Crisis rapidly assuming global dimensions
ANALYSIS:If the rescuers retain some faith in the ability of Lenihan to balance the books, they have none in the handling of the banks
THE PACE of events is breathtaking, and it is accelerating.
At 12.24 pm yesterday a text message was sent to journalists from the Department of Finance. It flagged Brian Lenihan’s lunchtime radio interview that was due to begin a little more than 30 minutes later. Such flagging only happens when something big is in the offing.
The interview confirmed this State’s mendicant status – a formal request for a bailout would be made later in the day to a hastily convened conference call meeting of the euro area’s finance ministers.
Lenihan said the amount sought would be less than €100 billion, and that the banks would be stress-tested (again) and then “restructured”; the Croke Park deal would be implemented; and the rate of corporation tax would not be hiked. He all but confirmed that the minimum wage would be cut.
These are very important matters, but on the biggest and broadest issues, he said little.
How much money will the State take from those bailing it out to fund its deficits and repay already outstanding loans that will fall due in the next few years? Over how many years will the bailout be stretched? How much will be put into a “firepower” fund that is to be set up to support the banking system? How will that fund work and be structured? And will there be any change of tack on how banks’ bondholders are treated, or will the Irish taxpayer remain on the hook for all the banks’ losses? These questions were not answered yesterday.
After the interview, Lenihan travelled the short distance from RTÉ studios in suburban south Dublin to Government Buildings in the city centre. At 3pm, he sat around a table with Cabinet colleagues to discuss the bailout application and the contents of the budgets for 2011, 2012, 2013 and 2014.
Lenihan left that Cabinet meeting early and went next door to the Department of Finance. There he joined a conference call with euro area finance ministers, which started at 5pm. This euro group meeting had been arranged less than 24 hours earlier.
According to a spokesman for the head of the euro group, the Luxembourgish prime minister Jean-Claude Juncker, there was just one item on the agenda – Ireland. He told The Irish Times in mid-afternoon that they would discuss the conditions of the rescue.
As no utterance of any member of the Government can any longer be taken at face value, The Irish Times asked Juncker’s spokesman if Ireland’s corporation tax rate was off the agenda, as Lenihan had said at lunchtime.
It had not been removed from the agenda, as some countries still wished to discuss it, he said.
At a press conference in Dublin last night, Taoiseach Brian Cowen said the issue of tax had not arisen. Neither Juncker’s spokesman nor any other non-Irish players in the bailout could be contacted after the euro group meeting last night to confirm or deny this.
If the Government’s claim that the corporation tax is safe remains in question, Lenihan’s statement that the the Croke Park deal’s get-out clause would not be triggered was surprising, and in more ways than one.
It will be a pleasant surprise for public sector workers to know that involuntary redundancies and further pay cuts are not in store, in the immediate future at any rate.
The non-triggering is significant in other ways too. That the troika overseeing the bailout – the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) – did not demand it suggests that they are cutting the Government some slack to decide on the details of the package.
This is unlike the Greek bailout, where line-by-line measures were dictated by the rescuing troika to that country’s government.
All of this, in turn, would suggest that if the Government’s credibility domestically has hit the rockiest of bottoms, the troika attributes to the Coalition enough credibility to let it decide on how the (confirmed) €15 billion, four-year budgetary adjustment should be done.
If the rescuers retain some faith in the ability of Lenihan et al to balance the books, they have none in their handling of the banks.
The troika do not know the true state of the banks, but they will soon. The balance sheets will be trawled though and, as Lenihan said yesterday, they would be subject to detailed stress-testing. Again.
Last night at the Cowen-Lenihan press conference, they spoke of downsizing the banking sector, as well as the restructuring mentioned earlier in the day.
The kid-gloves approach of the Government towards the banks is over. Hard heads are in charge now. They will change the landscape of Irish banking more in the weeks ahead than has happened in the previous 30 years. Expect to see the remaining bubble-era managers and directors to be given their marching orders.
This, of course, should have happened after the guarantee was given in September 2008. But better late than never.
Last night’s press conference, at which the request for help was formally announced, provided surprisingly little detail on the big questions listed above. Apart from sources saying that the size of the bailout package could reach €90 billion, all the other questions remain unanswered.
The euro group clearly believes that the markets need to know only that help is at hand and that detail is unnecessary. Today will prove them right or wrong.
What we know for certain is that the magnitude of the budgetary adjustment remains unchanged.
Its composition, however, has shifted towards higher taxes and away from spending cuts. The €15 billion adjustment will be achieved with one-third extra taxes and two-thirds spending cuts. The Department of Finance had been working on the basis of a quarter to three-quarters ratio as recently as two weeks ago.
Could the change be accounted for by an increase in corporation tax? This uncertainty needs to be squashed, and fast. If it is off the agenda, then one of the rescuers should urgently be persuaded to say so publicly.
Another eyebrow-raiser from last night statements was that the bailout funding would be exclusively European. No IMF money would be involved and two EU countries which are not in the euro area – Britain and Sweden – might “possibly” chip in.
Other than the big questions that remain unanswered, smaller ones do too.
One is the future role and standing of the Central Bank. It is an Irish institution, but a branch of much larger European one. Given that it, and the financial services regulator, conducted stress tests on banks earlier in the year, do the rescuers have doubts about the capacity of these institutions?
Another important matter is the state of relations between the Central Bank and the Government. The plain speaking of Patrick Honohan, the bank’s governor, on Thursday was not appreciated by the Government, according to sources.
While these matters are important, they are trifling when one considers how high the stakes are. This was illustrated when it became apparent last night that the Group of Seven, the club of the rich world’s biggest economies, had called a meeting on Ireland’s woes and how they affect the euro and the stability of the international financial system.
The finance ministers of the US, Japan and Canada, along with their counterparts from Europe’s big four – Britain, France, Germany and Italy – discussed the crisis after the euro group meeting.
This crisis has gone from continental to global.
Dan O’Brien is Economics Editor