Monday 27 March 2017

Forgive us our debts and we'll pass Treaty

Stark economic data dictates new Noonan line on crisis & Croke Park

Finance Minister, Michael Noonan

Jody Corcoran, John Drennan and JACK KISSANE

Ireland runs the risk of being unable to meet the terms of the EU/ECB/IMF bailout deal if, as expected, continued austerity measures drive the country back into recession next year.

A sharp contraction in economic activity, evident in figures published last week, has prompted the Government to step up efforts to agree a form of debt relief at European level.

There is a growing awareness at the heart of Government that, without a deal on debt relief, a likely treaty referendum on tighter fiscal rules for the eurozone will not be passed here in March.

The prospect that Ireland might fail to meet deficit reduction targets, laid down by the 'troika', has also given rise to informed speculation that the Government will be forced to renegotiate the Croke Park Agreement next year.

The agreement is unofficially back on the table after economic data published last week showed that Gross Domestic Product and Gross National Product had contracted by 1.9 per cent and 2.2 per cent respectively in the third quarter this year.

The figures show that consumer spending, State expenditure and investment here have each taken a significant hit against a background of turmoil in Europe.

Further economic data also published last week showed that, in the same period, July-September, the biggest fall in employment numbers was recorded in two years.

Yesterday, government sources said that a "resolution of the issues" in Europe was "the main focus at the moment".

In the absence of a deal on debt relief, however -- and with the domestic economy on its knees -- government sources also acknowledged that a "compelling case" existed to reduce public sector pay if troika deficit reduction targets are to be met.

Last week, a further three Fine Gael TDs told the Sunday Independent that the Croke Park Agreement, which protects public sector pay levels in return for agreed reforms, needed to be revisited.

In relation to the reform agenda, two government ministers also referred to "inertia" and a "lack of ambition" among higher-grade public sector employees which, they said, represented a serious threat to the survival of the agreement.

On the issue of debt relief, however, the Government has been strongly urged to change its negotiating strategy "with our European partners".

In the Sunday Independent today, economist Colm McCarthy says the strategy "never looked coherent" because it consists of two "conflicting components": regular expressions of confidence that the country's public debt would be repaid, accompanied by requests for debt relief.

The Minister for Finance, Michael Noonan, last week signalled an apparent shift in the Government's approach to the most urgent issue of debt relief.

While he remained unspecific, Mr Noonan said there were "other ways" to reduce Ireland's debt burden other than to restructure promissory notes.

Promissory notes, essentially IOUs to bondholders of the former Anglo Irish Bank and Irish Nationwide, amount to a massive €31bn, while interest on the notes totals €17bn.

Therefore, Ireland is to make annual payments to these bondholders of €3.1bn up to 2024; the payments continue at smaller, but still significant, levels until 2031.

In effect, interest payments on Anglo and Irish Nationwide promissory notes almost equate to tax and cut savings that the Government is forced to make to meet troika targets.

The target is for Ireland to reduce its budget deficit to 3 per cent of GDP by 2015. It is unlikely that the target will be met if the economy continues to contract at the current rate.

Government sources say they are confident the third-quarter deterioration will not "take hold".

However, there is little doubt that its export-led economic growth strategy has been thrown off course by the onset of recession in Europe.

Last Friday, the ratings agency, Fitch, expressed pessimism about the capacity of the eurozone to address the crisis: "Following the EU summit on 9-10 December, Fitch has concluded that a 'comprehensive solution' to the eurozone crisis is technically and politically beyond reach."

In Dublin last week, Mr Noonan said: "We are not particularly pinning our case on the promissory notes."

But he added. "The position is a methodology to reduce the burden of debt in Ireland and there are a number of ways of doing it -- the most striking example is the promissory note but there are other means as well."

The Government hopes to reduce Ireland's debt burden under an EU deal to recapitalise the stress-tested banks of Europe.

A government source said: "Ireland has already recapitalised its banks. So we expect to recoup under the new proposal to recapitalise Europe's banks with EU funds."

It is against this background that the issue of the Croke Park Agreement has come back into focus.

Last week, three Fine Gael TDs told the Sunday Independent they had come to the conclusion that the agreement needed to be revisited.

John Paul Phelan (Carlow Kilkenny) said: "We have inherited the Croke Park Agreement from the previous government. What is now needed is something that protects those public sector workers on low incomes and still can improve efficiencies at a higher level."

Brian Walsh (Galway West) said: "It needs to be looked at in the new year, especially if we don't get the projected level of growth."

Ray Butler (Meath West): "I regularly deal with borderline services in Meath West and many are being cut because of Croke Park Agreement pay rates. I have been in business and self-employed all my life and I believe in current circumstances everything should be up for renegotiation."

Sunday Independent

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