After Greece: Ireland's next move


Europe moved this week to grant a new swathe of financial concessions to Greece in a renewed effort to prevent the country falling into an abyss. Only days before another harsh budget in Dublin, the development underlined the Irish Government’s failure to prise a debt-relief deal from its sponsors in the euro zone.

Although economic conditions in Greece are far worse than in Ireland, there are questions about whether the new arrangement for Athens should prompt Taoiseach Enda Kenny and Minister for Finance Michael Noonan to intensify their campaign.

“I would, given the recent Greek deal, wait for a while to see whether the EU/euro zone responds; [there is] no point pushing hard now, having not done it before,” says Kiron Sarkar, a former Rothschild investment banker who writes a financial newsletter.

“However, if by January there is little movement, I would push far more aggressively. The EU/euro zone needs Ireland, in particular, as it is its only success story. In future it needs to offer incentives, rather than just penalties, to those that perform, [as that] will encourage a better response from the relevant country.”

In such arguments there’s little to gain by always being nice. Better to get down and dirty than to be teacher’s unerring pet, or so the argument goes. Kenny has extracted a vague political promise, but little more, from the German chancellor, Angela Merkel, that something will be done in recognition of Ireland’s “special” situation.

Still, the Taoiseach is no pushover. Last year he doggedly resisted a Franco-German assault on Ireland’s corporate-tax regime. Although the interest rate he received in the end will save a grand total of €12 billion, this was granted in a package to quell a market onslaught on Italy and Spain. In June he refused to sign up to new arrangements for Spain until a specific reference to Ireland was inserted. Notably, however, the value of that “breakthrough” faded fast.

The prospect of direct capital infusions from the European Stability Mechanism fund into the likes of AIB and Bank of Ireland is on hold. The focus now is on a deal with the European Central Bank to recast the Anglo Irish Bank promissory-note scheme. More than a year into the talks, however, there is still no agreement.

Would it ever work to get gritty? After all, straight talk won’t necessarily lead to a wilful act of disruption and might demonstrate an urgency to settle matters quickly. But this remains tricky. “You’ve got to think long and hard about upping the ante,” says a European official who knows the intricate ways of the Brussels machine. “You go for a showdown only if you have a reasonable expectation that it will yield results. The risk of hyping things up is that you may get a rather more categorical No than you want.”

Warning signals are already emerging. Even as the Government explores whether any of the new Greek concessions might be made available to it, the Dutch prime minister, Mark Rutte, has declared his opposition. This matches scepticism in Germany about Ireland’s need for additional aid.

More radical still would be a repudiation of a €3.1 billion Anglo repayment due next March, which would involve a damaging default on a sovereign debt. The same goes for any unilateral shunning of any other debt, something the ECB repeatedly refused to countenance when it insisted the Government repay senior bank bondholders in full.

Hence the view among close observers that any such move would be politically unsound, financially dangerous and, ultimately, self-defeating. To renege on debt would compromise the credibility of the Government as borrower, the very thing Dublin needs to cultivate if it is to free itself of the yoke of the bailout next year. To call the ECB’s bluff might threaten well in excess of €100 billion in emergency support for the Irish banking system. It is because of such support that the banks function.

In the end, this is all about reliability, as the salutary case of the former Greek premier George Papandreou illustrates. A year ago he was treated to strident public diktats from Merkel and the then president of France, Nicolas Sarkozy, for having the gumption to propose a referendum on the bailout. Critics bristled at this extraordinary intrusion into Greek affairs, but Papandreou’s international standing sank, and he was replaced by an unelected technocrat.

A similar fate befell the former Italian leader Silvio Berlusconi after he reneged on his promises to the ECB to assert control over his wayward public finances.

“I would be very much of the view that Europe does not operate on an antagonistic basis. For sure, the right strategy is to frame the case as what is best for Europe,” says Prof Philip Lane of the department of economics at Trinity College Dublin.

The new Greek arrangement comes at a pivotal moment for Ireland. It is two years since the disastrous banking guarantee inexorably led the faltering State into the clammy embrace of the EU-EC-IMF troika, meaning the Government must secure its return to private markets within 12 months.

Attitudes towards the bedraggled Irish have improved markedly since the dismal days at the outset of the bailout, but all the praise in Europe will not pay off the debt.

“I believe that what Noonan has done so far is very good, and we know where the problems lie,” says a participant in the talks in Brussels. Yet a solution acceptable to all remains elusive. Not only is Ireland’s national debt huge, thanks to the bank rescue and large ongoing budget deficits, but it is still expanding rapidly. The latest Department of Finance forecast suggests the general Government debt, representing the totality of the State’s gross debt, will reach €192 billion next month. This sum is four times greater than in 2007, before the eruption of the crisis. A further €34 billion will be borrowed between 2013 and 2015.

The European Commission estimates that Ireland’s all-important debt-to-GDP ratio, which measures public indebtedness as a proportion of economic output, will reach 122.5 per cent next year. (This is slightly higher than the Government’s own estimate in the table, right.) This is above the 120 per cent threshold the IMF generally considers unsustainable. The ratio will drop a little in 2014 but will remain very close to 120 per cent. In Brussels this month the economics commissioner, Olli Rehn, did not reply to a question about whether Ireland’s debt could be considered sustainable without relief on the bank rescue.

The sense remains that Ireland is not really a priority for Europe at the moment. Although the debt question has assumed totemic status in unending domestic debate, that’s not the case elsewhere. At the highest levels in Europe, it is well recognised that leaders move only when forced into emergency action. At a time of concern about the deteriorating Franco-German relationship, anxiety about a possible British exit from the EU and lack of clarity about Greece, Ireland is far from the top of the list.

This calls to mind a maxim attributed to the storied US diplomat Dean Acheson, secretary of state in the early 1950s under President Harry Truman: “Negotiating in the classic diplomatic sense assumes parties more anxious to agree than to disagree.”

It is clear by now that Ireland is more anxious than its partners to agree.

But all of this uncertainty is not without risk for the bond yields that will determine Ireland’s cost of borrowing at the end of the bailout. “You cannot interpret the success of the past year, in terms of getting the yields down, independently of the presumption that a bank deal will be achieved. If that deal disappears, the current reduction in yields could reverse,” says Prof Lane.

Debt relief: What are Ireland's best options?

Promissory notes: the Government’s main aim is to spread out the cost of this 20-year IOU scheme over a longer period, possibly 40 years, at a lower interest rate. For this to work, the ECB would need to commit to a long-term resolution plan for the former Anglo Irish Bank, but it disapproves of emergency banking support.

Direct ESM aid: the European Stability Mechanism permanent bailout fund buys shares from the Government in AIB, Bank of Ireland and Permanent TSB. For this to reduce Ireland’s debt, the ESM would have to pay for historic losses in those banks. Germany, Finland and the Netherlands have rejected that option for involving mutualisation of bank debts. A further drawback is that direct ESM bank aid was conceived for Spain, but it has not applied for any. This means there is no precedent for the deal the Government is pursuing.

The new deal: What Greece got

The latest deal for Greece marks the third attempt in a year to settle on a workable second bailout for the debt-struck country. After most private investors incurred voluntary losses on their Greek bonds earlier this year, the agreement reached on Tuesday morning will see euro-zone governments grant new financial concessions to the country.

In return for €43.7 billion in new aid between now and the end of March next year, the Greek government has enacted laws to extract €13.5 billion from the budget in the next two years. That is twice the comparable Irish retrenchment (€6.6 billion) in the next two years.

In the deal the interest rate on Greece’s borrowings is being scaled back, and a 10-year deferral of interest payments will save a cumulative €44 billion. Although Greece will buy its debt from investors below its face value, euro-zone countries will also forgo their profit on the Greek bonds held by national central banks.

The current stated aim is to achieve a debt level of 124 per cent of national output by 2020, still above the IMF limit after another decade of rectitude.

If Europe’s joint pledge with the IMF to bring that below 110 per cent by 2022 is to be met, euro-zone countries may have to take losses on their loans to Greece.

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