Fluid situation at EU level could be to Ireland's gain

ANALYSIS:Proposals to tackle the debt crisis are coming thick and fast – and may help ease the national debt burden, writes DAN O'BRIEN

THESE ARE times of flux, economically as well as politically. The election to be held within weeks is all but certain to result in the first significant change to the pecking order of the State’s three largest political parties since the 1930s. The last major obstacle to the setting of the date for that milestone electoral contest was removed last night when the main parties agreed on the timeframe to enact the Finance Bill.

The Government had claimed that it was anxious to ensure the Bill received adequate parliamentary scrutiny. Given the manner in which the banking Bill was rammed through the Oireachtas in December, the notion that the outgoing administration had suddenly developed an especially heightened respect for lawmakers’ prerogatives was always less than plausible. Moreover, Opposition sources were quick to point out yesterday that there has not been a successful opposition amendment to a Finance Bill in a decade.

The worst that could happen as a result of a hasty enactment is that loophole-hunting accountants find easily exploitable gaps in the legislation that normal scrutiny would have identified and closed. This is a real and serious risk, but all parties appear willing to run it.

All of the continued upheaval is taking place in the unprecedented context of this State being obliged to introduce detailed policy measures under the terms of November’s ECB-IMF bailout. But even those terms are now up in the air, both because at European level views on many issues surrounding the saving of the euro – including bailout conditions – are themselves evolving; and because the parties likely to form the next government – Fine Gael and Labour – are committed to renegotiating them.

It is almost exactly one year since Greece’s problems pushed euro zone governments to abandon the set-in-treaty principle that there would be no bailouts for participants in the single currency project.

But during the intervening 50 weeks, events of historic importance have taken place, including the ad hoc bailing out of Greece; the putting in place of a temporary euro zone bailout mechanism; the first use of that mechanism with the bailing out of Ireland; and agreement that a permanent “crisis resolution” (ie bailout) mechanism is needed.

Debate on both short- and long-term issues related to the euro zone’s debt crisis is intense and fast moving. Proposals are coming thick and fast from Europe’s leaders, EU institutions, think tanks and commentators.

The latest suggestion to grab the headlines was reportedly made by Klaus Regling, the German who wrote a report on Ireland’s banking crisis last year and who is now, coincidentally, the head of Europe’s bailout fund from which Ireland is being given cash to keep the State ticking over.

The new proposal involves Regling’s European Financial Stability Fund (EFSF) lending money to bailed-out countries so that they can buy back their own bonds. The logic of this seemingly convoluted financial engineering is as follows.

Bonds are IOUs – they have a face value and a date for repayment. Currently, Ireland’s IOUs can be bought below face value because their holders have been worrying that they would not be repaid. To offload that risk, some bondholders have sold off the IOUs at below face value (ie at a loss) to others who have a greater appetite for risk.

Regling’s idea is that governments themselves buy back their own bonds. Governments, banks and big companies do this all the time, but usually to a limited extent to avoid giving the impression of queering the pitch for their bonds. But given that the solvency of Ireland (and some other peripheral euro zone countries) is in question, this is the least of anyone’s worries. The buying back of bonds on a large scale is a viable way to save taxpayers some money without forcing losses on investors that could trigger a panic.

As it happens, ideas such as this have been floating around in Dublin for some time. The National Pension Reserve Fund and/or the Government’s still-significant cash balances could be deployed to retire debt at a discount. Using existing funds to do this would have the added upside of not having to pay an elevated interest rate to the EFSF for its funds. Although savings may not be huge, serious consideration could well be given to doing this.

Over the coming weeks there is also the possibility that euro zone governments will reconsider the interest rate the EFSF charges bailed-out member countries. A cut in the rate of interest charged on the monies lent by Europe would take place if a shared understanding emerges that it would offer the best chance of avoiding sovereign default, something that almost nobody wants.

Given how much is in flux in Europe, it may be that the terms of the bailout improve in the months ahead. Though, it should be stressed, this will happen not because there is scope for Rambo-style Irish negotiators kicking down the door of the European Central Bank in Frankfurt to tell its cowering inhabitants to do as mighty Ireland wants. If the terms are improved it will be because it is in everybody’s mutual interests.

Dan O’Brien is Economics Editor