Bailout conditions likely to follow Greek recipe
ANALYSIS:How would an Irish bailout work? To answer that, look at the Greek bailout
IN RECENT days the balance of opinion in Europe – among the euro area members and the EU’s institutions – has moved towards the view that saving the 11-year-old single currency will require Ireland to accept that it needs external financial assistance. This shift has been led by the European Central Bank (ECB), which is increasingly concerned about its exposure to Ireland.
It is probable that this will happen at some point in the weeks and months ahead. It could happen as soon as today, when finance ministers from the 27 EU member states gather in Brussels for their monthly meeting.
Who would be involved in drawing up a bailout package, what conditions would be imposed on Ireland and how would it be implemented?
The best guide to answering these questions is Greece’s bailout. Greece is the only euro area country to reach a point where it was unable to convince financial markets of its creditworthiness.
Once Greece reached that point in early April this year, it began discussions with officials from the European Commission in Brussels, the ECB in Frankfurt and the International Monetary Fund (IMF) in Washington DC. If Ireland goes down the bailout route, the same troika of players will be involved.
Economic affairs commissioner Olli Rehn confirmed yesterday that Ireland is already in talks with all three institutions. This suggests that this point is not distant.
There will not be an option for Ireland to choose among the institutions from which it takes help, not only because they will not place themselves in a position of being played off against each other, but also because the European countries could exercise their vetoes at the IMF if any direct Ireland-IMF arrangement were to be contemplated (which it won’t be).
The Greek package was agreed on Sunday, May 2nd after three intense weeks of pressure on Athens. In Ireland’s case the time-frame would almost certainly be even shorter, for a number of reasons. First, the bailout financing mechanisms are already in place, whereas in the Greek case ad hoc measures had to be hastily set up. Second, Ireland needs fewer reforms than Greece.
Finally, while there may not be abundant goodwill towards Ireland, the ill will that existed towards Greece, owing to the manner in which it deceived its partners, made tying down the package even more difficult than it might otherwise have been.
In the case of Greece, the bailout programme covered a three-year period. During that time the Greek state’s borrowing requirements will be met by the bailout fund, rather than the bond market or other private sources of finance.
Three years was the minimum period of time believed necessary to give Greece even a fighting chance of implementing the profound changes it needs to allow its economy get back on its feet.
A bailout for Ireland would almost certainly extend over a three-year period.
The implementation of the Greek plan is broken down into seven three-month periods running up to the end of 2011. Five quarterly programmes for 2012 and early 2013 are to be set out in a review of the entire programme in spring 2011.
In each of these time periods, a detailed checklist of reforms is set down for implementation. Towards the end of each quarter progress is to be reviewed.
Money will be disbursed to the Greek authorities for the following three-month period only if the commission, ECB and IMF officials adjudge that all targets in the preceding quarter have been met and complied with.
In reality, officials from other member states providing the cash also have a say, as demonstrated yesterday when Austria announced that it would withhold further payments to Greece because it was unhappy with the implementation of the programme.
The terms of the Greek bailout package are set down in a very dense 32-page document. Ireland’s bailout document would likely be slimmer, largely because Greece is more dysfunctional than Ireland and needs more reform. That said, the Greek plan provides a good guide to the sort of conditions that any bailout – even one that is spun as a bank rescue – would include.
The Greek package covers budgets and the machinery of budgeting; public sector reform; and a range of liberalisation measures designed to open sectors of the economy in which competition is hindered by incumbents or legislation.
There are many measures in the 32-page Greek bailout document that could easily be envisaged as conditions for an Irish bailout.
Regarding tax and spending issues, conditions include the reform or outright cancellation of welfare programmes that are deemed ineffective, privatisation of State assets, cuts in capital spending, an immediate increase in VAT and a widening of the VAT base, increases in excise duties, a widening of the property tax base and the imposition of a luxury goods tax.
On public pensions, reforms include the linking of the retirement age with changes in life expectancy, cuts in the highest pensions, the changing of the base upon which public sector pensions are paid so that they are linked to average lifetime earnings, the lowering of the ceiling on pension payments and the restriction of access to early retirement.
Cosseted professions identified in the Greek bailout programme for liberalisation include lawyers, pharmacists, architects and accountants.
Other miscellaneous measures listed in the Greek plan that could be also imposed as conditions for an Irish bailout include a major shake-up of the Greek equivalent of CIÉ, a new system of medicines procurement to favour generic drugs, and a system of electronic monitoring of doctors’ prescriptions.
What about corporation tax? Among the greatest concerns for Ireland is that those EU countries who resent this State’s low corporation tax rate would insist on it being hiked as a condition for a bailout. That the Greek bailout included “crisis levies” on “highly profitable firms” can only add to concerns in that regard.
Dan O’Brien is Economics Editor