Firm hand of the IMF will keep us steering in right direction
ANALYSIS:While psychologically we may feel put upon, the arrival of the International Monetary Fund is really not all that bad, writes DONAL DONOVAN
THE EVENTS of recent days have made it all but inevitable that within a very short while, the Government will end up “requesting” the International Monetary Fund, along with their European Union cousins, to provide an emergency bailout.
Fear is stalking the land, with dire prognostications that the arrival yesterday of the IMF/EU team will be a disaster, leading, for example, to wholesale closure of schools and hospitals, summary firings of thousands of public servants and drastic cuts in social welfare payments.
It is certainly true that calling in the IMF/EU represents a very visible loss of national sovereignty. It is a major political humiliation for a Government that asserted almost to the bitter end that any recourse to a bailout was not on the cards while saying at the same time that a bailout would represent economic Armageddon for the nation.
Yet, arguably (as was admitted a couple of days ago by Minister for Finance Brian Lenihan) any country that has left itself exposed to such an extent to foreign lenders for financing day-to-day operations (and that is before the banks’ problems are brought into the equation) has already ceded considerable sovereignty to others – be they rating agencies, bondholders or institutions such as the EU.
But on the more positive side, with the IMF and EU on board, two things would happen. First, the funds they will provide would be at rates much cheaper than those likely to be available to Ireland on the market any time soon – probably in the order of 5 per cent or so.
Second, it is likely that the sum to be given will cover – as in Greece’s case – most if not all of the State’s borrowing needs, including those of the banks, for the next year or so.
Incidentally, whether the money is “for the banks” or “for the State” is a red herring. It will all be signed for by the Irish Government, which owns most of the banks anyway.
Also on the positive side, many other “IMF case” negotiations, such as those that have begun on Merrion Street, start with the government and the IMF quite far apart on the needed adjustment.
As a result much drama and rhetoric (and indeed humiliation) can ensue before an agreement that may be very different from the government’s public policy posture is reached.
But in Ireland’s case, there exists widespread agreement – including cross-party agreement – on the overall objective to bring the budget deficit to 3 per cent of GDP by 2014. And, what is critical, public pronouncements by the IMF, EU and the markets have all endorsed this as a reasonable (albeit ambitious) objective.
It is thus very unlikely that the overall plan to be presented as a basis for the bailout will involve any more stringent adjustment than that we have already planned for ourselves.
So why should we worry?
Perhaps the real subconscious concern among the public is that the IMF will – politely but firmly – “insist” that the Irish do what they have repeatedly said they are planning to do. But if it is the case that we do not really believe ourselves what we are saying, then maybe some “gingering” from outside is desirable and would probably prove necessary at some stage anyway.
What is being discussed will hardly come as any surprise to the Irish authorities. The so-called “technical discussions” (including those that have not been publicised) will have involved extensive detailed work by IMF/EU staff at their headquarters regarding growth assumptions and various packages of revenue and expenditure measures.
Indeed, it is quite probable that many of the main elements of an agreement will have been discreetly worked out beforehand at the official level, involving all the key actors such as Klaus Regling of the EU rescue fund, who knows Ireland well.
These informal interactions – a common feature of such situations – are facilitated by the fact that most of the key personages are well known to each other as a result of interaction in other forums over the years.
So, my surmise is that yesterday the IMF team (which includes Ashoka Mody, who has led earlier IMF visits to Dublin) will have sat down with the latest drafts of the four-year and annual budget plan. (They will probably have had access to earlier versions also.)
They will again painstakingly scrutinise the underlying assumptions regarding growth, revenue yield and expenditure under current policies. There will be probably a “gap” – perhaps the famous €6 billion or thereabouts – to be filled by measures to be specified later as the Cabinet gives its final blessing to the Minister’s proposals.
Part of the team will have gone down to Dame Street to undertake a similar exercise with the Central Bank and the Financial Regulator to review the banks’ situation and the “funding gap” they face.
The final budgetary plan will be announced – quite rightly – as the Government’s own, although it will probably have to be admitted that it was “discussed” with the visitors. In what is likely to be a well-choreographed exercise, the IMF and EU will then announce their delight with the Irish authorities’ courageous efforts and all will be sweetness and light.
Could there be a major disagreement about the numbers and could the discussions break down leading to a further crisis? While this has happened elsewhere and certainly can’t be ruled out, in my view it is unlikely to happen due to the prior consultation process described earlier. However, in the case of the banks, the process might be more complex and it might take more time to nail down their precise financing needs.
As for specific measures, those on the table will include the “hardy annuals” such as the introduction of a property tax, higher university fees/charges, further reductions in the size of the public sector payroll and some widening of the tax base.
All of these have been hinted at in one form or other by Ministers over the last while and would probably form part of the “gap closure” anyway, with or without the IMF. Depending on how the numbers add up, it would be reasonable to agree that some of these measures be implemented in stages over several years.
As regards reopening the Croke Park deal, my guess is that again provided the numbers look fairly solid, there might be an agreement to “park” this issue until some time next year with the understanding (probably reflected in somewhat opaque language) that if the figures start to depart from projections, it would have to be looked at.
There is, however, one rather thorny nettle that might prove difficult to grasp, namely, the preferential corporate tax rate. It is no secret that we will face strong pressure from Germany – and other EU partners – to do something about it.
Despite the “not an inch” assertions of the Government, to my mind down the road the writing is on the wall for our regime. But to avoid additional humiliation the Government will resist fiercely. Given that in a certain sense the EU is the party most eager to reach agreement (what will be the effect on their banks of wider euro area instability?) the Irish have some bargaining power left.
My best guess is that this issue might also be “parked” (but only temporarily) via some agreement to re-examine certain elements of the tax system, etc. Whatever solution is eventually arrived at will probably involve a heavy dose of “grandfathering” of current arrangements, phasing provisions and so on.
Finally, since the main aim of IMF involvement is to increase the probability that we do what we say we will do, what happens if we end up falling short?
Teams from the IMF/EU will visit Dublin every three months or so to “discuss” our progress. There will, of course, be deviations from projections for all sorts of reasons and it will only be when there are major departures that the need for new measures might come into play. But again, this is what the Irish Government has had to do itself several times over the last two years.
In short, life with the International Monetary Fund will be a bit more stressful – at least initially – and we may feel psychologically more put upon. But things will continue much as they would have anyway.
The IMF bogeyman represents a gentle, albeit rather visible, nudge to keep our shoulder to the wheel and do what we mostly all agree has to be done in any event.