Debt and public sector deals needed - and loads of jobs
INSIDE POLITICS:Routine political jousting resumed when the Dáil returned from its Christmas break during the week but the real action, which will have a vital bearing on the country’s fortunes in the years ahead, was taking place elsewhere.
Debt relief, the scale of the public sector pay bill and the unemployment crisis all featured in behind-the-scenes talks that will determine if the target of exiting the EU-International Monetary Fund bailout by next year can be met.
Taoiseach Enda Kenny has staked his political reputation on getting a deal to ease the burden on the State’s finances arising from the €31 billion worth of promissory notes created to prevent the unilateral collapse of Anglo Irish Bank.
The impact of the notes has frequently been misinterpreted because they are a complex and technical banking device involving €31 billion in capital over 10 years as well as €16.9 billion in interest.
The net point is the State has to borrow the funds to meet the annual repayments on the notes. The interest has an impact on annual budgetary arithmetic.
The Government’s ambition is to get a deal that would extend the lifetime of the repayments for as long as possible. That would reduce the annual interest and make the State’s debt more sustainable.
Last Monday night, Minister of State for European Affairs Lucinda Creighton gave a very upbeat assessment of the prospects of a deal after a meeting in the German foreign ministry in Berlin. Her optimism tallied with that expressed a day earlier by the Taoiseach.
The Government clearly feels that a deal on the promissory notes is within its grasp. If it ultimately turns out that this is not the case it will cause acute political embarrassment and damage the credibility of the Coalition.
The Taoiseach has adopted a risky strategy by talking up the prospects of a deal but he has certainly left the European Central Bank and other EU states under no illusions that a new arrangement to deal with the debt is essential if Ireland is to meet its targets and successfully exit the bailout.
Of course, even if the deal is a good one, it will be derided by the boys of the old burn-the-bondholders brigade, from Sinn Féin to Shane Ross, as nothing short of a complete write-off would be enough to satisfy them.
Those who have been vociferously calling on the Government to renege on the Irish bank debt pretended not to notice during the week when their economic model, Argentina, which unilaterally defaulted on its debt in 2001, suffered further embarrassment over that decision.
It emerged that the country’s president, Cristina Kirchner, was not able to travel abroad in her expensive government jet earlier in the year because it was in danger of being impounded by Argentina’s creditors. Instead, she had to travel in a rented British aircraft. More to the point, the country’s economy remains in dire straits and is actually getting worse a full 12 years after the default.
Fine Gael TD Paschal Donohoe drew attention to Kirchner’s embarrassment and to the fact that Argentina is still having to pay exorbitant interest on any new borrowings. It is currently paying 9.25 per cent interest on its six-year debt and 14.25 per cent on its 25-year debt.
By contrast, the interest rate on five-year Irish bonds dropped below 3 per cent on Thursday. A good outcome on the promissory notes is crucial to keeping that interest rate down and forcing it even lower in the years ahead. The bond markets are already assuming that it will happen and their response to whatever emerges will indicate whether it is a good deal or not.
A deal to reduce the burden of public sector pay is equally important and Minister for Public Expenditure and Reform Brendan Howlin kicked off talks with the trade unions designed to get agreement on savings of €1 billion over the next three years.
That figure has already been included in the budget arithmetic so the real question is whether the savings can be achieved by agreement or whether it will involve a messy confrontation with the unions with a consequent impact on public services.
The troika supervising the bailout has pointedly referred on a number of occasions to the high pay levels in the Irish public service, particularly in the health sector. However, it has also acknowledged the benefits of industrial peace during a time of such economic crisis. The Government is anxious to preserve that industrial peace but simply has to find more savings.
Both sides appear to be taking the talks very seriously, despite a natural tendency to adopt hard-line negotiating positions at the start. They don’t have a lot of time to get to the point, as the longer the initial €300 million savings for this year are delayed the deeper the cuts will have to be.
An acceptable outcome to the negotiations on the promissory notes and public sector pay would be a huge relief to the Coalition and would allow both parties to breathe a little easier before they sit down in the autumn to draft next year’s budget.
On Thursday, they discussed the issue which both Enda Kenny and Eamon Gilmore have repeatedly said is the biggest of all: unemployment. They are pledged to create 100,000 jobs over the lifetime of the Government but so far progress has been slow.
An updated action plan for jobs will be published next month. Like last year’s initial offering, it will detail hundreds of small actions rather than any dramatic solution. Creating the conditions in which employment can grow requires myriad actions, from improved access to credit for small business to reform of the welfare system. Initial steps have been taken in many areas but the painfully slow pace of change threatens to undermine the effort.