Exiting the bailout: the factors at play
Analysis: The paradox for the Government is that the strength of its exit story weakens the case for further aid
Taoiseach Enda Kenny would have to pay a price in return for a precautionary credit line, namely a new series of fiscal policy conditions. Photograph: Virginia Mayo/AP
The Government and its sponsors must soon decide whether Ireland makes its return to private debt markets in December with or without the benefit of an emergency credit line.
This would be a special overdraft facility for use only if the State suddenly loses the confidence of private investors in the wake of the bailout.
At issue are two major questions. The first centres on the merits or otherwise of taking out such a safety net. Opinion is divided within the troika and elsewhere.
The second centres on the terms on which such aid is granted, the main element of contention being the force of fiscal policy conditions tied to the programme.
This is highly political for the Government and is already the subject of hard bargaining with both EU powers and the International Monetary Fund.
If there is to be a scheme, it is likely there would be separate credit lines from the European Stability Mechanism fund and the IMF. Yet there is still no certainty this course will be taken.
While the result of an ongoing stress test on Ireland’s banks will be critical, the reality is that there are
nuanced differences between the three troika bodies.
It is well established at this point that the IMF would prefer a programme. So too would the European Central Bank. Frankfurt fears a weakness in the banking system could come back to haunt it and so has adopted a maximum-safety approach.
They are not so convinced in the European Commission, which argues that there is no “obvious” need for precautionary aid. With Ireland providing the only evidence that Europe’s strategy on the crisis has worked, the concern is that a credit line would undermine that narrative of success.
There is further anxiety about the need for parliamentary approval in Germany, and other countries, for such a scheme, and this might prompt Angela Merkel to be reluctant about it. In addition, her likely Social Democratic coalition partners are agitating over Ireland’s corporate tax regime.
Still, Taoiseach Enda Kenny might determine that the safest option is to take out a precautionary loan programme. Given the fragility of the economic recovery, this could give comfort to markets and international benefactors that the exit will not be blown off course by any unexpected shock.
There would be a price, however, and this is where it gets tricky for Kenny.
To avail of a credit line Dublin would have to commit to a new series of fiscal policy conditions. How would that be measured against the rhetoric on a return of Ireland’s economic sovereignty in December?
The obvious play for the Government is to minimise the scope of any conditions to demonstrate to the Irish people that the Coalition is in command of policy. For Fine Gael and Labour, this is something of a glittering prize. In this context, the nightmare scenario would be for precautionary credit to be dressed up as some kind of a second bailout.