Ireland's case for debt relief
IRELAND’S PUBLIC indebtedness is unsustainable and will prevent economic recovery unless it is relieved. This State’s debt greatly expanded when it gave a guarantee on all bank deposits in September 2008, called on when the banks were nationalised. Efforts to pay out less than the face value to bank bondholders were blocked by the European Central Bank for fear of contagion. Last June’s decision by the European Council to break the connection between sovereign and bank debt offered a multilateral way out, but creditor states are now resisting applying it retrospectively. The Government must insist this promise is kept.
The arguments for debt relief are persuasive at national and European levels, even if there are real difficulties in getting it agreed. Ireland faces a huge problem to achieve a primary surplus on its public income and expenditure through spending cuts and tax increases. This has to be tackled irrespective of what is done about public debt and is the principal focus of the support programme from the European Union and the International Monetary Fund. But it will not be possible to stimulate recovery and growth on the basis of a more competitive economy if the burden of debt remains. That in turn would undermine returning to the markets, in a signal the programme had failed.
Such an outcome would be a real setback for the EU and the euro zone as well as Ireland at a time when international confidence is badly needed and in short supply. It would be compounded by a loss of trust and confidence in the European Council’s ability to deliver on its agreements. The undertaking to “break the vicious circle between banks and sovereigns” after a single supervisory system for EU banks is established came in the context of Spain’s search for help with its financial crisis. German, Dutch and Finnish finance ministers now say this cannot cover legacy debts but only prospective ones. Ireland, Spain, Italy and France dispute this, as do leaders of the European Commission, Parliament and Council. It is a matter of high politics to be argued out at three EU summits before Christmas.
At stake over this period is the very survival of the euro as a common currency for 17 of the EU’s 27 states. Solidarity must work both ways as the gaps in its original design are repaired. States like Ireland and Spain had an exemplary record on public finances until the financial and market crisis in 2008 left them publicly exposed to the huge flows of private capital from creditor states during the euro’s first years. That burden should be shared as solutions are found through closer banking, budgetary and economic integration.
Ireland is a willing partner in this endeavour, so long as political leaders can convince voters more beneficial outcomes flow from finding common solutions. That now calls for hard bargaining by the Government, including during this State’s six-month EU presidency from January. Pending agreement on banking supervision, Ireland is entitled to expect a sympathetic hearing on extending repayments of the promissory notes used to fund payments to the former Anglo Irish Bank.