After Greece: Ireland's next move
This calls to mind a maxim attributed to the storied US diplomat Dean Acheson, secretary of state in the early 1950s under President Harry Truman: “Negotiating in the classic diplomatic sense assumes parties more anxious to agree than to disagree.”
It is clear by now that Ireland is more anxious than its partners to agree.
But all of this uncertainty is not without risk for the bond yields that will determine Ireland’s cost of borrowing at the end of the bailout. “You cannot interpret the success of the past year, in terms of getting the yields down, independently of the presumption that a bank deal will be achieved. If that deal disappears, the current reduction in yields could reverse,” says Prof Lane.
Debt relief: What are Ireland's best options?
Promissory notes: the Government’s main aim is to spread out the cost of this 20-year IOU scheme over a longer period, possibly 40 years, at a lower interest rate. For this to work, the ECB would need to commit to a long-term resolution plan for the former Anglo Irish Bank, but it disapproves of emergency banking support.
Direct ESM aid: the European Stability Mechanism permanent bailout fund buys shares from the Government in AIB, Bank of Ireland and Permanent TSB. For this to reduce Ireland’s debt, the ESM would have to pay for historic losses in those banks. Germany, Finland and the Netherlands have rejected that option for involving mutualisation of bank debts. A further drawback is that direct ESM bank aid was conceived for Spain, but it has not applied for any. This means there is no precedent for the deal the Government is pursuing.
The new deal: What Greece got
The latest deal for Greece marks the third attempt in a year to settle on a workable second bailout for the debt-struck country. After most private investors incurred voluntary losses on their Greek bonds earlier this year, the agreement reached on Tuesday morning will see euro-zone governments grant new financial concessions to the country.
In return for €43.7 billion in new aid between now and the end of March next year, the Greek government has enacted laws to extract €13.5 billion from the budget in the next two years. That is twice the comparable Irish retrenchment (€6.6 billion) in the next two years.
In the deal the interest rate on Greece’s borrowings is being scaled back, and a 10-year deferral of interest payments will save a cumulative €44 billion. Although Greece will buy its debt from investors below its face value, euro-zone countries will also forgo their profit on the Greek bonds held by national central banks.
The current stated aim is to achieve a debt level of 124 per cent of national output by 2020, still above the IMF limit after another decade of rectitude.
If Europe’s joint pledge with the IMF to bring that below 110 per cent by 2022 is to be met, euro-zone countries may have to take losses on their loans to Greece.