Ireland's progress on meeting conditions of EU-IMF programme for financial support

MARGINAL NOTES: GYRÖGY MATOLCSY, the Hungarian finance minister and the current chairman of the EU Council of Economic and Finance ministers, knows a thing or two about embracing the IMF, his country having received a €20 billion bailout in 2008. Hungary, which holds the rotating EU presidency, is still struggling with an unwieldy deficit, but it has enjoyed a bond rally of late, which means its borrowing costs are falling.

DEMOCRACY CAN sometimes get in the way of the smooth passage of financial “assistance”. The Irish electorate’s comprehensive rejection of the Fianna Fáil-Green Party coalition in the February election has meant the deal has had to be renegotiated in painstaking detail, even if the resulting revised deal resembles the original quite a bit. The EU and IMF are now at a similar crossroads with Portugal.

IRELAND’S FINANCE “partners” are scheduled to carry out a total of 13 quarterly reviews of the State’s progress in reshaping the economy along more acceptable lines between now and the end of 2013. The phrase “the Irish authorities will present a comprehensive report” crops up more than once in the list of “actions” to be completed between now and then.

“STRUCTURAL reform objectives” is Government jargon for cutting wages in sectors such as retail, catering and contract cleaning that are covered by employment regulation orders (EROs) or registered employment agreements (REAs).

Reducing replacement rates (the ratio of income in work to income while out of work) traditionally involves the cutting of social welfare payments, officially in order to avoid poverty traps – a strategy that tends to stand a better chance of succeeding when there are actual jobs available.

FORMER MINISTER for finance Brian Lenihan has accused Jean Claude Trichet and his colleagues at the European Central Bank of forcing Ireland into accepting the €85 billion bailout package, suggesting that some members briefed against Ireland and implying this was a “betrayal”. Internal politics within the Frankfurt-based institution tend to be complex.

Germany’s Axel Weber, once tipped as a successor to Trichet, ruled himself out in February, claiming his economic views brought him into conflict with too many euro zone members.

The frontrunner to replace Trichet, who is due to exit the stage in November, is now Italy’s Mario Draghi. With the credibility of the monetary authority judged to be at stake, there are interesting times ahead.

THE Government’s much-flagged jobs initiative, set to be announced in full tomorrow, will be granted a “significant” amount of funds, according to Minister for Public Expenditure Brendan Howlin. However, the plan must also be “fiscally neutral” to keep Ireland within the terms of the EU-IMF deal, which rather limits the Government’s ability to stimulate the economy in this way.

SO IT’S far from done and dusted yet then.

Ah, Dominique Strauss-Kahn, head of the IMF. Michael Noonan and Patrick Honohan sent him a slightly different letter, in which they note that the Government would quite like the next round of money under the deal to come one month earlier than planned – May 15th rather than June 15th. They also want this quarter’s sum to be reduced “in view of the smaller immediate external financing need than was envisaged”.

The Government has requested to draw down a smaller sum than originally scheduled for the second quarter, attributing the reduced need to the fact that the bill for the banks came in below the €35 billion worst-case scenario built into the plan. Running down cash reserves before the EU-IMF kitty is tapped may also reduce Ireland’s swelling debt servicing costs, which came to €2.7 billion in the first four months of 2011 alone, according to last week’s exchequer data.

“WELL RECEIVED” is not a synonym for critical acclaim in this instance. Financial markets did not jump up and down for joy, with investors immediately pouring their spare cash into Ireland in celebration of this Celtic revival.

However, the grim Central Bank figures on future losses at AIB, Bank of Ireland, Irish Life Permanent and EBS were assessed to be credible enough to prevent fresh market chaos, although Irish 10-year bond yields remain elevated at more than 10 per cent.

IT IS hard to argue against the Government’s assertion that it has met the benchmarks for banking sector reform specified under the EU-IMF deal. The revised deal adds a number of new policy measures, including the thrilling prospect of liability management exercises (LMEs) in respect of subordinated debt holders. The Government says these will be carried out with a view to reducing the sums owed to these investors “by the maximum extent possible”.