State's credibility rests on delivery of bailout targets

 

ANALYSIS:The months ahead will test any pledges made by Enda Kenny and Eamon Gilmore to our European sponsors

THE GOVERNMENT’S campaign to restore Ireland’s battered reputation comes as the sovereign debt saga enters a decisive new phase. In spite of claims that Europe’s scarred leaders are turning the corner in the crisis, increasing speculation about debt default in Greece and a surge in support for a Euro- sceptic party in Finland show clearly that the battle still rages.

The rise of the True Finns was enough to unseat Mari Kiviniemi as prime minister; he becomes the third euro zone leader in as many months to be felled by the debt debacle.

Although the demise of former taoiseach Brian Cowen and that of Portugal’s caretaker premier José Socrates shows what happens when economies go badly off the rails, Kiviniemi’s case illustrates that the leaders of strong countries are no less vulnerable. That is crucial.

As confidence in the Greek rescue slips, all of this underscores the urgency of the Government’s drive to persuade the State’s European sponsors of its determination to do all in its powers to overcome economic collapse. With German chancellor Angela Merkel under electoral siege at home, she has all the more reason not to relent in her demand for a “gesture” from Ireland on corporation tax.

That question is as vexed as ever. Whatever about the fight over the 12.5 per cent tax rate, it seems impossible at this reading to conceive of a resolution without some kind of a commitment to entertain the dreaded common consolidated corporate tax base (CCCTB).

Although Taoiseach Enda Kenny came to office last month saying this was the back door to tax harmonisation, Merkel and French president Nicolas Sarkozy are not for retreating.

The work actually done in the months since Ireland’s bailout earned an EU-IMF seal of approval last week, but a huge distance remains to be travelled and the road is littered with political landmines. Another bout of credit rating downgrades and a new warning about Ireland’s “fragile” position emphasises the depth problem.

Kenny and Minister for Foreign Affairs Eamon Gilmore adopted the persuader’s mantle in their respective meetings yesterday with British prime minister David Cameron in London and EU heads of mission in Dublin. Ireland’s international standing though will not be retrieved with mere promises.

If the recovery of lost confidence rests on difficult deeds, it will take many years to set aside the ill feeling that still surrounds Ireland’s slide into the bailout zone.

What is more, moves to execute promised public sector reforms and other contentious policies guarantee tension on the home front. Be it in the backlash against the Croke Park arrangements or resistance to privatisation, Kenny and his Ministers are confronted with a series of challenges in the months ahead which will test the pledges made in Downing Street and Iveagh House.

Still, a limited reworking of the EU-IMF memorandum brings a close for now to most elements of the “renegotiation” debate. If the Government’s narrow interest lay in the push for improvements, its international credibility now rests on the execution of increasingly difficult reforms and the bank rescue. Leaving aside the unresolved question of the bailout interest rate, the time for talking about the parameters of the deal itself has passed.

Greek worries and the advance of Timo Soini’s True Finns leave little scope for dilly- dallying. Reports circulate day by day that preparations are in train for a restructuring of Greece’s mountainous national debt – code for a default and something European leaders did not want to contemplate before the permanent bailout fund is set up in 2013.

Much as bailout talk is ritualistically denied before the act itself, such reports are routinely dismissed for now.

The fact remains that the Greek problem continues to confound Europe’s leaders. Only weeks ago they shied away from a form of restructuring when they spiked proposals that would have empowered the European Financial Stability Facility (EFSF) bailout fund to buy back sovereign bonds at a discount.

This however is question which refuses to go away. Indeed, the very volume of restructuring reports and their increasing frequency suggests that public opinion is being softened before the bailout troika of the European Commission, the IMF and the European Central Bank issue their latest judgment on Greece in June.

The official line remains that the country’s debt burden remains sustainable, but it would appear that doubts are steadily growing. Furthermore, the questioning reaction of market investors shows they are not at all convinced by the soothing words of those who say the doubters are wrong.

Quite how restructuring is achieved – possibly by lengthening of loan maturities or something more radical, such as a haircut on debt liabilities – is an open question. With European banks and the governments who stand behind them in the line of fire, this cannot be achieved without serious pain in Athens and other capital cities.

Important here is a new round of stress tests on major European banks, tougher than discredited tests last year and highly political, given the necessity for member states to decide soon how they will deal with any requirement for new capital. The test results are due in June, around the same time as the all-important troika report, meaning there may be little let-up in the tension for months to come.

All along, default has been portrayed as the greater evil. Even if that view is now changing, to start down this road is to run the risk of renewed disruption and turmoil in markets. Against that, however, is the argument that the sovereign debt crisis will not be resolved until the trickiest problems are finally dealt with.

What does the Greek situation mean in the Irish context? Despite public utterances to the contrary, serious anxiety lingers in Government circles that the combined weight of bank and sovereign debt presents an unsustainable burden to the State.

Ireland’s sponsors take the contrary view, but we have seen again and again how the Greek case creates the precedent in the euro zone. For the moment, however, Kenny’s task remains to implement the deal as done while the crisis tightens its grip.