Decision to go it alone a signal of confidence in our exit strategy
Opinion: The reality remains that tight budgets are de rigueur under EU rules
Michael Noonan with EU Commissioner for Economic and Monetary Affairs, Olli Rehn yesterday. Photograph: Peter Cavanagh
The decision to leave aside the option of a post-bailout credit line marks an unambiguous declaration of confidence by the Government in its exit strategy.
To be sure, the “clean break” approach is not without risk. But it strengthens the argument that economic sovereignty will be fully restored to its rightful owners when the rescue plan ends next month.
Although this is something of a glittering political prize for the Coalition, more important still is the fact that the State and the Irish people can stand again on their own without recourse to external aid.
If the symbolism of it all is crucial, the psychology is no less important.
The move to leave the bailout without a formal safety net avoids the unappealing prospect of taking on tough new fiscal policy conditions from external masters.
Even if this involved nothing more than a reinforcement of obligations on the Government to complete unfinished business from the bailout, there would be no move away from intrusive policy surveillance by international inspectors.
This is convenient politically, but it does raise the stakes greatly in the aftermath of the bailout.
“We certainly have the benefit of the doubt from the markets. You’ve got to be doubly convincing to do that, and we’re certainly very conscious of that,” said a senior Government source.
Thus the Coalition recognises it will be cautious and risk-averse in its economic policy.
While this rules out any return to bad fiscal habits, the reality remains that tight budgets are de rigueur under new EU rules.
The really big test will come in the second half of next year. With significant cash reserves already in place for the period immediately ahead, the Coalition will become more and more reliant on market financing as the reserves are run down.
This is an incremental process. Rather than seizing opportunistically on positive market conditions for opportunities to sell Irish debt, the National Treasury Management Agency (NTMA) will adopt a regular issuance schedule.
A further factor is a looming pan-European stress test on the banks by the European Central Bank, something which carries the danger of a demand for yet more capital for Ireland’s stricken lenders.
While banks are set to pass an ongoing mini-stress test which has been under way for weeks, next year’s examination will be appreciably deeper.
Banking union plan
What is more, the outcome will be scrutinised against the backdrop of progress made on Europe’s “banking union” plan. While real advances on that front would be helpful to Ireland’s cause, any absence of progress would not.
If all of that constitutes risk to the outlook, there is no such thing as a risk-free return to private debt markets after a period in no-man’s land.
Still, the sense remains that market confidence will have to be fully established at some point. If any credit line would have been for one year only, then the same issues teased out in recent weeks would still have to be teased out this time next year.
In recent weeks the Government saw the argument stacked in favour of going it alone. For one thing, officials perceive no discernible danger factor on the immediate horizon for Ireland. So a smooth exit is foreseen is the coming weeks.
For another, current Irish borrowing rates on the open market are at their lowest level for years. The case could therefore be made that it is better to strike now while conditions are favourable.
If the crash shows that the loss of market confidence is self-fulfilling, the opposite can be true too. The anticipation must be that a successful return to market would breed success.
The central aim remains to capitalise on nascent investor confidence to consolidate the exit and the economic recovery.
Yet the Government took care to test the water as well. Unseen in recent weeks, Minister for Finance Michael Noonan shuttled his way between Strasbourg, Frankfurt, Washington and The Hague for talks with troika chiefs in a quiet effort to gauge investor sentiment.
This involved discreet visits by Irish officials to sovereign debt market participants in London.
The views of primary debt dealers were canvassed, as was the opinion of Irish debt holders and potential buyers. The feedback was positive.
So too was the response from major credit rating agencies contacted by the NTMA.
The troika’s response evolved. Both the European Central Bank and the IMF were keen at the outset for a credit line, although the EU Commission was less convinced.
While the IMF turned and gave its blessing to the go-it-alone strategy, the absence of any formal objection from the ECB was seen in Dublin as tacit approval.
The Germans were keen initially for a credit line but rowed back over the summer amid election talk that clean exit would be better. If this means no new policy conditions, a further dose of sabre-rattling in Berlin over the corporate tax regime may also be avoided.
Could go sour
There is always the risk that everything could go sour. The debt crisis has been becalmed, but it is still not fully settled. Ireland remains exposed to a potential backlash from any return of generalised turmoil, be it in Spain, Italy or Greece.
Yet that would be the reality even if a credit line was in place. If crisis returned in a big way, the EU powers and IMF would have to provide aid. With or without a credit line in place beforehand, that would still be a disaster for the Government.
The move to go it alone without special insurance carries definite appeal. While the Government always said the argument was “finely balanced”, only with time will we know whether the decision was a good one.