Business Irish

Monday 26 June 2017

Michael Noonan: In the eye of the storm ...

After a lacklustre start to this term in office, Noonan has challenged the authority of the ECB with talk of 'haircuts'

AFTER just over three months as Finance Minister, Michael Noonan is the man at the eye of the storm. As Greece hurtles towards a seemingly inevitable default and his cabinet colleagues long-finger politically-difficult decisions, the political veteran is under pressure as never before.

Just over a year ago Mr Noonan's 30-year Dail career seemed to be gently winding down. Something of an outcast from his own party since Fine Gael's disastrous 2002 general election performance -- when it was reduced to just 31 seats -- it appeared Mr Noonan was yesterday's man.

That was before Richard Bruton launched his ill-fated putsch against Enda Kenny's leadership. With most of his shadow cabinet having joined the revolt, Mr Kenny needed some heavyweights in his camp. Enter Michael Noonan. Yesterday's man was suddenly transformed into Mr Kenny's secret weapon. The rebels were defeated and Mr Noonan, after a decade on the back benches, staged a triumphant return to his party's front bench.

It was Mr Noonan rather than Mr Bruton who was Fine Gael finance spokesperson when the previous Government was forced to apply for an EU/IMF bailout last November. His assured performance in the run-up to and in the aftermath of the bailout ensured he would become finance minister when Fine Gael returned to office after a 14-year hiatus.

Disappointment

Having been one of the opposition's best performers, Mr Noonan has been something of a disappointment in government. Not alone was the old Department of Finance sundered to create a new Department of Public Expenditure and Reform to accommodate Labour's Brendan Howlin, Mr Noonan has been lacking the aggression and elan he showed in opposition since taking office last March.

It was almost as if, having finally made it back into government, he was overwhelmed by the scale of the problems confronting him. Gone was the vitality he displayed last November. Suddenly, Mr Noonan was looking every one of his 68 years.

And, make no mistake about it, the problems facing Mr Noonan are enormous, perhaps even insurmountable. His efforts to lower the penal 5.8pc interest rate Ireland is being charged on the EU's €45bn portion of the bailout have so far been entirely unsuccessful.

Until this week, his pre-election pledge to "burn" the Irish bank bondholders also appeared to have fallen victim to the ECB's implacable opposition to any write-downs.

His only apparent success has been last month's "jobs initiative". While Mr Noonan's decision to fund the jobs initiative by a €1.9bn raid on private pension funds was highly controversial, his move to cut the VAT rate charged on labour-intensive services such as hospitality from 13.5pc to 9pc was well-received.

Then, when everyone was wondering if he was past it, the old Noonan suddenly re-appeared. This week, in a move which he must surely have known would cause apoplexy at the ECB's Frankfurt headquarters, Mr Noonan proposed that "haircuts" be imposed on the senior bondholders of Anglo Irish and Irish Nationwide.

While Mr Noonan was careful to stress the "haircuts" would be confined to these two "zombie" banks and the senior bondholders of both AIB and Bank of Ireland would be repaid every "red cent" they were owed, there was little doubt but that he was quite deliberately challenging the ECB's authority.

Default

It's not difficult to see why. With a Greek default now seemingly inevitable, ECB boss Jean-Claude Trichet, who retires in October, is determined to prevent any write-downs of either sovereign or senior bank debt within the eurozone. The markets have made their determination and they no longer believe Mr Trichet and his colleagues when they say there will be no write-downs.

With Germany, the EU and the eurozone's largest economy now in open revolt against the ECB's no-write-down policy, the only question remaining is the extent of any write-downs and what form will they take -- a so-called "soft" default where Greece, and perhaps some other eurozone countries buy back their debt at a heavy discount, or a disorderly default where some or all of the PIGS (Portugal, Ireland, Greece and Spain) simply announce they can't repay their debts in full and unilaterally impose "haircuts" on their creditors.

Frankfurt's difficulty may well prove to be Ireland's opportunity. With the rapidly worsening Greek crisis making a nonsense of the ECB's no-write-down policy, the issue of burning bondholders is suddenly back on the agenda.

Unfortunately for Mr Noonan, even if the ECB could be persuaded to agree to burn the unguaranteed senior bondholders of all of the Irish banks, it would make only a relatively minor contribution to solving Ireland's fiscal crisis. With €70bn of senior bonds having already been repaid in full, there are now only €16.4bn of unguaranteed senior bonds outstanding. Even imposing a 50pc across-the-board haircut on the remaining bonds would generate savings of just over €8bn.

So what is Mr Noonan's game plan? Why is he apparently deliberately setting out to antagonise the ECB for such relatively small savings? Could it possibly be that he expects to regain at least some room for manoeuvre in the wake of a Greek default, which would of course have a devastating impact on the ECB's already battered credibility? We also need to put our own house in order and the events of the past week don't provide much room for comfort on that score.

During the general election campaign Fine Gael promised to reverse the previous Government's decision to cut the minimum wage by €1 an hour to €7.65. However, much to the surprise of most observers, Mr Noonan actually delivered on the promise in last month's "jobs initiative" with the legislation finally being passed by the Oireachtas this week.

Further evidence of the apparent economic illiteracy of Mr Noonan's fellow ministers was provided by this week's press conference held by Mr Kenny and Eamon Gilmore to "celebrate" the Government's first 100 days.

While both Fine Gael and Labour had promised not to increase income-tax rates or cut social welfare payments in their election manifestos, pledges that were repeated in the Programme for Government, Mr Noonan appeared to back away from the promise not to raise taxes when he told the Dail on June 9 that tax increases could not be ruled out.

Then, on Thursday, Mr Kenny and Mr Gilmore announced there would be no income-tax increases or social welfare cuts in next December's Budget. With the Government committed under the terms of last November's EU/IMF bailout to finding a combination of €3.6bn of spending cuts and tax increases in next December's Budget, Mr Noonan's ability to narrow the budget deficit in 2012 had been drastically reduced.

Did Mr Noonan agree with Thursday's announcement or was he blind-sided by the Taoiseach and Tanaiste? Not to put too fine a point on it, did Mr Kenny and Mr Gilmore pull the rug from under him? Regardless of the answer, what was already a very difficult job has now become even more difficult.

Irish Independent

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