Frankfurt's way prevails as harsh economic reality confronts Noonan
POLITICAL ANALYSIS:Forget about burning bondholders or burden sharing – Irish taxpayers must take the pain, writes STEPHEN COLLINS, Political Editor
THE DAWNING of cold, hard economic and political reality on the new Government was the most notable feature of the bank restructuring plan announced to the Dáil yesterday by Minister for Finance Michael Noonan.
All the talk of burning bondholders, or even its more polite relation, “burden sharing”, suddenly vanished. Instead, Noonan spelled out the reality that the Irish banks need to be recapitalised to an extraordinary level to restore confidence in the country’s financial system.
Sadly, the Irish taxpayer will be asked to underwrite the deal.
It was a far cry from the sustained Opposition rhetoric of the past few years, or the flourishes of the general election campaign. The reality is that Frankfurt’s way rather than Fine Gael or Labour’s way was always going to prevail, except in the fevered imaginations of those who don’t know how the real world works.
The Minister did hint that when it comes to the two dead banks, Anglo Irish and Irish Nationwide, the Government will try to impose some welcome burden sharing but as far as the real live banking sector is concerned they will play it by the book.
Bank of Ireland, AIB and Irish Life Permanent will have to be funded by the State and, with luck, the taxpayer will recover some of the money in time. Subordinated bondholders will be asked to take some of the pain but this was always going to be the case.
While he didn’t divulge the nature of his discussions with the European Central Bank (ECB), it was clear from Noonan’s announcement that Jean Claude Trichet and his colleagues in Frankfurt had told him the facts of life in no uncertain terms.
After an initial swipe at the former government at the beginning of his speech, Noonan got down to brass tacks at the end. “I want to be clear for the benefit of our people and of market participants, that we are committed to the EU-IMF programme,” he said.
The Government had issues it wished to raise and changes that needed to be made in the context of ensuring growth and recovery in the Irish economy, but Noonan added a crucial caveat: “We will respect the overall fiscal parameters of the programme and where adjustments to the programme affect these, we will make appropriate offsetting adjustments, and it is clear from contacts to date that there is already a good level of understanding between us and the funding parties in this regard.”
In his response, Fianna Fáil finance spokesman Brian Lenihan broadly welcomed the Government’s action but pounced on the fact that after all the huffing and puffing, the new Government had accepted the EU-IMF programme. He noted that subordinated bondholders were going to take a hit but he pointed out that this had been the case all along.
Lenihan also pointed out that precisely a year ago the governor of the Central Bank and the regulator, Matthew Elderfield, had announced stress tests that supposedly dealt with the situation once and for all.
The former minister for finance said that under the terms of the new stress tests, the banks would be “stuffed with capital” but the extreme scenario that underlay the stress tests was actually dangerous for the economy and was far more pessimistic than the stress tests adopted in any other EU state.
Lenihan wondered what had happened to the media speculation that some new funding mechanism at European level was on the way and he warned that the ECB was “not subject to megaphone diplomacy from national governments”.
By contrast Sinn Féin denounced the Government’s decision, saying it beggared belief. “The reality is that this Government is continuing on with the reckless policies of the previous Fianna Fáil government,” said finance spokesman Pearse Doherty.
“Like Fianna Fáil they have placed more priority on bailing out bank bondholders than bailing out ordinary people trying to make ends meet,” he said.
While his comments annoyed the Labour Party, they echoed the rhetoric that emanated from the junior Coalition party not so long ago.
Now Labour and Fine Gael have to face the fact that without the support of the ECB, the Irish banking system, and with it the Irish economy, would probably collapse in ruins.
Going it alone and burning the senior bondholders is a risk no Irish government could afford to take.
The problem, though, is that the severity of the stress tests on the banks and the immediate demands being made on the taxpayer also threaten the prospect of a recovery.
There is no easy way out of our current problems but hopefully the latest stress tests mark the bottom line and the Minister will not be back in another year with an even more pessimistic scenario.