The cases for and against ratification of fiscal treaty

The evidence for the Government being able to return to the bond markets by 2013 is positive, writes Tom O’Connor

THE Government has been keen to point out that Ireland would not be able to draw money from the European Stability Mechanism if it doesn’t ratify the fiscal treaty. Sinn Féin, the United Left Alliance, and groups of other economists — most notably Terence McDonough of NUI Galway, Michael Taft of Unite, and Andy Story from UCD — suggest there are choices post-2013 regarding further bailout funding, even if we reject the treaty.

In this context, it’s important to look at the current bailout and overall government debt to see where this will leave us when the money runs out in 2013. Ireland owed €170bn at the end of last year. The breakdown was: €85.3bn in outstanding government bonds; €35.7bn used as programme assistance from the EU/IMF deal; €28.3bn over its promissory note to Anglo and Irish Nationwide; state savings owed to post office book holders and other savers of €14.1bn; and other debt of €5.9bn.

The total amount of the EU/IMF bailout is €67.5bn. This was made up of €45bn from the European Financial Stability Fund/Mechanism and bilateral loans from Sweden, Britain, and Denmark. A further €22.5bn has come from the IMF. So, there is a further €32bn in borrowing to come from the EU/IMF before this money runs out at the end of 2013.

The average interest at that point will be 4.8%. Ireland’s overall debt at the end of 2013 will be in the region of €202bn, heralding a debt to GDP ratio of 117%. This will challenge investor confidence on a return to markets in 2013 and would support a yes vote in the fiscal treaty to access the ESM funds, even as a precautionary measure.

The Government and many more market-driven economists are anxious about the fact that we will be crippled with this level of debt. In addition, the government deficit is projected to be 5% in 2013 and 2.9% in 2015, after a further €8.7bn in austerity measures through cuts and tax increases.

Nonetheless, the Government is projecting real GNP growth of about 1% this year and 1.7% in 2013. However, given that austerity has driven the economy further into recession recently, the overall high level of government debt and the possibility of a flat economy as a result would likely deter investors in Irish government bonds after 2013.

This raises the possibility of a second bailout through the ESM, which would lean toward a yes vote.

However, on the basis of these modest growth projections and a modest increase in tax revenue last year, alongside a fall in the Irish bond rates to below what they were prior to the first bailout, the Government is confident that it can return to the markets by 2013.

The evidence is positive: In December, the 10-year bond rate was 8.5%, which had dropped substantially to the pre-bailout rates of almost double that amount. Also, the Government tested the markets in January by selling €3.5bn worth of three bonds at 5.2% and found there was an increased demand for them. As a result, Ruairi Quinn said in January that Ireland was in a strong position to return to the markets by 2013.

Curiously, now that we are in the referendum campaign to ratify the ESM, Michael Noonan last week and Lucinda Creighton this week have publicly stated that we might not be able to get back to the markets and we should vote yes to ensure access to the ESM bailout money.

However, within hours, Taoiseach Enda Kenny re-iterated that he expected Ireland to be back in the markets by 2013, but we should still vote yes.

The logical conclusion of all this is that if the government position of a return to the markets by 2013 is to be believed, Ireland could vote no because it wouldn’t need the ESM in 2014. The Government would go back to the status quo of bond-financing its deficits on the markets. However, bond investors might likely turn off Ireland if the ESM safety net is rejected by a no vote.

So, can Ireland still receive a bailout from another source apart from the ESM if it rejects the fiscal treaty? It seems very likely. Ireland would be entitled to borrow separately from the IMF.

The huge level of Irish government debt suggests a further reason why a no vote may not be a bad idea. Basically, many would argue that Ireland’s debt by 2013 standing at €202bn and increasing, with an increasing interest rate exceeding 5%, is unsustainable. As such, it might be better to plan to reduce it now through an orderly restructuring. This would make Ireland plc more sustainable and reduce the growing absorption of tax revenue to service debt interest payments from 15% in 2011 to over 20% in 2015.

Economists such as Nouriel Roubini have argued that countries like Ireland should work with the IMF and use its sovereign debt restructuring mechanism. This would allow Ireland to make an offer to its creditors. A deal could be struck to significantly reduce the €31bn promissory note to Anglo and to impose writedowns on senior bondholders in the other financial institutions. This could be done for the €65bn cost of the bank bailout. Indeed, Central Bank governor Patrick Honohan has insisted that a deal must be done on the promissory note.

The IMF cannot refuse Ireland funding even if it rejects the fiscal treaty. A recent report in a Sunday newspaper evidenced an unnamed IMF official confirming this fact. Some commentators close to the IMF have dismissed this but the IMF officially has not ruled out bailout funding for Ireland in the context of a rejection of the fiscal treaty.

Mr McDonough, of NUI Galway, makes the astute observation that the IMF would be very keen to make sure Ireland avoided a disorderly default. He also points out there are other EU mechanisms through which financial support could be offered to Ireland in 2014.

The voter going to the polling booths must ultimately choose who she wishes to believe.

* Tom O’Connor is lecturer in economics and public policy at Cork Institute of Technology

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