OPINION: The idea that our European partners would entertain entering into discussions on a second bailout now is fanciful
RARELY HAS an opinion expressed by a foreigner who is anonymous to the overwhelming majority of the citizens of this State caused such a protracted stir. Dutch economist Willem Buiter, who was in Dublin this day last week to raise the profile of the financial behemoth for which he now works, was forthright in his view on why Ireland should immediately seek a second international bailout.
The Citigroup chief economist’s view’s were as welcome by officialdom – here and in Brussels – as a breach in a Dutch dyke during a North Sea swell. Many members of the Cabinet, up to and including the Taoiseach, spent the rest of the week dismissing the suggestion. Buiter is a serious guy. He has a long and distinguished record as an academic economist and his contribution to public debate on economic affairs internationally has been considerable, in part owing to his Dutch bluntness.
Though it is perfectly healthy for people to discuss and opine on all such matters, his view that Ireland should pre-emptively seek a second bailout is both curious and profoundly mistaken.
It is curious because the idea that the Germans, the Finns and his co-nationals in the Netherlands would entertain entering into discussions on a second bailout now is fanciful.
The euro zone agenda is choc-a-bloc, and becoming more so by the week. Europe’s leaders are scrambling to negotiate a new fiscal discipline treaty by the end of the month, and at the same time figure out how it can be accommodated in the EU’s legal order given that it will not be an EU treaty (thanks to Britain vetoing the EU route in December).
Greece, which is never far from the top of the euro area agenda, moved further up that schedule over the weekend following the collapse on Friday of talks with its creditors. An even more disorderly default than previously anticipated is looming.
As if that wasn’t enough to be getting on with, a credit ratings agency on Friday night downgraded the debt of more than half the euro zone’s 17 states, including the bloc’s second-largest economy, France. It is almost certain that the EU’s bailout fund, which provides much of the Irish Government’s borrowings, will be downgraded in short order as a result. Among other things, that will increase the cost of servicing Irish public debt.
Against this backdrop, there is no prospect that already overwhelmed EU leaders would voluntarily increase their burden with a matter as non-urgent as a second bailout for Ireland. As pertinently, they have no reason to add to the size of their peripheral nation bailout bill without obvious gain. But even if the still-creditworthy countries were ready to commit to throwing more money the Government’s way, what gain would there be for Ireland to lock itself into bailout constraints for a longer time period than it already has done?
Buiter says it is best to secure more money now rather than wait until the last minute. That is true, but we are nowhere near the last minute now, being just 14 months into a three-year programme. The State is many months away from even starting to try to entice private investors to lend to it. Bailouts are a last resort, not a first resort.
But that is not the main reason to avoid considering a second bailout now.
Among the main objectives of Irish diplomacy in the short to medium term is to spread some of the cost of bailing out foreign bank bondholders to those who have benefited from it – ie, the rest of the euro zone. The chances of achieving that objective remain limited, but the best opportunity will come when there is a convergence of interests across the continent on doing so. A second bailout now would all but end any hope of sharing the banking costs, while sticking to the current plan keeps alive the possibility that a convergence of interests could take place. To see why, consider the interests of all the main actors. Nobody wants any more bailouts. Everybody wants success stories to show that the current strategy, such as it is, can work. As Greece is a horror story and Portugal’s prospects are grim, Ireland is the only one of the three bailed out countries that has any chance of exiting its bailout programme on time. If that happens, the core euro areas countries can hold Ireland up as an example to the Mediterraneans, saying if the Irish can do it, others can too.
But exiting the programme on schedule will depend on convincing the bond market to start lending to the State again on affordable terms. That hurdle will have to be approached in the second half of this year.
That will be the moment of greatest opportunity. If, as that time approaches, the prospect of the Government successfully raising private cash appears in the balance, other countries will have two choices: stump up money for a second bailout, which will merely keep Ireland on life support; or stump up money to address the problem in a meaningful way by lowering the debt burden.
Either way, they will take a hit, but the second option could provide the success that everybody wants.
Ireland’s gross public debt burden passed through the 100 per cent of GDP threshold last year. A deal on the €30 billion in promissory notes used to prevent Anglo defaulting on its bonds could bring the State’s debt burden back below that important 100 per cent of GDP threshold. That could make all the difference in convincing the bond market that Ireland is worth lending to again.
Jumping the gun by pre-emptively seeking a second bailout is neither achievable nor desirable. Patiently persuading other countries that sharing the costs of bailing out bank bondholders is in their best interests offers the best prospect of improving Ireland’s situation.