ECB and bank debt - Deal failure would be catastrophic

The Fine Gael/Labour Coalition has invested so much of its political capital in getting a better deal from the European Central Bank on the Anglo Irish Bank promissory notes that unless it succeeds in a transparent way its survival will come into question.

Even if Enda Kenny’s negotiators secure a deal short of the modest expectations created by Government, that may still be the case. Even as the Taoiseach reiterated his optimism about a deal in the Dáil yesterday afternoon, that possibility remains a reality.

Not only would the Government face the sternest challenge since it came into office almost two years ago, but the whiff of optimism beginning to permeate the economy might well evaporate. Yesterday’s Central Bank downgrading of growth predictions — from 1.7% to 1.3% — will influence that mood too.

Indications from ECB sources — that the Government will not get the deal it needs to satisfy budgetary or political imperatives — suggest that it may be time to consider the implications of such a turn of events. That the crisis, for us at least, has provided so many false dawns means credibility is squandered each time a deadline is passed without reaching a resolution.

That both government parties promised radical and independent debt restructuring — a refusal to pay if a debt deal was not struck with the ECB/EU — before they were elected makes this speculation not only prudent but unavoidable.

That the governing council of the ECB has apparently rejected a Department of Finance proposal to incorporate these payments into a 30- to 40-year bond moves speculation about the Government’s sustainability onto an altogether different, more immediate plane. That speculation will intensify over the coming weeks as a repayment of €3.1bn falls due at the end of March.

Failure to secure a deal may make it impossible to honour promises not to cut core welfare payments or raise income tax. That would have consequences for incomes right across society. It would also mean framing any renewal of the Croke Park deal in a far colder, harsher light.

It would inevitably reshape our relationship with Europe, even as we hold the presidency, though what that might mean outside this island remains to be seen. No matter what Europe’s leaders might argue about the rights and wrongs of a refusal to budge on debt imposed on us, it would be a draconian and heartless imposition by the powerful on the powerless. It certainly would not suggest a relationship of equals.

It would also raise questions about what, if anything, a different government might have achieved.

Unfortunately, the immediate impression is that, irrespective of who sat, or might sit, on the Government benches in Leinster House, the ECB remains the final arbiter about our economic future. That we find ourselves so impaled raises questions about the authenticity of our democracy, our place, and the place of all other small and vulnerable member states, in Europe.

That we face these difficulties to protect private bank investors — despite the basic risk rules of capitalism — shows where power really lies. The consequences of not securing a deal are almost unimaginable, but they are certainly unsustainable and profoundly immoral.