Exiting the bailout is one thing, staying clear of trouble is another

Opinion: Concern remains that any unexpected call for new capital could undermine the game plan

No clear way forward is likely to emerge until a new government has emerged in Germany. Photograph: The New York Times

No clear way forward is likely to emerge until a new government has emerged in Germany. Photograph: The New York Times

Thu, Nov 7, 2013, 00:01

The Government is poised to pass its final bailout review, but troika inspectors remain concerned about an all-too familiar list of problem items. While the final round of rescue loans will be released as planned, we are not exactly in the realm of straight-As for the most diligent member of the bailout class

At issue primarily is anxiety that the banks might need yet more money, that the economic forecasts underpinning the budget might prove overly optimistic and that more should be done to encourage unemployed people to pursue job opportunities. There are further concerns about the languid pace of reforms in the health service and the legal sector.

All of this feeds into protracted debate in Dublin and beyond on the merits of taking on a post-bailout credit line to guard against any sudden return of turmoil. Within the troika the sense is that Taoiseach Enda Kenny would rather stay well away from the tough fiscal policy conditions that would be tied to such a credit facility. Seen through troika eyes, this a political stance largely. If Kenny bills the end of the bailout as the moment at which he regains Irish economic sovereignty from external interlopers, the acceptance of new conditions might throw a different light on things.

At the same time, Minister for Finance Michael Noonan is perceived to be more pragmatic on the credit line question.

Although the European Central Bank and the International Monetary Fund are in the vanguard of those who believe the safest course by far is to seek a precautionary credit line, attitudes are more relaxed within the EU Commission. The favoured approach there is for a “clean-break” exit without a credit line.

Still, the argument is unlikely to be settled until a new German government takes office. The reality right now is that German officials have no real mandate to explore any further aid for Ireland. Even if Chancellor Angela Merkel is willing to do a deal eventually, it’s not going to happen until a new coalition is in place. One of the main points of contention is the necessity for Bundestag approval for any Irish credit line. This has potential to prompt yet another round of German pressure on Ireland’s corporate tax regime.

Big threat to exit plan

Whatever the eventual outcome, the sense remains in troika circles that risks within Ireland itself still constitute a big threat to the exit plan. This is at variance with the official narrative that the major danger for Ireland is concentrated in the wider euro zone, the clear sense being that the restoration of relative calm does not mean the debt crisis has been resolved.

The big worry in relation to the Irish banks, which have been bailed out to the tune of €64 billion by taxpayers, centres on a stress test next year by the ECB. This will be the third pan-European test but the first under ECB stewardship. The previous two examinations are widely deemed to have failed the credibility test, hence pressure on the ECB to ensure the new round does not fall short. Any weakness in the test criteria would be damaging to the ECB’s own reputation so a rigorous exercise is in prospect.

In spite of Kenny’s confident assertions that Ireland’s banks will come through the test in one piece, there is concern within the troika that the application of especially tough criteria could expose a capital “hole” in Irish lenders. Even if that happens, there is some confidence in troika circles that Bank of Ireland and Allied Irish Bank might be in a position to tap private investors for new capital. There is decidedly less confidence about the prospect of Permanent TSB doing the same.

Either way, the concern remains that any unexpected call for new bank capital could undermine the exit plan. The difficulty is not that the exit per se would be blocked, rather that there could yet be trouble ahead at the very time when Ireland is wholly-reliant once more on market financing. With this in mind, the argument is made that it would be more sensible to make provisions just in case, even if the evil day never comes.

Strings attached

There may be some sympathy in the Government for that line of thinking, but the problem remains that a precautionary loan programme will not come without strings attached. While it is in Dublin’s interest to minimise conditions, the inevitable reply is that Ireland will be bound for years to maintain strict fiscal discipline and especially tight budgets.

The troika’s anxieties don’t end there. Two days ago, the Commission downgraded its forecast for Irish economic growth next year to 1.7 per cent of GDP from 2.2 per cent. This is below the Department of Finance’s 2 per cent forecast in Budget 2014, so the Commission is less confident than the Government. While forecasting of this nature is an imprecise science, there is concern within the troika that there may be too little headroom in the budget.

The chief worry is that any appreciable slippage as regards the central assumptions could undermine the delivery of key fiscal targets. To be sure, that is a fact of life for all governments. The particular danger for Ireland right now centres on the reliance from January on private market investors, who would prefer no deviation from the plan.

Such are the main concerns as the Government prepares to bet big on its exit from the bailout. While it is no small achievement to be the first country out a rescue programme, the next task will be to stay out of it.

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