Government bursts into activity as big-bang solution misfires
AnalysisThe terms of any deal with the ECB on bank debt are the critical element
Once all the key players in Ireland's EU-IMF bailout agreed to put the issue of the promissory note on the agenda well over a year ago, a deal of some sort was always going to happen at some point - organisations such as those involved in the talks do not agree to allow something on the agenda if they do not accept that there will be an outcome.
That is the (very old) good news.
Less welcome has been the understanding that a straight cut in the debt was/is never going to happen in the current context (writedowns and/or write-offs will happen only if Ireland goes the way of Greece).
The promissory note is a sovereign obligation voluntarily entered into by the Irish State. Not honouring it would be a sovereign default. The current administration has never countenanced a unilateral sovereign default.
But despite much talk, including from people who should know better, writing off debt is not the only way to make the State's debt burden much more manageable.
To see why, imagine being offered a loan of €1 million. Most of us of modest means would recoil at the thought of accepting such an offer because it would mean joining the ranks of the highly indebted. In these times - of all times - being highly indebted is not a position in which most people are comfortable to be.
But if the person making the €1 million offer then adds that he does not need to be repaid for 50 years and that he will charge no interest on the loan, even the most prudent and borrowing-averse person would immediately accept that offer.
Inflation is among the main reasons why one would be mad to turn down the €1 million.
Just as today's money buys much less than it did half a century ago, it will (almost certainly) buy much less again in another 50 years' time. Assuming that prices rise by 2 per cent every year for the next half century, the loan is free cash worth €630,000 in today's money.
The point of all this is that debt is as much more about its terms and payback time frame as it is about the total amount borrowed. The terms of the new IOUs which will replace the promissory note are the key ingredient in the deal.
What is certain is that the total cost - in today's money - will be lower when accumulated interest and the effects of inflation are factored in. The big question is: by how much?
But even with a very good deal, it should be recalled that the Government's total debts stand at about €200 billiion. The promissory note accounts for only €30 billion of that.
A study published yesterday by the trade union-linked think tank NERI showed that even if the promissory note was to disappear entirely the effect would be for Ireland to go from being the fourth most indebted state among the EU 27 to the fifth most indebted.
What would a deal on the promissory note mean for next December's budget?
The European Central Bank is notoriously hawkish on budgetary matters, believing that the faster governments' books are balanced the better for everyone. It has also been extremely reluctant to agree to any restructuring of the promissory note.
Having made one concession (on the promissory note) it is not likely to want its own concession to be used as a reason for give another concession (on the pace of budgetary adjustment).
Don't take for granted that a deal will lead to a smaller package of tax increases and spending cuts in December than that to which the government long ago committed.
There is, too, cause for concern about the way events unfolded yesterday. Government sources started signalling that a deal was in the offing late in the afternoon and expectations were raised about a big-bang approach, including the overnight liquidation of the shell of Anglo Irish - Irish Bank Resolution Corporation.
They would not have done so unless they were as certain as it was possible to be that all the issues had been squared with the ECB.
But by about 7.30pm word began to filter through from Frankfurt that no deal would be done last night. The big bang had misfired. It was not possible to ascertain last night what happened in Frankfurt.
Did the Government seriously misjudge the ECB's governing council? Did members of 23-man council unexpectedly raise objections? Or did the ECB seek to punish the Government for putting it under too much pressure to agree a deal?
There were also some questions about the reasons for last night's emergency legislation to liquidate IBRC. Government spokespeople said the ECB insisted on it and it was necessary for company law reasons.
Minister for Finance Mr Noonan told the Dáil last night that as soon as information regarding liquidating IBRC became public, that there was an immediate risk to the bank so he took "immediate steps to secure the stability of the bank" and its €12 billion in assets.
However, it is difficult to see why Frankfurt would demand the shutdown of IBRC and the moving its balance sheet into another State entity.
The political motivation for taking this route is much clearer. "Liquidate" has a satisfyingly radical ring to it. Anglo is the bank everyone loves to loathe, so extinguishing IBRC will not be unpopular.
Emergency overnight legislation gives a sense of change. Dragging lawmakers into the Oireachtas to enact legislation in the dead of night and having the president dash back from Italy to sign it into law makes the Government look bold and decisive.
One hopes that last night's burst of activity was not just about optics.