‘Clean’ break comes with lots of oversight

The bond market will take it as read that we will behave ourselves and not upset ournew masters in Brussels and Frankfurt

The only variable that will interest bond investors will be economic growth. Photograph:  Pawel Kopczynski/Reuters

The only variable that will interest bond investors will be economic growth. Photograph: Pawel Kopczynski/Reuters

Fri, Nov 15, 2013, 01:00

The pragmatic reason for opting for a clean bailout exit appears to have been the fact that no precautionary credit line was on the table.

We could probably have negotiated something if we had wanted to do so. The troika, especially the IMF, has until very recently been operating on the assumption that a credit line was both sensible and “do-able”.

The problem would have been the negotiations: they could have gone on forever, would have invited one or more European governments to tack on conditions related to their favourite gripes, and would probably have resulted in a credit line of very short duration. We would have been back at the negotiating table within months, even if everything went smoothly and quickly.

There are also the optics to consider: expect dodgy claims about “regaining our sovereignty”.

Anyone who thinks that the levers of economic power have been restored to us needs to reflect on the current state of euro zone governance. This is a minefield of acronyms, jargon, policy made on the hoof and policy that is also taking forever to arrive. There are things called the Six Pack, the Two Pack and the Treaty on Stability, Co-ordination and Governance. The Six Pack strengthens the earlier Stability and Growth Pact and contains five regulations and one directive. And so on.

Spanish Inquisition
Critically, we now have policy enforcement: the “Preventive and Corrective arms” of the Excessive Deficit Procedure, which, arguably, is the modern day equivalent of the Spanish Inquisition. It means that the troika is either in town or is on the way. Beware politicians who claim that destiny now lies in our own hands. This is oversight and control – nothing more, nothing less.

The Department of Finance’s Twitter machine went into overdrive yesterday. One tweet hastily began “Public under Control in Ireland”. I think they meant the public sector deficit but we can’t be too sure.

In a longer statement about why we have gone for a clean exit the department referred to the bond market, improving economic conditions and “the Two Pack, the Six Pack and the stability treaty, the introduction of the ESM, and the major efforts by the ECB to do whatever it takes to safeguard the currency, further support our efforts to make a sustainable and durable return to the markets”.

As always it will come down to the bond market. We will have to raise money from these folks next year – running down the cash mountain in a serious way isn’t really an option.

We won’t be able to do anything, fiscally, that upsets the bond market – and we also have all those euro zone regulations that are absolutely binding, if not constraining.

The bond market will take it as read that we will behave ourselves and not upset our new masters in Brussels and Frankfurt. The only variable that will interest bond investors will be economic growth. We and the euro zone are one recession away from further chaos, if not catastrophe. So we need recent signs of economic stability to continue.

Irish bond yields
In the immediate aftermath of yesterday’s announcement, Irish bond yields were barely changed, trading at around 3.55 per cent. These are eminently sustainable yields, particularly if we can get our (nominal) economic growth rate up to a similar, if not higher, level. If bond yields shoot up again it won’t be our fault – we are too constrained for that. All of the risks are external.

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