You are viewing the content for Friday 15 November 2013

Bailout exit declaration exaggerated half-truth

Finance Minister Michael Noonan with, from left, European Bank president Mario Draghi, French Finance and Foreign Trade Minister Pierre Moscovici, and EU commissioner for Economic and Monetary Affairs Olli Rehn

THE vaunted declaration by Taoiseach Enda Kenny that Ireland will exit the bailout without a precautionary credit line, though welcome, is an exaggerated half-truth aimed at building market confidence ahead of the Dec 15 deadline.

Mr Kenny said, before this decision, he talked with German Chancellor Angela Merkel who has asked German development bank KFW to work with Irish and German authorities to discuss ways to improve Ireland’s funding mechanisms.

The spin has firmly located the involvement of KFW as a bank that will lend significantly to businesses. This is to be welcomed at face value. This is because one of the biggest problems preventing Ireland from recovering economically has been the failure of Irish banks to open up sufficient lines of credit to small and medium-sized businesses. This in turn has been a significant factor in preventing any significant improvements in the Irish domestic economy.

KFW is fully owned by the German federal government (80%), with the remaining 20% owned by German states. The 37-member supervisory board of the bank is chaired by Wolfgang Schäuble, the German minister for finance.

One part of the overall KFW banking group is KfW Entwicklungsbank (KfW Development Bank). This bank lends to governments and public bodies within countries, in addition to lending to commercial banks. It is this "development bank" (KFW) which Mr Kenny refers to in his speech. He talks then about credit to businesses. However, it seems very clear that the development bank side of KFW’s group operations will indeed represent a precautionary credit line to the Irish government.

This is very clever. In his speech, the Taoiseach said Ireland will exit the bailout on Dec 15, "without the need to pre-arrange a new precautionary credit line from our EU and IMF partners". Importantly, he doesn’t say that there aren’t other precautionary credit lines open to him.

It looks very clear that KFW is indeed the precautionary credit line which the spin coming from government is saying it will not be seeking.

In fact, it’s certain that Mr Kenny has already sought the credit line if he needs it, and has got it from Chancellor Merkel. This is extremely dangerous. Ireland has been forced into tens of billions of austerity since the bailout started three years ago, because of harsh conditions exercised by the Troika.

This was viewed by the markets and people in society as being demanded by Chancellor Merkel. Indeed, we all remember when she was sent an advance copy of the budget a couple of years ago! Interestingly, Mr Kenny and Tánaiste Gilmore have said in coded language austerity will continue, and this will please the markets, who are already delighted with the high likelihood of the deficit reducing to below 3% by 2015.

However, one suspects that extra ‘conditions’ have been agreed between the Taoiseach, Angela Merkel, Michael Noonan and German Minister Schäuble, particularly if Ireland needs to draw down cash from KFW bank at some stage.

OF COURSE, the ongoing austerity has always been on the cards since we approved the Fiscal Treaty early last year.

The Budget 2014 Fiscal Outlook stated that the Government has raised €12.5 billion in new bond issues in 2013, which gives hope. However, it also states that "there remains a sizeable gap between day-to-day revenues and expenditure".

This will still continue to exist until for several years yet to come. As a result, with maturing debt which must be repaid, the funding requirement for 2014 is estimated at around €16.5 billion. Clearly, the Government will still need serious borrowed funds in the medium term, despite its reserves of €25 billion, which after all, still need to be ‘reserves’.

It seems obvious that the KFW is the security blanket, if the Government cannot raise the scale of this funding at competitive interest rates. It looks like the Government will need the support of the KFW German bank and Mr Kenny’s statement indicates a deal has been done.

This deal with KFW could further tighten the grip of the German government on Irish fiscal policy.

On Dec 15, officials from the Troika may well be finishing up their work and Ireland won’t formally be obeying the three masters of the ECB, IMF and European Commission. There is also a final report on the state of the Irish banks, which might cause more funding problems, which the KFW may need to fix.

Ireland may well need to obey one master in the coming years, a German one.

* Dr Tom O’Connor is a lecturer in Economics & Social Policy at Cork Institute of Technology