Scaled-back troika role for ECB worthy of consideration

Wed, Sep 12, 2012, 01:00

THE BOTTOM LINE:THERE IS something to be said for the European Central Bank having a reduced oversight role, or none at all, in the bailout of Ireland and other “programme countries”.

This may seem odd for a country whose live banks have borrowed €61 billion (as of July) at a bargain rate of 0.75 per cent from Europe’s central bank and whose dead banks (Anglo Irish Bank and Irish Nationwide) have approved funding from Frankfurt for €41 billion more in emergency loans.

And it may be a strange suggestion to exclude the ECB when it is the only institution in Europe with the ability to start the money printing presses, much to Germany’s frustration, to solve this intractable crisis.

But as Ireland’s biggest creditor the ECB has the most to lose and will always have its own interests at heart when it comes to bailout targets being met, no matter what.

Indeed it was Frankfurt’s concerns about its rapidly-growing exposure to Irish banks as the lenders turned to the ECB to fill the gap left by a run on deposits that led to the pressure on the last government to apply for a bailout.

It is hard to understand how the ECB didn’t see this exposure growing in the summer of 2010 when it was clear the Irish banks were shut out of funding markets – and would have little hope of getting in again in the aftermath of the Greek bailout in May 2010 – as the end of the bank guarantee was fast approaching.

That aside, Ireland and indeed Europe may have been better served by its programme being checked by an EU-IMF duo with the ECB canvassed for its views on certain issues. Europe’s interests are already served by the European Commission and, besides, the International Monetary Fund’s function is to help countries out of economic crises.

The best example of a misdirected target in Ireland’s bailout programme was the demand that the Irish banks reduce their loans-to-deposits ratio to 122.5 per cent (€122.50 on loan for every €100 on deposit).

The only real beneficiary of this strategy was the ECB as the deleveraging – sale and run-down of loans and other bank assets – was intended to generate cash to repay Frankfurt.

The unintended consequence – although again it is hard to see how this wasn’t anticipated – was a deposit war as the banks raised savings rates to try to reach this target. This further damaged the profitability of the banks and in turn their capacity to attract market investors/lenders and finally loosen the debt-grip of the banks on the State.

The troika has since backtracked in favour of a more flexible target for the banks.

The IMF’s regular health check of the Irish economy – the Article IV report published on Monday – shows that it is at least looking to longer-term fixes for structural problems.

While not representative of the troika’s views, the IMF’s “selected issues” report provokes discussion around solutions beyond just repaying debt as quickly as possible.

It points out underlying problems with our tax system that are out of kilter with modern economies. For example, the level of pay at which income tax kicks in is “unusually high”; in fact it’s the highest in the Organisation for Economic Co-operation and Development, while for higher earners the top marginal rate kicks in at a relatively low level, says the IMF.

It suggests that one way of improving things is to raise rates for those earning above €21,000, raise the income level at which the top marginal rate kicks in and make changes to special income tax reliefs which at present help those who don’t need really them.

The IMF also says public sector pay can be cut via the Croke Park agreement by tackling allowances, sick pay and reduced overtime.

Beyond the immediate problems, the IMF also says public service pensions may need to be reduced given that there will be a one-third increase in the number of over-65s to 2020.

The IMF also suggests mean-testing medical cards for over-70s to reduce a rising cost with an ageing population, treating child benefit as taxable income and reintroducing college fees on courses where graduates have a greater potential for earning afterwards.

While many will find the IMF’s suggestions unpalatable, they at least offer some lateral thinking and long-term fixes beyond just getting money back to an irate creditor who should have seen the warning signs coming.

The IMF is also keen on restructuring the State IOUs covering the cost of Anglo Irish Bank and Irish Nationwide, which it says would help Ireland’s return to the markets.

This is in contrast to the ECB’s and – surprise, surprise – Germany’s sceptical views about the merits of such a move. Again, this is hard to understand given how it would help Ireland’s recovery and ultimately the ECB’s chances of getting their loans back.

A troika without the ECB – now what’s the Russian for twosome?

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