2053: What does the 40-year payback mean?
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.