Rearguard action on bank debt seems a setback for Government
EUROPEAN DIARY:The Government insists EU pledges on bank debt remain valid despite German-led resistance
AN APPARENT German-led row-back on deploying the European Stability Mechanism (ESM) fund to rescue stricken banks looks like a big setback for the Government. As problems pile up again in the euro zone, with noisy protesters on the streets of Athens and Madrid, the question arises as to whether the recent calm was but a blip.
EU leaders pledged in June to review the Irish bank bailout, a promise that heralded the prospect of debt relief and stoked hopes of a turnaround in the fortunes of the bedraggled State. With acute caution prevailing in official circles, progress since then has been painfully slow.
On Tuesday, the finance ministers of Germany, Finland and the Netherlands made the clear case that national bodies would remain liable for most banking debts in the new dispensation. Even if the ESM invests in institutions such as AIB and Bank of Ireland, sovereign debt would thus remain inextricably linked with bank debt. This is not quite what the Government had in mind, although euro zone sources in Brussels and government figures in Berlin and The Hague insist nothing has changed.
Again and again yesterday, the argument was made that the commitments made in June still stand and carry greater political weight than a statement by a trio of ministers. There was surprise, indeed, that their statement achieved such prominence.
However, Germany and its allies in the triple-A club of wealthy countries have laid down a tough marker as difficult talks proceed on the creation of a euro zone “banking union”. Standing against them are France, Italy and Spain: Spain, because it needs direct ESM aid for its banks; Italy, because it fears a blowback from Spain; and France, because it is wary of contamination by the other two.
This is a negotiation in which all sides carry baggage. A summit next month and a prior meeting of finance ministers may well determine whether euro zone leaders can really come good on their solemn promise “to break the vicious circle between banks and sovereigns”.
Albeit without any great enthusiasm, German chancellor Angela Merkel was party to that particular communique. She remains the pre-eminent power in the euro zone, although there is increasing talk – and evidence – of renewed jitters in Berlin over the response to the crisis.
In Brussels, the concern is that the European Central Bank’s bond-buying scheme will provide an excuse to do nothing. European Council president Herman Van Rompuy expressed his concern two days ago about “a tendency” to lose the sense of urgency. “This must not happen.” But it is happening. Backsliding over new powers for the ECB, a precondition for ESM bank recapitalisations, has been under way for weeks.
None of this bodes well for Taoiseach Enda Kenny, who is struggling to maintain discipline within the Coalition.
Feuding over the budget, the cave-in over pay allowances and disorder in the Department of Health show that the strictures imposed by the EU-International Monetary Fund “troika” are hurting badly. But the sense that the Government is operating in a severe state of emergency has dissipated. That’s what the squabbling suggests.
Yet the State remains in peril. Virtually unnoticed last week was the release of a further loan of €1.7 billion to Ireland from Europe. Taken alongside €900 million from the IMF, the running total is just shy of €55 billion: €33.8 billion from the European Financial Stability Facility and European Financial Stabilisation Mechanism funds, backed by euro zone states and the EU Commission; €18.2 billion from the IMF; €2.41 billion from Britain; €300 million from Sweden; and €200 million from Denmark.
This huge flow of money is due to expire next year, meaning time is limited to fully establish the confidence of private investors. Selling short-term debt is one thing. Finding a market for long-term bonds is in a different category altogether – and there is a big leap between the two.
This amplifies the need for bank debt relief, difficult as the going is. If that proves to be a chimera or an eventual agreement delivers less than anticipated, serious alternatives would be required to improve the sustainability of the State’s finances. Would the Croke Park agreement survive and would welfare payments remain untouched? Hardly.
Glowering in the backdrop is the real danger that Ireland would need a second bailout – or some form of emergency bridging finance – if it could not regain access to debt markets. That would be a disaster for the Government, with yet more troika visitations in store and consequent pressure to escalate the austerity drive.
It is difficult to see how this could be in Europe’s interests at all. At this stage in the game, however, there is some distance to go before the Taoiseach and his lieutenant Michael Noonan deliver the goods.