‘Game of poker’ over budget deficit target

Labour ministers Eamon Gilmore and Pat Rabbitte are “technically correct” that the agreement with the troika is to reach a 5.1% budget deficit target by 2014, but it will come down to a “game of poker” whether the Government will be allowed ease up on the €3.1bn in consolidation planned for October’s budget, according to UCD economics professor Karl Whelan.

Both the Tánaiste and Minister for Communications have said that the Government has room to introduce a softer budget as it is ahead of its targets to meet the 3% deficit by 2015 agreed with the troika as part of the bailout programme.

Moreover, the Government secured roughly €1bn in savings through the restructuring of the promissory notes in February.

But it will not be able to act unilaterally. If it wants to deviate from the €3.1bn adjustment, then it will have to get permission from the troika, says Mr Whelan. “The head of the ESM, Klaus Regling said in an interview last week that he wanted the Government to stick to €3.1bn. If the Government wants to get a precautionary credit line, it is very important that they get it from the ESM because that is a pre-condition for OMT [the ECB’s unlimited bond purchasing programme].”

Spokespersons for the IMF, the ECB and the EU Commission declined to comment on the basis that pre-budget talks have not started. But a source close to the commission pointed to the MoU between Ireland and the troika. “The programme restates the commitment to the fiscal adjustment presented in the Nov 2012 Medium-Term Fiscal Statement of €3.1bn (1.8% of GDP) in 2014 and €2bn (1.1% of GDP) in 2015, as well as demonstrates that savings from the replacement of the promissory notes with longer-dated government bonds are used to accelerate debt reduction.”

IMF mission chief to Ireland, Craig Beaumont, said last month following the last bailout review, that the fund would prefer if the Government proceeded with the €3.1bn adjustment. Moreover, an ECB source said it is likely the ECB would argue against relaxing the consolidation, and to stress that if the Government would outperform its deficit target, then that would give a very good signal so shortly before the exit from the programme.

If Ireland was denied access to a precautionary credit line it would be much more difficult to extend this facility to Portugal, which gives the Government some room for manoeuvre in negotiations, adds Mr Whelan.