Monday 16 October 2017

It will be tricky for Noonan to play hardball in Europe over bank debt deal

Minister for Finance Michael Noonan
Minister for Finance Michael Noonan
Richard Curran

Richard Curran

“Play hardball with Europe” is a phrase that has been thrown around for about five years now.

Usually it has come from politicians from smaller parties, colourful independent TDs, some respected economic commentators and others among the commentariat.

A few years ago it meant Ireland should not pay the bank bondholders but instead should threaten to pull the plug on the euro currency if we were not allowed default on our debt.

At times it has meant playing tough with the European Commission or ECB to secure an actual write down of our sovereign debt, or securing a better deal on the money we owe the troika.

It has been a problematic argument all along. It has been a high risk strategy, that could have blown up in our faces, because we weren’t holding any of the cards – other than deliberately trying to bring down the single currency!

So it is all the more interesting to hear the comments of Willem Buiter, chief economist with Citi, when he says we should play hard ball with Europe on recovering the costs of our bank bailout.

He believes Ireland could threaten to veto the European banking union deal unless we get a chunk of that money back.

I fully agree with Willem Buiter that Ireland “took one for the team” on this issue. But playing this kind of game could be very risky indeed. Firstly, vetoing the banking union would affect the single currency, the perception of its stability and would probably also adversely affect our bond yields on the money we have to borrow from the markets.

Secondly, you can’t threaten to do something unless you are fully prepared to see it through. What if Europe called our bluff and said OK, we won’t proceed with the banking union as constructed.

There is no doubt that Ireland is holding more cards now that it did five years ago. But are we still holding enough playable cards? I am not so sure.

Perhaps the smartest thing Buiter has said is that if Ireland wants to get a better deal, having “right” on its side is not enough. This comes back to the famous remark from 2010 by UCD economist Morgan Kelly, that Ireland would have to rely on the “kindness of strangers.”

Buiter advises that Ireland must make its case on the basis that there is something in it for the others – namely a European banking union or some similar gain. He understands very well the dynamic of European politics that it is about mutual gain rather than just banging on about what is fair or right.

Nevertheless, threatening to blow up the European banking union could be very risky. Ireland got a deal on the Anglo Irish Bank promissory notes from the ECB. It has also got a minor interest rate cut on the troika loans and the repayment date for some of them has been pushed back.

Yet, these minor concessions may not be enough to help the country get back on its feet, especially if there are wider Eurozone problems a few years down the road.

Write downs of Irish sovereign debt would only take place in the context of wider write downs of the sovereign debt of other bigger countries if the single currency project was in real peril again.

Hopefully it won’t come to that.

In the meantime, Michael Noonan is not likely to put guns to people’s heads any time soon.

Online Editors

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