The boys who cried wolf

Irish politicians have been so vociferous in demanding a deal on bank debt that they are in danger of convincing European counterparts they are being driven by self-interest, writes Ann Cahill

THE Government may have protested too much over the issue of the €62bn banking debt and risk falling well short of expectations.

EU sources, who at this stage tend to switch off when an Irish politician stands up to speak, are firmly of the view that a debt deal is of political importance, rather than being essential to debt sustainability.

And the louder the politicians shout about it, the more convinced they are that this is a matter mainly of domestic and personal interest. The delivery of the message is now reaching fever pitch with Irish politicians crossing the bounds of EU etiquette.

Ireland’s six-month stint in the EU presidency is being taken as an opportunity to push for a debt deal and in this journalist’s experience of more than a decade of EU presidencies never has a national issue been pushed by like this before.

The apostolic zeal reached a nadir, however, last week with Tánaiste Eamon Gilmore’s speech at the EU-South America summit in Chile. He pushed further than ever with the demand for a debt deal — suggesting that not getting a break on the debt would call into question the sustainability of the debt — a statement that risks making the markets nervous, according to one EU source.

On the sideline, he reportedly told EU leaders present that the coalition government could fall without a deal, fuelling further the belief that this has more to do with political imperatives than economic sustainability.

Veteran Labour party member Brendan Howlin, the minister for public expenditure and reform, in Brussels last week disagreed with this view.

“The bottom line here is we have shown our clear determination about this,” he said.

But some senior Labour members behind the scenes insist that Gilmore’s leadership will be called into question if the Government does not get a useful debt break and he could even come under pressure to pull the party out of government.

The Labour Party’s annual conference has been postponed until September — after the EU presidency — but with Colm Keaveney, the party chairman’s star rising with every new tax and service cut, the push from inside could become unstoppable.

Diplomatic offensives — with the Taoiseach Enda Kenny and Finance Minister Michael Noonan touring the capitals to explain and deal — worked well last year in getting across the intricacies of the country’s economic state. They did not change any leader’s opinion of whether EU money should be used to bail out banks or countries as is evident from the letters and comments of the major net payers — Germany, the Netherlands, and Finland.

The most that Angela Merkel could be inveigled to concede was that Ireland’s position was different when it came to the issue of bank debt.

Given that the decision of EU leaders was to have the rescue fund, the ESM, directly give money to troubled banks — but with Ireland not looking for money for any of its banks — this was a statement of fact.

Recently senior eurocrats from the highest technical level in the European Council’s economic committee spent some time educating journalists on the difference between legacy debt and retroactive debt.

And they pointed out that Ireland clearly came under the retroactive heading and nothing had been agreed at any level about backdating money governments gave to their banks. So Ireland is indeed a “special case”.

Ireland has now calmed down its campaign for funding from the ESM for the €32bn it put into the pillar banks — Allied Irish Bank, Bank of Ireland, and Permanent TSB.

It will wait for the decisions to be made over the next few weeks about legacy debt — specifically how far back will the ESM be prepared to go to fund such debt, how much would they fund, and prepare a sliding scale of how much they insist a government shoulders.

Most likely they will agree that no bank debt will be fully funded by the ESM until some time after that bank comes under the direct supervision of the ECB.

They will take the view that they will not be responsible for anything other than what they have been charged with supervising.

This should take care of the fears of countries like Germany that Spanish and French inundating the ESM looking for loans — quickly depleting the fund that each eurozone country must contribute to.

Once that is all agreed, it will be time to turn to Ireland and listen to our woes, EU sources say. Then each application will be taken on a case by case basis — and the fact that Ireland put more than €17.5bn of its own money, from the National Pension Reserve Fund, into it will be considered. They may agree that it has a reasonable case, but then the real negotiations will begin.

It is likely that the ESM will only hand over the cash in exchange for the State’s share in the banks. If so, what will they do with them? Hold onto them? Or sell them to the highest bidder? But it’s very hard to calculate what the shares in the banks are now worth, with the troika and rating agencies warning the Irish banks have some way to go before they can be assured of a future.

THE letter from the Helsinki meeting of the finance ministers of Germany, the Netherlands, and Finland said they would only accept current value for banks. Ireland’s would come in at under €8bn.

The IMF has suggested €24bn, but German and Dutch finance ministers have a tendency to get their way in such matters. Following the German election in September/October this year, and with a Labour finance minister in the Hague, they may be inclined to be more generous when Ireland’s case comes before them.

ECB vice-president Vitor Constancio said the situation will be like any new investor that injects capital into a bank, losses not yet identified will have to be absorbed by the existing shareholder and this will be reflected in the price paid .

Care has to be taken to ensure the “entry of European capital would not create moral hazard and excessive mutualisation of past debts”, he added.

Financial regulator Matthew Elderfield said the discussions on the direct recapitalisation should take into account that Ireland was not allowed to bail-in the bondholders when it put money into the banks.

And now we return to the more immediate issue of the other €32bn promissory notes. As far as the ECB is concerned the Irish State created liabilities — the promo notes — that can be turned into money to prop up the bad debts of Anglo, and it must be taken out of the system and burned.

Were it to be allowed stay in the system it would amount to the ECB creating money — and with pictures of people going with barrow-loads of notes just to buy a loaf of bread in the back of their minds, they will not allow this. It means there is more money in the system than can be accounted for by normal economic growth — that leads to inflation, to the artificial creation of money which the treaties that rule the ECB expressly forbids.

ECB president Mario Draghi has been vitriolic on the issue. “The ECB cannot undertake any agreement, cannot enter into any agreement that is being viewed as monetary financing and is forbidden by article 123 of the [EU] treaty,” he says in the especially cold voice he adopts to deal with this query. The Government no doubt is hoping that his second sentence might mean something — “But other than that, there is plenty of goodwill”.

Michael Noonan has said discussions are now at the crunch point. He has been told that a 15-year government bond in exchange for the promissory notes is not acceptable.

At the same time, the ECB said buying short-term sovereign bonds of up to three years on the secondary market — and so not directly from governments — would not breach the no monetary financing rule.

But they refused to restructure the bank’s holdings of Greek bonds because it would break the rule. Ireland is trying to discover the way between these two and how it could apply to its promissory notes.

There are four meetings of the ECB governing council between now and the end of March — two followed by press conferences and two without, and the usual weekly meetings of the Executive Board.

ECB sources hint that any deal will be less ambitious than the Government would like, and in fact economists are now saying it may do little to make the debt more affordable in the longer term. But if this is more about politics than economics, then a week is a long time in politics.

The Government’s willingness to accept this possibly more expensive in the long run deal may confirm to those in Brussels and Frankfurt that the tantrums were really about TDs and ministers satisfying the voting public.