ANALYSIS:Burning bondholders and renegotiating the bailout are among opposition parties election promises, but are they realistic, asks ARTHUR BEESLEY
ALL OF the Opposition parties say they would seek to alter fundamentally core elements of Ireland’s EU-IMF bailout if they win the election. In so doing they have set themselves a difficult task.
At this point there is little appetite in Europe to revisit the basic plan. However, talks to widen the scope of the euro rescue scheme may yet bring some relief on the banking front.
In Brussels, Berlin and Frankfurt, there are strong views that the programme for the public finances should not be changed in any significant way. In these cities, where the key decisions about the Irish economy are made, the package is seen to embrace the minimum possible to regain credibility and confidence.
Although it may be possible to extract a small interest rate reduction, Ireland still faces years of grinding austerity to bring its wayward public finances under control.
The IMF has in the recent past indicated its willingness to discuss “different measures” within the broad parameters of the programme. Yet that framework is quite severe.
Seen from the perspective of the State’s international sponsors, the rescue programme is the keystone of recovery. Although some analysts complain that the plan cannot work in its current form, the EU and the IMF have staked their own reputations on the endeavour. The plan is subject to quarterly and annual review. Down the line it could be relaxed if, against the odds, conditions improved markedly. It might just as easily be made tougher if they worsened; always a risk in the present malaise
To achieve but a minor reworking of the programme in the future depends very much on goodwill from Ireland’s lenders in Europe and the IMF. The sense right now is such goodwill is contingent on executing the plan, month after month.
For the banks, however, ongoing talks to widen the scope of the euro zone bailout schemes may ultimately lead to a new plan. This is a highly political debate, however, is riddled with financial complexity.
The rhetoric on the hustings is seen from Europe to be just that, part of the cut and thrust of electioneering.
Still, certain European officials are known to take a very dim view of any implication that Ireland’s benefactors are “stealing from the country”.
On the campaign trail, demands to rewrite the basic terms and conditions of the pact are a matter of raw politics. The proposals go from the moderate to the radical.
CUT THE INTEREST RATE
This is a central element of the Fine Gael and Labour manifestos. The Greens are also in favour. Such a move is already on the table in ongoing talks between EU leaders and euro zone finance ministers. This “renegotiation” demand, therefore, is more likely to succeed in the short term than any other.
When the bailout scheme was set up, euro zone countries insisted that loans should be granted only at punitive cost to prevent copycat claims. The current annual “surcharge” on Irish loans is 2.925 per cent, almost €30 million for every €1 billion borrowed.
Diplomats caution that only a small decrease might be in the offing, meaning the loans will still come at a hefty price. A further suggestion is that the rate might be reduced retrospectively at a later date, pending the achievement of fiscal targets.
Either way, the commission favours a reduction, as do some other euro zone countries. The greatest power here though rests with Germany and it wants concessions from Ireland as the price of any rate cut. In German eyes, this would increase Ireland’s credibility on the capital markets.
Chancellor Angela Merkel is campaigning for pan-European corporate tax rules, something Dublin rejects. She might seek an Irish concession on that front in return for lower interest. Equally, Berlin might also accept a pledge of deeper cutbacks or higher taxation in return for lower interest.
It would be difficult in such a scenario to present a small rate cut as a great victory.
As for the IMF loans, Ireland pays the uniform interest rate that applies to most aid recipients. The State does not qualify for the concessionary financing rate reserved for low-income countries.
EXTEND THE LOAN TERM:
Labour wants to extend the EU-IMF loan term by one year to 2016, leaving Ireland with a little more time to bring the budget deficit within EU limits.
The party argues it makes little sense to embark on a five-year bailout with a four-year economic plan, as in the present arrangement. It also believes less onerous austerity would improve growth prospects, crucial for the repayment of debt.
There is some precedence for an early review. When the Irish bailout deal was done in November, euro zone ministers also agreed to extend the duration of the Greek bailout programme they cleared only six months previously. There was concern that the country’s fiscal targets were too ambitious.
Viewed from Europe, Ireland is not seen to be in that position. Any extension would spread budget cutbacks and tax hikes over a longer period, but Ireland’s sponsors have a clear preference for a front-loading of budget consolidation measures.
While prolonging loan repayments for up to 30 years has been mooted, large euro zone countries question the viability of that notion and some say it would open the door to formal debt restructuring. Ireland’s lenders don’t want that.
CHANGE THE POLICY CONDITIONS:
Among other changes it is seeking, Labour wants to review the universal social charge, to insulate those earning less than €100,000 from any further tax increases and to reverse minimum wage cuts. Sinn Féin says it would reverse social welfare cuts and the universal social change.
Senior EU sources say the overwhelming view right now is that any changes made to the policy programme cannot dilute its overall impact, particularly this year and next. If the new government decided not to cut €100 million from one spending line, it would have to find another €100 million elsewhere to replace it.
In addition, Ireland’s sponsors remain wedded to the structural reform proposals set out in the agreement made last November.
BURN SENIOR BANK BONDHOLDERS:
In one form or another, each of the Opposition parties favours a manoeuvre to compel senior bondholders to bear losses on their investments in Irish banks. This was examined before the original EU-IMF deal but ruled out.
The European Central Bank, in particular, which is supporting Ireland’s banks to the tune of some €130 billion, remains vehemently opposed to the notion. In its view, even the “orderly” debt restructuring proposals raised by many analysts would lead only to disorder, in Ireland and further afield.
This stance is also rooted in fear of market panic and contagion, a big threat to the stability of the wider euro zone. As the fight continues to avert the threat of a Portuguese or Spanish rescue, the force of that consideration cannot be underestimated.
Given that most of this debt is guaranteed by the Irish State, any senior bond “haircuts” would also bring Ireland into the realm of formal debt restructuring. At its core, the rescue plan is designed to avoid national default.
Yet this is an issue which will not go away. Although recent history shows there would be no support for a unilateral move to burn senior bondholders, a co-ordinated European solution to the problem could yet emerge. This is favoured by Fine Gael and by the Greens.
Current talks on an all-embracing “grand bargain” to reinforce the temporary euro zone bailout scheme, the European Financial Stability Facility (EFSF) may offer some hope here.
Whether they lead to bondholder “haircuts” is another matter.
In some accounts, however, the EFSF’s mandate may be widened to allow it to participate in bank recapitalisations or to take responsibility for the funding of distressed bank assets.
Such manoeuvres might lessen the weight on Irish taxpayers a little, although Berlin’s natural wariness in this area could see such arrangements postponed until a permanent bailout scheme comes into place in 2013. It also seems inevitable that big concessions would be sought.
Nevertheless, the debate here is in keeping with the IMF’s call for a pan-European policy to tackle fundamental financial sector problems while limiting the burden on fragile sovereign balance sheets.
BURN UNGUARANTEED SENIOR BANK BONDHOLDERS:
Fine Gael suggests the holders of €25 billion in unguaranteed senior bank bonds should be asked to take a €17 billion “haircut” on their investment. Likewise, Labour says unguaranteed senior bondholders should be burned.
The considerations here are somewhat different because the fate of such paper is not in principle aligned with Ireland’s sovereign debt. In Frankfurt, however, and in other EU power centres, the view remains that this too might prove too risky. The thinking here is that the longer Ireland continues without any default on such debt, guaranteed or not, the better.
USE THE EFSF TO BUY SOVEREIGN BONDS AT A DISCOUNT:
Fine Gael sees appeal in this notion, currently under discussion among euro zone ministers. This is a form of debt restructuring, but may have only a small impact as the system would be voluntary. If done for Greece, however, it could well be done for Ireland and could have the impact of marginally reducing the national debt. Ireland’s position would therefore change, with a consequent change to the deal.
SCRAP THE DEAL:
Sinn Féin, the Socialist Party and the United Left Alliance suggest they would walk away from the EU-IMF arrangement. Sinn Féin says in its manifesto that there should be no further drawdown of rescue loans.
Among Ireland’s sponsors, this is not held to be viable. Ireland may well be fully-funded until mid-summer, but the gap this year between revenue and spending is projected to be €17.7 billion. That would be likely to widen if Ireland said it was not taking a bailout.
Public confidence in the economy might collapse, investment would evaporate, capital flight would be in prospect and even more severe budget cuts would be required. It sounds like a recipe for chaos.
Arthur Beesley is European Correspondent