IOUs offer us a rare, if remote, opportunity

Ireland is short on time and options, but IOUs may offer some remote hope of easing our burdens, writes Europe Correspondent, Ann Cahill

TIMING is everything — and Ireland’s timing in the euro debacle has been little short of a disaster.

Now it looks as though the chances of cutting the cost of the bailout debt are once again lengthening as other issues take priority.

Instead, Ireland may find itself fighting on new fronts to protect its tax rates in exchange for the latest miracle cure for the currency — economic union.

The only real successes so far has been the almost accidental cut in the interest rate on the bail-out, from the penalising rate of 6% demanded by Germany to the no-profit rate of 3%. It cut about €700m a year off payments.

The best option for a sizeable cut in the debt was to get the bondholders to shoulder their share. But while the Government insisted in giving them a free ride at the start, the ECB has since forced the country to keep that promise.

For close on a year now, the Government has been pushing other ways of cutting the cost of the debt. There are not many options, however, and those that exist depend on some creative accounting.

In all such EU matters there are two issues — the written rules and the political. First you have to find a way around the rules, and then you have to convince the politicians to support you in whatever way you have found to exit the problem.

And timing is everything.

Despite the ECB being firmly against Ireland re-engineering IOUs — the €31bn promissory notes the Government gave on Anglo Irish debt — and refusing to agree to unlimited long-term liquidity for the banks, Irish politicians set to work, bending everyone’s ear all over Europe about it.

They managed to get the troika on side, more or less, and sent them off to draw up the technical details. Nobody is clear what this exactly means. The Government has come up with a few scenarios of its own but none have met with full acceptance so far.

There was some talk that the document could be ready by July when the troika next visit Dublin. The legal documents and fine details would be worked out over the intervening months at the same time as the eurozone finance ministers would be expected to give it the nod.

Now that has been put off, at least until the autumn, according to Europe Minister Lucinda Creighton. People close to the discussions said there has just been no time to deal with it given the more acute happenings in Greece and Spain.

As Spain and the EU publicly denied there was any possibility of a bailout for Madrid so as not to add to the tizzy the markets were whipping themselves into, talks were going on behind the scenes.

Spain did not want to be tainted by a full bailout, but by money solely for their banks. Changes made to the EFSF bailout fund after Ireland availed of it meant this was now possible. And it will also be possible under the new, permanent fund, the ESF, when it comes into being in mid-July.

The possibilities for Ireland to benefit from these is small, since the money has been paid out and it has disappeared into the banks. So the best chance of improving the deal lies in changing the way the money is charged to the country.

This opened up two fronts over the past few weeks as discussions over the conditions for Spain went on behind the scenes between representatives from eurozone countries’ finance departments. Ireland joined in pushing for the new ESM to be allowed to directly fund banks, without going through a government’s books and adding to the debt and deficit.

This would have suited Ireland very well, if not now, then in 18 months time when, having to return to the markets for money, it could tap the ESM to pay off the Anglo IOUs, and take interest payments of up to €1.8bn, or more than 1% of GDP, off the books — and cut the interest to around €700m, according to economist Karl Whelan.

Germany and some others have adamantly opposed this — on the basis that feckless governments might go back to mad spending if they were not made responsible for their banks.

And now the second option is on the table — as Ireland supports Spain taking the interest on the bank bailout from the government’s books. For Ireland, this would cut about 0.6% off the annual deficit — and possibly meaning less stringent budgets for a year or two.

With Angela Merkel facing irate parliamentarians in the Bundestag and having to pass the ESM and the austerity treaty on July 1, Berlin is expected to say a firm “nein”.

However, there is one more option for Ireland — the IOUs. But it requires a period of calm to get agreement to restructure them.

However, with signs that Italy will now be drawn into the conflagration and turmoil like to ensue after Greek elections next Sunday — time is not on Ireland’s side.

Spain is by no means out of danger, and many believe that while a bank bailout might be good for the optics — the conditions attached make a bad situation worse. The Spanish government must meet the already agreed targets to cut its 6.4% state budget deficit to 3% next year — a massive undertaking in a country with no growth and 25% unemployed.

Little wonder that, within hours of the markets euphoric greeting of the deal, they collapsed, pushing up not just the cost of Spain’s borrowing, but Italy’s too. The political games surrounding the bank bailout are not helping either. Spanish prime minister Mariano Rajoy anxious to maintain that he has not invited the “men in black” into the country says there will be no troika. There won’t, of course, for the state, but in fact there will be a quartet of overseers on how the banks are reforming — the European Commission, the ECB, the banking authority and the IMF in its special outsider role as demanded by Germany.

Germany and the other three Triple A countries would prefer Spain to get funding from the new bailout fund, the ESM, when it comes into force in mid-July. The ESM gives member states financing the loan priority status — like the IMF. But this has its downside for Spain in that other private investors will be less willing to put money into Spain because they would be less likely to get their money back in case of a problem.

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