Ireland’s second chance an opportunity to cut debt repayments

Ireland has effectively been handed a second chance to write the terms of the bailout.

It is not a blank sheet of paper but it does challenge Irish experts to come up with innovative ways to cut the annual repayments of debts and to make the country look more attractive to investors.

The lucky part of the deal for Ireland is that it has been agreed that the measures now open to Spain and Italy can be applied to Ireland retroactively. So whatever benefits the big countries have won, Ireland can apply to the arrangements it made in the past, especially for bank bailouts.

What exactly this will be worth to the country has still to be worked out, but Ireland has put €63bn into the banks so far, adding around 40% to the massive debt that will reach 120.3% of GDP next year.

Ireland put €24bn of the bailout funds into re-capitalising the banks, and it will hope that this could be taken off the Government books as debt.

There are also hopes that the €31bn promissory notes for Anglo Irish Bank will disappear from the books.

The hitch is that this cannot happen until at least the end of the year, when a single eurozone-wide supervisor for banks is expected to be in place. The ECB will oversee the big banks, while the smaller and more problematic banks will be subject to a mixture of national and EU oversight.

But once this is in place, the Government will hope to take as much of the banking debt off its books as possible. This should make the country more attractive to investors, who consider debt of more than 80% worrying and anything close to 120% unsustainable.

Under the new EU legislation and the fiscal treaty, the country is obliged to lower the debt to 60% of GDP as quickly as possible, so anything that makes this more achievable should make for easier budgets.

There is a potential additional perk for Ireland, since Spain has been told that the money it borrows for its banks from the EU’s rescue funds will have the same status as all other investors. Ireland will hope this applies to it as well, if it manages to borrow money to replace promissory notes.

But this is far from certain yet, as some countries, such as Finland, insist this concession is only for Spain and will not apply to anyone else. They and the Dutch are also poised to demand that any loan for banks should be accompanied by collateral, such as state assets or income streams. A demand like this could make it impossible for Ireland, especially since all our taxes together are not enough to pay the State’s bills, and so many of the assets are due to be sold.

The agreement for the Italians will be potentially a major boon for Ireland, as it means that when we have to borrow from the markets in the next six months, there will be competition for our bonds as the bailout fund, the ESM, will be able to buy our bonds. This option should be open to us from July 9.That date is also when Michael Noonan and his fellow eurozone ministers get around the table to thrash out the details, some of which could take at least nine months.

But agreement on this means that banking union is well under way, while political and fiscal union will be plotted out by October, bringing Ireland into a completely different EU from the one we joined, or have at the moment.