Coalition held its nerve when others despaired
ANALYSIS:The deal on the promissory notes announced by Taoiseach Enda Kenny to a packed Dáil chamber yesterday afternoon represents a hugely important political achievement which should steady some rattled nerves on the Government backbenches.
The warm applause for the Taoiseach and Tánaiste Eamon Gilmore from their backbenchers showed just how relieved their TDs were to have something to cheer about at last.
Getting a good deal with the European Central Bank on the bank debt was vital for the credibility of the Coalition.
Over the past few months the Taoiseach and his senior Ministers had staked their reputations on getting such a deal, so they needed to deliver.
The confusion that developed over the past two days, as the deal was dragged over the line, was an unfortunate distraction but it didn’t matter in the end when the real and substantial nature of the concessions was revealed.
Relief that the deal had been done was palpable among exhausted Government TDs who had been up until the early
hours of the morning to get through the House the emergency legislation necessary to underpin the financial arrangements.
Those critics who have been arguing for debt default all along were naturally unimpressed by the deal but there is no disguising the fact that it will significantly reduce the burden of debt in the short term by €1 billion a year.
That will help the country back on the road to full economic recovery, which in turn should make the repayment of the long-term principal look paltry when it comes to be paid back between 2038 and 2053.
The qualified welcome given to the deal by Fianna Fáil leader Micheál Martin, who naturally wanted more details before giving a detailed response, was a measure of just how significant the actual terms were.
In a succinct outline of the deal, the Taoiseach explained that the original promissory note arrangements involved the payment of €3.1 billion this March and every March until 2023, followed by declining payments until 2031, to cover the massive losses of Anglo Irish Bank and Irish Nationwide.
When interest costs were included the total cost would have come to almost €48 billion, but under the terms of the deal these annual payments are gone. Instead the promissory notes are being exchanged for long-term Government bonds with maturities of up to 40 years.
“In effect, we have replaced a short-term, high interest rate overdraft that had to be paid down quickly through more expensive borrowings, with long-term, cheap, interest-only loans.”
The Taoiseach said one result of the deal will be a reduction in the State’s general government deficit of approximately €1 billion a year in the coming years, bringing us €1 billion closer to attaining the 3 per cent deficit target by 2015.
“This means that the expenditure reductions and tax increases will be of the order of €1 billion less to meet the 3 per cent deficit target,” said Kenny, hinting at easier budgets ahead.
He also pointed out that the deal should improve perceptions of our debt sustainability in the eyes of potential investors in Ireland, leading to lower interest rates and faster growth than would otherwise be the case but, despite his reference to easing the requirement for extra taxes and spending cuts, he did not pretend that it was a silver bullet to end all our economic problems.
“Even as the lower interest rates resulting with this agreement reduce Ireland’s deficit, a very large and unsustainable gap between Government revenues and spending remains to be fixed, a gap unrelated to our banking crisis.
“Only we in Ireland can fix this problem by reforming the way our State and country works.”
This is the challenge now facing Government TDs. The deal on promissory notes does not absolve them of standing by decisions already made to find further savings in the public service pay bill and to implement unpopular measures like the introduction of a property tax and water charges.
The yawning gap between revenue and spending still remains to be bridged.
While the easing of the debt terms should have some impact on the budgetary arithmetic over the next three years, both Government parties will have to live with further tough decisions.
The deal should pave the way for Ireland’s exit from the bailout before the end of the year and that will certainly be an achievement for the Coalition to boast about. European Commission vice-president Olli Rehn noted that market conditions for Irish bonds had been improving, and the deal on the promissory notes should improve confidence and help facilitate the country’s exit from the EU-IMF programme as planned.
However, that won’t remove the requirement for the State to borrow, as Micheál Martin pointed out in the Dáil.
The difference will be that instead of the EU/IMF providing the funds they will come from the international bond markets.
In order to keep funding costs at affordable levels, the Government will have to convince the markets that it is going to keep its borrowing at or below the 3 per cent threshold agreed for the bailout and that will impose its own disciplines.
The nature of the deal on the promissory notes has reinforced the image of the competence which the Coalition wishes to give off and that will certainly be a help on international markets.
Persuading the electorate to appreciate that quality will be the real challenge, but for the present Government TDs have something to cheer about.
* Stephen Collins is political editor