No avoiding the hefty price of an Irish rejection of fiscal treaty


EUROPEAN DIARY:With no clear path to aid, Ireland’s campaign to regain access to private debt markets would run into difficulties, writes ARTHUR BEESLEY

WOULD EUROPE really throw Ireland to the hounds if the referendum goes down? The hunch must be that it would not, but this is a very small comfort. Problems would still multiply.

Any country that fails to ratify the fiscal treaty by next March will not be entitled to aid from the permanent European Stability Mechanism, which comes into force this summer. This presents a serious problem, because the lack of such a safety net would impede the campaign to regain access to private debt markets.

At its core, this is a confidence game. The danger remains that a No vote would trigger a sudden collapse of investor goodwill. The door would simply slam shut.

The absence of a clear path to aid – should it ever be needed – would make the requirement for additional aid more likely when the bailout expires in late 2013. That is the way sovereign bond markets work these days. For Ireland, whose debt is deemed highly risky, this is something of a cul de sac. As a result, the question arises as to what happens if the treaty is rejected.

The risk of a default by the State would rise if it could not borrow on the open market, yet the sense must be that EU powers would not let that happen. However, this would have more to do with the sanctity of the single currency than any special concern for Ireland.

Why so? In its World Economic Outlook report last month, the International Monetary Fund made it clear that default is a risky thing with implications far beyond Ireland.

“The potential consequences of a disorderly default and exit by a euro area member are unpredictable and thus not possible to map into a specific scenario,” the IMF said.

“If such an event occurs, it is possible that other euro area economies perceived to have similar risk characteristics would come under severe pressure as well, with a full-blown panic in financial markets and depositor flight from several banking systems,” it added.

“Under these circumstances, a break-up of the euro area could not be ruled out. The financial and real spillovers to other regions, especially emerging Europe, would likely be very large. This could cause major political shocks that could aggravate economic stress to levels well above those after the Lehman collapse.”

With any or all of that in prospect, it seems unlikely that Ireland would be allowed to fall over the edge of the abyss. No. You’d have to think some help would be offered, but on considerably more onerous terms than at present and with severe policy conditionality.

Based on the example of Greece, it seems two things would likely happen.

First, the Government would come under immediate pressure from Europe and other quarters to radically escalate its austerity drive. Minister for Finance Michael Noonan has said as much in the last couple of days. There is little reason to believe it would not. Second, but only as a last resort, some form of exceptional European aid might be made available to avert disaster.

It is clear that the ESM route is debarred and that the temporary European Financial Stability Facility would be closed for new business when the Irish bailout ends. Still, the first Greek rescue was executed by way of an ad-hoc fund set up before the EFSF was established.

If Europe saw that it was in Europe’s interest to proceed in that way or some variation of it, then perhaps it would.

Recent history shows, however, that there would be a steep price to pay on the Irish side.

Under the second Greek bailout, for example, rescue funds are to be held in escrow to pay down the national debt. External oversight has also been stepped up, with European officials posted full-time to Athens.

Any of that would tie the Government’s hands – and other things precious to it would also likely be threatened.

Would the Croke Park deal survive? Would welfare payments be protected? Would corporate tax come on the radar again? Holding the line on these fronts and others would be more and more difficult in any new dispensation.

The chance of having a friend in court would be unlikely.

The question of IMF aid was raised in recent days, but that too is highly problematic.

For one thing, the IMF involved itself in the first round of euro zone rescues on the basis that it provides one-third of the loans while Europe provides two-thirds. For another, the IMF contribution to the second Greek bailout is less than one-third. In addition, there is pressure for the IMF to reduce its European exposure.

Indeed, two days ago, Canadian finance minister Jim Flaherty said the IMF’s presence in the euro zone rescue scheme raised basic questions of fairness. “We cannot expect non-European countries, whose citizens in many cases have a much lower standard of living, to save the euro zone.”

With all that in mind, it would seem fanciful to expect that the IMF would jump forward to fill the gap.