Promissory notes deal welcome but it's not enough


Task ahead remains daunting when set against realistic growth targets

The Government will repay its promissory note obligations to the European System of Central Banks over a longer period of time, as a result of the deal announced last week.

The Irish economy will benefit from the reprieve. The immediate debt-service payments will be reduced. And although the nominal value of debt owed has not changed, the real value of the payments will depreciate over time with even modest inflation.

These are important gains. But they should not be overestimated. The fiscal deficit and the public debt remain extraordinarily high by any historical benchmark. And, when set against realistic growth prospects, the task ahead remains daunting.

The promissory notes deal should be cheered because it firmly establishes euro zone official debt restructuring (euphemistically, official sector involvement, OSI). The bogus Greek OSI late last year was manifestly inadequate and will be followed by further driblets of forgiveness. The claim that Greece is sui generis – and the line would be drawn there – has just been disproved.

The need for OSI arose in Greece and Ireland for the same reasons. Private creditors were paid with borrowed official money. Saddled with these official debts, the governments are bearing an unreasonably onerous burden.

Strategic advantage

The official creditors postponed the inevitable but, despite denials and delays, have been forced to face reality. The pity is that the “debtor” nations view their bargaining position as so weak that limited gains from the OSI have been overly celebrated.

With the precedents now in place, a more aggressive bargaining strategy can be pursued. The debtors have the moral claims on their side and hold the strategic advantage. Failure to lengthen repayment terms on all official debt will only keep the “debtors” unstable and further damage the financial and economic outlook of the euro zone.

The mystery is why, despite the fallout that the official “creditors” are being forced to face, they continue to resist private debt restructuring. “No bailout” of private creditors was an integral principle of the euro zone construct. When the euro was set up and in its first decade, “no bailout” was never controversial.

Indeed, once exchange rate flexibility is given up, the only macroeconomic manoeuvre available to the sovereign is through the ability to restructure its debts.

But not only was sovereign debt restructuring abandoned, governments were forced to assume debt they never signed on to. What is the principle that requires the Irish taxpayer to honour the debts of a rogue bank? The promissory notes deal must not be judged by the relief it provides to the Irish budget; the right benchmark for its achievement is the debt obligations that live on. Why were Irish repayments not reduced further?

The debilitating consequence of delays in debt restructuring has been unrelenting fiscal austerity. That silent tragedy has no champions. In May 2011, upon completion of its second review, the ECB-EC-IMF troika projected that Irish GDP would grow by 1.9 per cent in 2012. Instead GDP grew by an estimated 0.4 per cent. Growth expectations for 2013 have fallen from 2.2 per cent to just over 1 per cent.

The jobs story is heartbreaking. The number of people at work was expected to grow in 2012, by 0.8 per cent; instead it contracted by an estimated 1.2 per cent. And, instead of the projected 1.8 per cent growth this year, the troika thinks that Ireland will be lucky if employment finally stabilises.

The magnitude of the unemployment catastrophe is hidden since many have simply stopped looking for work – and many will never return to the workforce. Undeterred, the troika – using the Scarlett O’Hara principle that “tomorrow will be a better day” – expects that Irish GDP will grow by more than 2 per cent in 2014 and by about 3 per cent thereafter. These numbers do not add up.

Private consumption may show some brief bounce: old clothes and cars must eventually be replaced. But that cannot be the basis for sustainable growth. Continued, large budget cutbacks are due through 2015. Unemployment will remain disastrously high. Mortgage arrears and foreclosures will continue to climb. Even if world trade finally picks up, the largely-enclave Irish exports will draw in more imports, providing limited fillip to domestic GDP.

The promissory notes have served the useful purpose of certifying the principle of OSI. Much more of it is needed. The legacy burdens of the crisis must be addressed. The alternative is unending human pain, a culture of national dependency and a fraying European economic and social fabric.

Ashoka Mody was the IMF’s mission chief to Ireland and is now Charles and Marie Robertson visiting professor of international economic policy at the Woodrow Wilson school, Princeton University.

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