Reality of the bailout only beginning to bite

 

We are are not as prepared as we should be in Ireland if things take a turn for the worse

THE RECENT BBC Radio 4 programme on the Irish bailout shed new light on the bondholders question. Previously, the blame for the Government’s refusal to move against holders of senior debt in Irish banks was attribute almost exclusively to the reluctance of the ECB to countenance such action. However, comments by Jörg Asmussen, state secretary at the German finance ministry, made it clear the issue was discussed at the Council of Finance Ministers, and that the German delegation, at least, shared the ECB view.

Equally pertinently, the BBC interview with Amadeu Altafaj Tardio, spokesman for the EU Commission, confirmed that the G7, which includes the US and the UK, was also involved.

Meanwhile, a follow-up piece in last Monday’s Irish Timesby Dan O’Brien, who conducted the interviews, quoted Brian Lenihan as saying the US was concerned that a coercive default would trigger credit default swaps (CDS), a form of insurance that can be purchased on bank debt.

It is now clear the G7, Ecofin and the ECB all ruled out burning the bondholders, leaving Ireland isolated. He who pays the piper calls the tune and no amount of chatter from the commentariat will change this reality.

This also explains why the new Government did such a quick about-turn on the bondholder issue.

Interestingly, none of those interviewed by the BBC saw fit to mention that informal discussions with the troika had been under way for some time prior to the ECB pulling the plug, though Brian Lenihan came close when he said he was concerned that a 2011 budget package greater than €4.5 billion would damage the economy.

In the event, the budget included €6 billion in deficit reduction measures. Though the four-year plan was billed as a government initiative, it is now clear that it was nothing of the sort.

By the same token, the changes to the bailout package by the current Government are little more than cosmetic and while details have yet to be released, the net impact of changes to the JLC rules, for example, may well be to tighten policy in this area, a desirable outcome. It is also clear that the EU will demand significant concessions in return for a lowering of interest rates on loans to Ireland.

The Central Bank, too, has less freedom than formerly. A key part of the memorandum of understanding (MOU) is the insistence on stress tests overseen by a range of outside bodies and with a degree of severity unparalleled elsewhere. It is also likely that these terms were imposed by the troika.

Ajai Chopra, deputy director of the IMF’s European department, known in Ireland as AJ or, more colloquially, the Chopper, was the star of the recent press conference on the first review of the EU/IMF programme. He produced some memorable but totally misleading quips such as, “This is an Irish solution to an Irish problem”. However, he will never make the grade as an actor for he had forgotten his lines and had to peruse his notes prior to quoting them.

More generally, it is clear that major efforts are being made by the troika and the incumbent governments in Ireland and Greece to pretend that the locals are in charge. This has been punctured somewhat by the recent BBC revelations, though it must be said that Ministers such as Michael Noonan and Ruairí Quinn are more candid than most. The latter, for example, told the teachers’ unions Ireland was in receivership. Lucinda Creighton, on the other hand, claimed significant amendments to the programme had been negotiated.

The upshot is that the general public is only now becoming aware of the new reality and are not as prepared as they should be if things take a turn for the worse. There is room for a backlash given that the election was fought, to a significant extent, on the false premise that the terms of the bailout could be significantly changed with some of the candidates urging the renegotiation, if not the outright repudiation, of our obligations. The price for this irresponsibility is likely to be paid by the incumbent government.

By the same token, public sector workers are only now waking up to the reality that they are on the cusp of fresh cuts in wages. While the union leadership is, by and large, cognisant of the need for the Croke Park agreement to achieve its objectives, the same is not true of their members. Critically, the public sector management side, until now at least, seems to have neither the vision nor the capacity to deliver its part of the bargain.

The real danger, however, is that growth disappoints and tax revenues underperform, causing the budget deficit to miss the quarterly targets in the MOU. The response of the troika would likely to be the same as it was in Greece, viz, an unscheduled hairshirt budget with cuts and tax increases that would further depress growth. Hopefully, this will not arise but the odds on it are by no means zero.

The McCarthy report was a useful, if belated, examination of an area that has been neglected for too long. There was a somewhat surreal atmosphere around the whole thing given that it was overtaken by events as the programme for government had decreed that only €2 billion be raised from privatisation.

There is, moreover, a desire that the proceeds be spent on so-called job creation measures rather than used to redeem debt. This ran counter to McCarthy’s mandate, which was to consider asset disposals “in view of the indebtedness of the State”. We may not have heard the last of this as the troika has yet to pronounce on what it will allow.

The Greek experience with privatisation is illuminating. The IMF and the OECD estimate that Greece has State assets of €200 billion or more than 80 per cent of GDP. The Greeks say they do not know the true figure – the results of an exercise to measure them are due by mid-year – but have agreed to raise €50 billion from sales of state-controlled companies, commercial property and state-owned landholdings.

It appears, therefore, that much of the €50 billion will come from state property sales. Initially, they had planned on raising €1 billion, then €3 billion, then €7 billion, but this was upped to €50 billion, the price of the one percentage point reduction in interest rates on the EU part of their bailout package.

The premature announcement of the latter by the troika caused a major rift in relations with the Greek government and musings by a commission official that Greece could sell its islands and beaches did not help.

If the Greeks succeed in finding €50 billion of assets to privatise – equal to €230 million a week between now and 2015 – they will knock almost 20 percentage points off their debt ratio. This seems to be the only way to lower it short of outright default.

In our case, there is little point in going down this road unless we can sell, say, €10 billion of assets, financial and real estate, thereby reducing the debt burden by about six percentage points. Any bids for Rockall?