2053: What does the 40-year payback mean?

Sat, Feb 9, 2013, 00:00

After years of economic turmoil and social distress, is the new deal with the ECB a turning point for Ireland?

The deal to restructure the debts of Anglo Irish Bank clears a major political and financial hurdle for the Government as it prepares to break free of the international bailout later this year.

Although huge challenges remain to be overcome in the months ahead, the new arrangement with the European Central Bank relieves some of the debt burden on the beleaguered Irish people. The immediate impact for the public is minimal. There will be no getting away from painful new taxes on property and water, for example. This year’s budget remains intact, but some benefits will be felt from next year.

To meet European targets in the next two years, the Government had been due to cut the budget by a further €5.1 billion: €3.1 billion in 2014 and €2 billion in 2015. The Coalition now expects to reduce the total by €1 billion in that period, easing some but not all of the pressure to scale back expenditure and increase the tax take.

In a hostile political environment, with the Government’s popularity on the wane, this is welcome room for manoeuvre. As Tánaiste Eamon Gilmore revved up international pressure for a deal, the argument was quietly made in Government circles that it would be very difficult for Ministers to agree to a new swathe of budget cuts this autumn if the promissory notes were not recast.

The deal means the Government will not have to shell out €3.l billion at the end of March, nor another €3.1 billion in June to meet a liability to Bank of Ireland under an arrangement to defer last year’s bill. A further €3.1 was to fall due in March 2014, meaning the Government was faced with paying no less than €9.3 billion into a bust bank in the space of 13 months.

At the same time, a big reduction in the State’s titanic borrowing requirement in the years to come means it will be easier for the Government to persuade private investors that Irish sovereign debt is again a good bet.

The benefits here are twofold. First, the likelihood of the Government being less indebted should ease concerns about its ability to repay debt. Second, the consequent increase in demand for Irish bonds should reduce the interest the Government must pay when selling debt to investors.

“It’s not that paradise starts tomorrow. It’s not heaven on earth all of a sudden. It’s a good first step in the process towards exiting from the programme,” says a central-banking source who knows the Irish scene.

In this respect the deal should bring Taoiseach Enda Kenny and Gilmore closer to taking charge of Ireland’s affairs, and reduce the influence of the troika.

Intrusive external surveillance will be a fact of life for ever in the euro zone, so economic sovereignty is a diminished and limited thing these days. But it would still be a huge boost to take Ireland away from its morale-sapping dependence on the emergency loans of its sponsors. For the State to pay its own way again would bring clear psychological and political benefits.

It would not fix rampant unemployment or solve mortgage-loan defaults, but it might improve the conditions for tackling them.

Speculation and drama

It was a week of drama: fevered speculation in Dublin and beyond about the outlook for a major financial institution; hushed action in Government Buildings; uncertainty about the outcome; ambiguous signals from Europe; furtive whispers about a long night in Leinster House; bag-eyed TDs braying at each other at a midnight sitting of the Dáil; ardent pleas for order from a put-upon Ceann Comhairle; and President Higgins’s dead-of-night dash home from Rome to sign emergency legislation into law.

Dublin’s aim all along was to avoid making the €3.1 billion payment due next month, which necessitated a long diplomatic campaign.

Although the basic proposal to replace the notes with bonds and liquidate Anglo had been on the table since last autumn, there was no sign of a breakthrough as the new year opened.

This a led a decision to step up the political offensive. After the ECB’s governing council rejected one initiative, Dublin submitted a refined plan to the council this week.

There were many tense moments as news of the liquidation plan leaked on Wednesday, prompting the Coalition to proceed with emergency legislation that night. A senior Government source says there were signs beforehand that the ECB’s executive board was recommending that the governing council accept the plan, but its assent was never a given. When the decision was taken to go ahead with the legislation, there was no certainty of a successful outcome.

Support finally came on Thursday, but it was very close-run. Jens Weidmann, the president of Germany’s Bundesbank, pushed back strongly against agreement on Wednesday night, raising doubt about the entire plan.

The fluid atmosphere was all very redolent of the 2008 banking guarantee, which drove the State into a fiscal wall of fire, and the 2010 EU-ECB-IMF bailout, which saw strangers step forward to pay Ireland’s bills. These were defining events, seared in memory as moments of acute distress at which increasingly bad situations became inexorably worse.

By contrast, the deal to scrap the dreaded promissory notes makes a bad situation better. It feels like progress.

Is it a turning point? Perhaps. If Ireland’s economic collapse came about in steady increments before the bubble finally burst, recovery is also an incremental slog. We are not in the realm of overnight changes in fortune. The crisis is far too deep for that. Yet this is still a decisive step forward on the long road to sustainable finances, and a battle won for the Government after many long months of resistance from an unyielding ECB.

The deal is far from perfect. The Irish people are still on the hook for the rot in Anglo and in Irish Nationwide Building Society. That debt is €31 billion, an appalling sum by any standard, and a drain on the national finances for generations to come.

However, the arrangement made on Thursday peels back an excess burden built in by the promissory-note scheme. The interest fees on these IOUs were set to bring the total cost of the arrangement to €47.4 billion. By spreading out repayments for up to 40 years and reducing the interest, the State’s borrowing requirement should drop by €20 billion over the next decade.

Instead of paying down interest and principal while in the maw of recession, as foreseen under the promissory-note scheme, the issuance of long-dated government bonds postpones the first repayment of principal until 2038 and the last until 2053.

There are three potential benefits. First, less money is drained out of the economy when the Government is still trying to engineer recovery and economic growth. The second is that this improves the chances of selling debt to private investors as Ireland pushes to exit the bailout. Third, the fact that the bonds won’t be repaid for decades opens scope for economic growth and inflation to reduce their relative burden.

All of that is benign, but there are still risks on the horizon, both abroad and at home. A consistent feature of the Irish debt saga is that it has been made appreciably worse at times by events elsewhere that were beyond Dublin’s control.

In the run-up to the bailout in 2010, the Deauville declaration by the German chancellor, Angela Merkel, and the then French president, Nicolas Sarkozy, all but sealed Ireland’s fate when they said private investors would have to bear costs in future bailouts. It was a political statement, now widely seen as a grave error, that cost Ireland dearly.

In spite of relative calm in the euro zone since the ECB initiated a new bond-buying scheme last September, there is still uncertainty about the outlook for Spain and Italy.

Any worsening of the general situation in the euro zone would hinder Ireland’s prospect of exiting the bailout smoothly.

Seeing Ireland through

At the same time, there can be no doubt about Europe’s determination to see Ireland through to the other side. There will be tough battles about the treatment or legacy of historic banking debts in surviving lenders such as Allied Irish Banks and Bank of Ireland. But the mood has changed fundamentally. More than ever, Ireland is seen as the best prospect of a successful bailout programme and as an exemplar of the merits of German fiscal rectitude.

Two years ago, within hours of becoming Taoiseach, Kenny was at a European summit in Brussels. Immediately, he was ambushed by a forthright Sarkozy, who initiated a long campaign for Ireland to reform its corporate-tax regime as the price of bailout concessions.

The “Gallic spat”, as Kenny memorably put it, underlined Ireland’s low standing in the aftermath of the bailout. It mattered not a whit that Kenny had been on the Opposition benches throughout the boom years and that the economy blew up under the stewardship of Brian Cowen and Bertie Ahern.

There would be no reduction in the interest rate on the rescue loans without a corresponding concession from Kenny on corporate tax, he was told. Not entirely without foundation, our economic disaster was seen “in Europe” as the failure of the entire body politic and the administrative class.

It took the Taoiseach many months to win the argument. When the breakthrough came, it was as the result more of an effort to ease rising pressure on Italy and Spain than of Dublin’s negotiating prowess.

The picture has since changed, incrementally but steadily. At the outset there was anxiety among European politicians and officials about election slogans such as “Labour’s way or Frankfurt’s way”. They were also reluctant to countenance the notion that senior bank bondholders would be torched.

Praise for the Government

In the intervening period, the Government’s solid execution of the bailout programme won international plaudits. These may grate, and much of the praise is superficial, but there was still a sense that Kenny, Gilmore and their Ministers were doing what they were supposed to do.

This is important in a scenario where successive Greek governments have failed to meet promises, worsening recession in that country and increasing its reliance on external aid.

Similarly, the political scene in Italy and the sense of brooding crisis in Spain underscore the external image of stability in Ireland.

The referendum to cut judges’ pay is said to have impressed Merkel greatly. A bigger coup still was the referendum on the fiscal treaty. Voters might have come out more in fear than relish at the prospect of “more Europe” in Irish budgets, but it was still a result.

All of this was for the good. While the Taoiseach always played on his centre-right political link with Merkel, the unseating of Sarkozy by the new socialist president of France, François Hollande, opened up a new alliance, and a connection for the Tánaiste to exploit.

Government priorities

The key for the Government is to capitalise on the progress made. While the next big task in Europe is to secure a concession on legacy banking debts, a breakthrough is unlikely before the German general election in the autumn.

In spite of this week’s success, there is no let-up of other tension on the home front. Leaving aside the abortion conundrum, the economic pressures are still huge.

The reforms mooted in talks on a second Croke Park pact are not exactly the stuff of popularity. While no Government wants gardaí and nurses protesting on the streets, the ending of the promissory-note scheme will do little to lessen the demands to reduce the public-sector pay bill.

At the same time, there is still frustration in the troika that the Government has not tackled pay at the very top of the scale in the health service and the Civil Service. The argument that the external supervisors would provide a degree of political cover for Ministers has not gained traction.

The deal with Frankfurt comes as a great relief to Kenny, Gilmore and the rest of the Government, and reinforces their credibility and authority. But the road ahead is still long and hard.

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