Bailout exit will not bring fiscal sovereignty

Kevin Anthony reads a text on Ireland's recent economic woes in Temple Bar, Dublin

Ray Kinsella - Bailout exit will not bring fiscal sovereignty

Our formal exit from the bailout marks an important milestone for Ireland and the wider eurozone.

It has already been portrayed as an endorsement of the economics of austerity. It is nothing of the sort.

Neither the troika nor the Government have addressed in any detail the question — what has been the cost of the policies of austerity to the people and to the capacity of the country to renew its economy?

It does, however, mark some kind of distancing of Ireland from the calamitous events leading up to the bailout, including the onerous and oppressive terms imposed on the Irish economy — not least as a sacrifice for saving the institutions of larger countries.

Much is being made of the fact that the exit is a “clean break”. In fact, the troika will continue its surveillance, and its monitoring and enforcement of our fiscal policy.

Exit will not mean a recovery of Ireland’s fiscal sovereignty. Firstly, the template of further cutbacks into 2014/15 is already set in stone and this will be enforced by the troika. Secondly, the scope for flexibility has been (almost) irredeemably lost as a result of the fiscal compact.

The formal exit means a shift in exchequer funding away from our partners to the markets. The credibility of the NTMA has been perhaps the single institutional success in the whole management of the crisis. NTMA hold cash reserves of some €20bn and this provides a significant buffer. What the markets will be looking for is the credibility of future economic policy. Here, the challenges remain the same:

* The burden of sovereign/bank debt of some €200bn, which is well north of 120% of GDP.

* The recapitalisation issue. The German finance minister said, on Ireland’s recent budget day, that there would be no retrospective recapitalisation of Ireland’s bank debt, through the ESM (Europe’s rescue fund) or otherwise. And chancellor Angela Merkel’s offer of putting a good word in with a German development bank is a, well, it’s a poor substitute.

This means, that Ireland’s debt burden is near-unsustainable. The cut in interest rates and the extension of some of the debt will not change this. The reason is slow growth. Ireland’s economy under the policies of austerity has fallen well short of the growth projections on which the austerity budgets were based.

In or out of the bailout, Ireland is mired in what Nobel prize-winning economist and former senior IMF staff member Joseph Stiglitz in his recent book called “a lost decade”. With Germany opposed to recapitalisation of our banking system and minimal growth, Ireland’s debt burden will continue to absorb a significant proportion of exchequer receipts into the foreseeable future. The cost of servicing our debt will suffocate growth. This has to change.

The single most important priority now is to insist on a debt write-off, not alone because — as Citibank’s chief economist William Buitar recently argued — we are entitled to it for prospectively saving the euro. But also because it would be a sensible incentive for Germany and the troika to hold out to other countries.

Finally, it would be sensible for Ireland to seek a standby agreement with the IMF alone. Such agreements are normal and it would mark a real normalisation of Ireland’s status.

By contrast, continuing to be dependent on our European partners and institutions would reflect the chronic dependency into which the bailout led us in to in the first place.

* Ray Kinsella is a professor of banking and financial services, and healthcare at UCD

Brian Lucey - Government jumps without a parachute

We have a poor historical record of managing the economy. Mass emigration is back, removing the potential pressure value that in most countries causes evolution of the political system

The Government’s decision to exit the bailout “clean” is a curate’s egg.

The good element is that this signals that the worst of the effects of the noughties credit binge on the macrofinances of the State are truly behind us; that the catastrophic bank guarantee has washed through; and that we are capable of contemplating standing on our own two feet again.

However, there are downsides.

The context of this is that we are now going to have to go to the markets for money. And we need a lot of money. In 2014-17 we face up to €30bn of government bonds to be repaid. These will be rolled over, which means we need to borrow that much before we borrow a cent more for any deficits. Exchequer borrowing requirements of upwards of €20bn are also required. Thus we will have to borrow about €12.5bn per annum on average just to stand still. And do it on our own.

So what are the downsides?

First, we close off options when we do this. Options have value. A major part of the value of an option comes from not exercising it. Determining that we will exit clean removes any chance that we have of a transition. Should the world economic situation worsen and drag up our borrowing costs, should a major bailout of Irish banks be required, should any unforeseen event come to pass that requires us to seek assistance, this will be a new game.

Second, there is the cost of debt. We pay an approximate interest rate of 3% to 3.5% on our existing debt. That is just about the level at which we might now be able to borrow, assuming we can do so. A very large part of the driving down of the interest rates on peripheral country debt is down to the ECB stance. How long will rates stay low? If and when rates rise then so too will the costs. Thus we are likely to see these costs of borrowing of the required €50bn rising above the cost of repayment at present.

Third, we face conditionality in any case. We are signed up to a variety of EU agreements that require us to be overseen. We would be as well to get as much as we can for it, including some cheap cash.

Fourth, we have a poor historical record of managing the economy, over decades. Mass emigration is back, removing potential pressure value that in most countries causes revolution and evolution of the political system. With no external stick to beat domestic elites, there is a significant danger they will revert to the bad old ways.

Fifth, much good work in reforming closed shops and technocratic regulatory improvements has been undertaken over the last few years, but all at the behest of the troika. With no external oversight this will cease.

Sixth, the banks remain, rotting away and poisoning the national flow of funds. Irish SMEs in particular remain under strain.

The Government has decided to jump without a parachute. Let’s hope for all our sakes that there is a nice soft landing... Now where have we heard that before?

* Brian Lucey is professor of finance at Trinity College Dublin

John Walsh - Bank lossesmay cause uncertainty in markets

In its 12th and last review of the Irish economy, the IMF had one line in its report that was loaded with political and economic significance for this country. The agency noted that if EU leaders had agreed for funds from the bloc’s rescue fund, the European Stability Mechanism, to be used to recapitalise struggling banks, then it would have been the most effective way of breaking the sovereign-bank “doom loop”.

Even though the Government’s guarantee of the banking system forced the country into the EU/IMF programme in Nov 2010, the economy exits the bailout with uncertainty over the level of losses still lurking in the banking system. This is the biggest challenge facing the Government and the reason why there probably should be some sort of precautionary credit line.

KBC Bank released its results for Ireland yesterday. It announced that it was increasing its bad debt provisions by €671m following a review of its entire loan book in anticipation of the EU-wide stress tests next year.

Michael Noonan said the advice he has received from the Central Bank is that Irish banks will not need any further capital as a result of the stress tests. The three domestic banks are undergoing a balance sheet assessment, which is set to be completed by the end of this month.

However, if there is a read through for the Irish banks stemming from KBC’s increased provisions based on the stress test criteria, then they might need further capital. If there is one thing markets do not like, it is uncertainty. And given that the troika is no longer in town what the markets think matters a great deal.

It isn’t just the health of the banks that are creating uncertainty, global growth remains stuttering and fragile. Ireland is an open economy and without growth the debt burden could become a huge problem.

Without a credit line, there is a possibility that Ireland’s bond yields will start nudging up to uncomfortable levels if the economy hits a bout of turbulence.

It seems that the Government’s reluctance to negotiate a credit line was shaped by less than welcoming overtures from Berlin. It had been speculated that if Ireland had formally requested a credit line, then concessions, including the corporate tax rate, might have been sought.

If this is the case, then it is a very unsatisfactory outcome. The other big variable is how will the Government’s fiscal discipline hold without the troika breathing down its neck? If there is a possibility that the Government could fall before serving its full term, then that has the potential to really unsettle the markets. It is not clear whether the Irish people are ready for Sinn Féin in government, but it can be said with a good degree of certainty that investors would be extremely concerned about such an outcome.

* John Walsh is Irish Examiner business correspondent

Micheál Martin - It would have been safer to seek precautionary credit line

I welcome the conclusion of the EU/IMF programme itself but I strongly believe, as did Taoiseach Enda Kenny until recently, that it would have been sensible and safer for Ireland to seek a precautionary credit line, in these times of global economic uncertainty.

As recently as Sept 6, the Taoiseach and Finance Minister Michael Noonan stated that Ireland would benefit from having what they termed a €10bn overdraft facility from Europe.

They said then that it was prudent and that it would reduce the cost of borrowing for Ireland because it would give investors the confidence to lend at lower rates.

What changed since then?

How did a need for €10bn two months ago suddenly become irrelevant?

The refusal to provide even the most basic response to this fundamental point should concern everyone.

Both the IMF and the ECB have stated that conditional funding would help Ireland. The European Commission has come down firmly on both sides of the argument. On balance, they do not want to provide a credit facility because it would be complicated and it would reduce the amount of money available for bank recapitalisation.

What the Taoiseach and Tánaiste have also not done is to explain what has happened to the retrospective bank recapitalisation which was hailed by the Government last year as offering a bonanza for Ireland.
Last June, ministers Noonan and Howlin were giddy in their outlining of how they had just achieved a breakthrough on financing banks. The agreement of the European Council to potentially directly recapitalise banks was, they claimed, a great victory for Ireland (even though we hadn’t put it on the agenda) worth potentially up to €60bn.

So far it has been worth exactly nothing to Ireland.

As one insightful commentator put it, Minister Noonan has established himself as a master in misdirection.

What the Cabinet agreed yesterday is not to seek any new programme. It has not “negotiated” any exit or any backstop arrangement.

Given that both Fine Gael and Labour campaigned in 2011 on the basis of opposing the support programme and promising to renegotiate it, the number of ministers praising its implementation is surprising.

The reality is that for two-and-a-half years, ministers have been building a record of stage-managing announcements but withholding basic background information.

No one can say what the significance of yesterday’s announcement is because no information whatsoever has been supplied about the background to the decision.

All we know for sure is that as recently as two months ago, the Government said we needed a €10bn backstop to keep borrowing costs down.

At a minimum, they should publish the economic papers behind this decision. Only then will people be able to decide how significant it is.

* Micheál Martin TD is leader of Fianna Fáil

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