Hard to find reasons not to pursue precautionary credit line for State

The most obvious reason for going for a credit line is that it will save the State hundreds of millions of euro

The euro zone banking system is about to be stress-tested and, as European Central Bank president Mario Draghi put it recently, the process will have to involve some banks failing the test if it is to have credibility.  Photograph: Andrew Harrer/Bloomberg

The euro zone banking system is about to be stress-tested and, as European Central Bank president Mario Draghi put it recently, the process will have to involve some banks failing the test if it is to have credibility. Photograph: Andrew Harrer/Bloomberg

Wed, Oct 30, 2013, 01:00

It has to be the case, doesn’t it, that someone in Government has over recent months licked a pencil, drawn a line down the centre of an A4 page, and put the headings “reasons for” over one column and “reasons against” over the other, while considering whether Ireland should go for a precautionary credit line as it exits the EU-IMF troika bailout programme?

If they have done so, it must also be the case that the “reasons for” column is well-filled with scribbles, while the “reasons against” column is blank.

The most obvious reason for going for such a credit line is that it will save the State hundreds of millions of euro. Take, for instance, the much-vaunted €25 billion in cash that the Government says it has in the bank, as an assurance to the bond markets.

This money is not ours. It’s borrowed, probably at an average rate of approximately 4 per cent.

If it is earning any interest it is probably about half a per cent. So it is costing us approximately €875 million. Annually.

Turkeys for Christmas
That €875 million is being raised in taxes but not being spent on services, so the money goes out of the economy and has a corresponding dampening effect. Turkeys voting for Christmas comes to mind.

But it is probably even worse than that. What we are doing when we decide not to go for a precautionary line of credit is to opt to assume a certain amount of additional risk. And if you want lenders to assume the risk, then you have to pay for it.

If we go for a precautionary line of credit and use our cash stockpiles to pay off debt, it is likely to have a positive feedback effect. The risk falls, the debt falls, and the interest rate is likely to respond accordingly, with the resulting easing of the need for austerity. If we take the opposite route, we run the risk of the feedback loop being a negative one.

The figures involved are huge. Last year we spent €5.679 billion servicing the interest on our national debt, the equivalent of 15.5 per cent of all tax revenue, or 4.3 per cent of gross national product (according to figures from the National Treasury Management Agency website).

The euro zone banking system is about to be stress-tested and, as European Central Bank president Mario Draghi put it recently, the process will have to involve some banks failing the test if it is to have credibility.

Given the potential for renewed turbulence throughout the euro zone, Ireland should be doing all it can to make its bondholders feel comfortable they will get their money back.

Some people might be inclined to scribble the words “conditionality” and “economic sovereignty” in the A4 page’s “reasons against” column, but a moment’s consideration would surely prompt them to reach for the rubber.

The troika wants its money back, but if it is going to get it, the Irish economy needs to grow. In that sense, their interests and those of the Irish people are the same. Any conditions that may form part of any precautionary credit line will have to make sense in terms of economic growth.

Talking about conditionality and loss of sovereignty is a load of bunkum when you are up to your tonsils in debt (and living in one of the most open economies in the world). Furthermore, irrespective of what happens, Ireland is still locked in to a whole slew of conditions arising from our membership of the EU and the euro zone. Any conditions associated with a precautionary credit line are likely to be mirror images of these rules. Ireland has been pooling its “economic sovereignty” since 1973, and a good thing too.

Bluff
Maybe somewhere on the A4 page, someone has written the word “bluff”, indicating the Government’s thinking that going on about its cash pile gives it a stronger hand when negotiating a precautionary credit line. That’s not a comforting idea.

A potential reason for a scribble in the “reasons against” column is that someone thinks it would be a good political line to be able to say this Government has “restored” Ireland’s economic sovereignty and/or, that going for a precautionary credit line would give political ammunition to Fianna Fáil and/or Sinn Féin.

If there is any validity in such an observation, it reflects very badly on Irish politics. And anyway, the popularity or otherwise of Fine Gael and Labour politicians come the next general election will be a factor of the economic health or otherwise of the State.

If things are looking up, people won’t give two figs for bogus faux-nationalistic nonsense like our “restored” economic sovereignty.

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