relief for its banks, saying the problems that appeared in Ireland were not created by the EU.
Mr Buiter said, however, Ireland would have to play hardball if it wanted a deal.“Reason is not enough. Right is not enough. You have to make it in the interest of other parties to agree with you,” he said.
He said the fact Ireland was the only country to have fulfilled all the conditions – structural and fiscal – of its bailout loans was another reason why it should receive a deal on debt.
“Ireland had to make a choice either to be unpopular in the short run by playing hardball or living with zombified domestic banks for several more years and, as a consequence, having below-par growth.”
In its outlook for the Irish economy, Citi said it had lifted its growth forecasts in response to “better data” linked to the expansion in employment and recovery in the housing market.
It also said Ireland’s public debt/GDP ratio was also likely to have peaked at 125 per cent in 2013 and would begin edging down this year, in contrast with several other peripheral European economies.
The bank said the fiscal deficit was likely “to fall quite rapidly” in the coming years, dropping from about 7 per cent of GDP in 2013 to about 3 per cent of GDP next year.
Mr Buiter said the future for Ireland was positive despite the fact that the banking sector would act as a drag on domestic growth.
Citi is forecasting GDP growth of 1.1 per cent for the euro area this year, and 1.3 per cent in 2015.