Move emboldens ‘sovereignty restored’ argument
Hope must be that a successful return to market breeds success, writes Arthur Beesley
Minister for Finance Michael Noonan and European monetary affairs commissioner Olli Rehn. Both the European Central Bank and the IMF were keen for a credit line, although the EU Commission was decidedly less convinced. Photograph: Alan Betson/The Irish Times.
The Government’s decision to leave aside the option of a post-bailout credit line marks a demonstration of confidence in its exit strategy.
Although the “clean break” approach is not without risk, it emboldens the Coalition’s argument the Irish economic sovereignty will be fully restored to its rightful owners next month when the international rescue programme reaches its conclusion.
It is a given that the Government will be bound under new EU laws to tight fiscal policies for many years. But the move to leave the bailout without a safety net avoids the unappealing prospect taking on any additional fiscal policy conditions from external masters. If that is politically convenient right now, it raises the stakes greatly in the post-bailout period.
The big test will come in the second half of next year. With significant cash reserves already in place for the immediate post-bailout period, it is only that as that money is run down that the Coalition will become fully reliant on market financing. 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.
Against all that is the sense that market confidence will have to be fully established at some point. If a credit line would be for one year only, then the same arguments discussed in recent weeks would still have to be teased out this time next year. With current Irish borrowing rates on the open market at their lowest level for years, the case can be made that is better to strike now while conditions are favourable.
If the torrid experience of the Irish crash shows that the loss of market confidence is self-fulfilling, the opposite can be true too. The hope must be that a successful return to market breeds success. The central aim right now is to capitalise on nascent investor confidence to consolidate the exit and the recovery.
But how will it wash with the international partners? Both the European Central Bank and the IMF were keen for a credit line, although the EU Commission was decidedly less convinced. The Germans were keen initially but rowed back over summer amid election talk that clean exit would be better. If the clean exit means no talk of new conditions, a further factor is that it may head off for the moment any more German sabre-rattling in relation to the corporate tax regime. To say that is convenient for the Government is to understate matters greatly.
There is always the risk of course that everything goes sour. While the debt crisis has been becalmed, it is still not fully settled. Ireland remains exposed to potential backdraft from any return of turmoil, be it in Spain, Italy or Greece. But that would be the reality even if a credit line was in place. If crisis returned to Ireland in a big way, there may be little doubt that the EU powers and IMF would provide aid. If that eventuality would be a disaster for the Government in the domestic sense, it would be doubly on the hind foot in its relations with the troika if a second bailout was required.
For its own reasons, however, the Government has decided to go it alone. The decision still carries definite appeal for Taoiseach Enda Kenny and his administration. The Government always said the argument vis-à-vis a credit line was “finely balanced”. Only with time will we know whether the decision to go without special insurance was a good one.