EU/IMF to look at terms of loan rather than tax rate

Sat, Nov 20, 2010, 00:00

Government’s patent attempt to mislead public has proved a last straw for electorate

THE NAIVE, week-long attempt by the Government to disguise the reality of discussions taking place with the European Central Bank (ECB), the European Commission and the International Monetary Fund (IMF) on an Irish rescue plan seems to have been a misconceived effort to strengthen its bargaining power in the face of a new and alarming phase in our prolonged financial crisis.

This foolish and transparent ploy achieved nothing positive, but it had several damaging consequences. Thus it clearly infuriated a worried ECB, which needs to pull back from its huge credit provision to our small state, and it clearly also irritated our EU partners, whose goodwill we desperately need at this juncture. This patent attempt to mislead also proved a last straw for our own electorate.

The damage done to what remained of our international credibility was fortunately retrieved on Thursday morning by the straight-talking interview that Central Bank governor Patrick Honohan gave to RTÉ, which reverberated around the financial world. Remaining within his role and emphasising that the impending discussions would be with the Government and not with the Central Bank, he succeeded in clarifying a very confused situation by explaining that a team was being sent here to agree a package that would be acceptable. He added that he expected that a loan would be put in place, running into tens of billions, to assist us with our banking emergency. While this might not be needed, it could be drawn down if necessary.

How did the Government react to this intervention? Later on Thursday the Taoiseach, still apparently in denial, repudiated Honohan’s view, which he said did not necessarily reflect that of the Government. “The governor is part of the Governing Council of the ECB and it is a matter of public knowledge what the ECB general view has been,” said Cowen.

In this statement, the Taoiseach was also repudiating what his Minister for Finance had told the Dáil earlier in the day. With what seemed like relief at being freed from what may have been an imposed requirement to obscure the reality of what was happening, Brian Lenihan had at once came clean. For he told the Dáil that he agreed with Honohan’s comments to the effect that “a substantial contingency capital fund” could be made available to the State that could “create confidence in the firepower available but not be drawn down by the banking system”. This “would be a very welcome development for the State”.

Such an open divergence between the views of the Taoiseach and his Minister for Finance is extremely disturbing and a government so deeply divided cannot long remain in office.

However, I think that the balance of advantage would not lie in an election before the budget – in the middle of an international rescue operation. Once these two matters have been dealt with by this Government, it should call a January election rather than wait for death by a thousand cuts – or rather by a series of byelections.

The diminution of our sovereignty is dramatised by the presence in Dublin of an international rescue team, but our capacity to determine our own future was prejudiced quite some time ago when a combination of the failures of our banking system and of our public finances put us massively in hock to the ECB. That left us vulnerable to action by that institution, which 10 days ago decided that it could no longer sustain this growing Irish drain on its finances, which was starting to threaten its capacity to steer the euro zone through its existential crisis.

It is a measure of the enormous scale of the damage done by the policy failures of the governments of the past decade that these blunders have put at risk not alone the solvency of the small Irish economy but the survival of the whole euro zone.

Two or perhaps three issues may come up for discussion in the negotiations at Upper Merrion Street.

The first will involve the conditions to be attached to the proposed loan. Honohan believes that the steps we are already taking may be largely sufficient to meet the requirements of our potential lenders. Although we have not yet furnished to the commission full details of our €6 billion budget measures or of our four-year fiscal plan, Ollie Rehn of the commission has been well enough briefed about our Government’s budgetary and four-year fiscal plans to have been able to indicate the commission’s broad approval of these proposals.

While it is possible that the IMF will look for something extra, there is a good chance that in this aspect of the problem we may not be required to do much more than implement the measures to which we have already wisely committed – although it is perhaps possible that the €15 billion target of adjustments over the next four years might have to be somewhat increased.

I doubt our visitors will be impressed by the Croke Park agreement, which blocks any move to bring our public service pay rates down towards those of most of our EU partners. But they may decide to leave it to a future government to decide whether this issue will need to be re-addressed before 2014.

A second issue will be the terms of the proposed loan. Will we be charged a fee of some kind for any part of this facility that is not used? And what interest rate will be charged on any money actually drawn down – 5 per cent? It is in any event clear that this new loan will certainly cost us a good deal more than the present ECB facility.

A third possible issue – which in my view simply ought not to arise – is our corporate tax rate.

Some EU governments may pretend to believe that it would be sensible of us to raise additional revenue by increasing our corporate tax rate – but their real concern is, of course, to make us less competitive with their own industries than we are at present.

But I would have thought that the key concern of this expert team must be to enhance, rather than to diminish by such an imposition, our future growth prospects.