News Analysis

Sunday 31 August 2014

Jody Corcoran: Kenny's moment of truth is nigh

The Taoiseach must force a final deal on the debt crisis, as public patience has run out

Jody Corcoran

Published 02/12/2012 | 05:00

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WHAT does Greece have that Ireland does not have, the Taoiseach was asked in the Dail last Tuesday – to which various suggestions emerged from the backbenches, not least this from the chairman of the Labour Party: "Sunshine."

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The seemingly flippant remark may have been more apt than Colm Keaveney had intended to explain why people here have, generally, remained stoic in the face of five years of austerity.



But after the Coalition has been 21 months in office, the public's patience has almost run out, a point likely to be reinforced after the Budget this week, which will see a further €3.5bn in cuts, bringing to almost €30bn the amount taken from the economy since 2008.



It is not sustainable.



Next year, a further €3bn will be taken and, the year after, another €2bn, probably through incremental increases to a Trojan horse property tax, which, as proposed, is likely to wreak immediate havoc on shoestring household budgets.



It is little wonder that today's Sunday Independent/Millward Brown opinion poll has found that nearly half (48 per cent) believe there is four to five more years of hardship ahead – the lost decade.



In Greece, they take to the streets, petrol bombs ablaze; in Ireland they take to Twitter, or the pubs, or the back of taxis, to register protest at this relentless turning of the screw.



Eurozone ministers last week agreed to cut Greece's debts by a further €40bn as well as to release €44bn in bailout money and aid; a few weeks earlier, they had also agreed to give Athens two more years to cut overspending.



That decision came as Greece's parliament approved spending cuts of €9.4bn next year – a budget that sparked those mass protests in the streets.



While the Mediterranean climate may facilitate such protests, the truth is also that, to use the cliche, Ireland is not Greece: yes, we are a basketcase, thanks to unsustainable levels of debt, but the Greeks have long since gone to hell in a handbasket.



The risk status of both countries remains high, as the charts here illustrate: the Government debt to GDP ratio in Greece is 166 per cent, in Ireland it is 109 per cent.



Yet the differences were illustrated by Enda Kenny last week in a debate during which he also seemed to prepare the ground for yet more failure in Ireland's tortuous negotiations to secure a sustainable deal on debt.



Kenny told the Dail:



• In Greece, the tax-free threshold has been lowered from €12,000 to €5,000; in Ireland, a married couple with one earner only enters the income tax net at €25,750 and a single person at €16,500.



• In Greece, the number of public sector job cuts will be 150,000 by 2015; public service reductions here were done on a voluntary basis.



• In Greece, monthly pensions above €1,000 will be cut by 20 per cent and the minimum wage is being cut by 20 per cent from €751 to €600 per month.



• In Greece, the Government is obliged to raise €11bn through privatisation by 2016, which will solely be used to pay down debt.



In Ireland, meanwhile, ratings agency Fitch has just raised the country a notch; Bank of Ireland raised over €1bn on the markets without guarantee; the ESB raised €500m; Bord Gais raised €500m and some of the bond issuances were oversubscribed 12 times; and the sale of the communications spectrum has also raised over €800m from three major telecommunications companies.



That said, the tone and content of the Taoiseach's remarks are a long way from his approach when first he stormed a summit meeting in Europe, in March 2011, exuberant from success in the election that month.



Swept along by the bogus rhetoric of his Coalition partners, their epitaph, in fact – "Labour's way, not Frankfurt's way" – Kenny singlehandedly demanded a revised bailout deal for Ireland.



He was sent away with a flea in his ear by Germany and France, who, according to Channel 4's economics correspondent, declared the Taoiseach to be "very cocky".



Since then, the Government has substituted cockiness with what seems to many to be servility, although the Coalition would argue that the approach is more diplomatic than submissive.



The denouement of this softly, softly approach appeared to reap a dividend of sorts in June when Europe switched a policy position to break the "vicious circle" between bank and sovereign debt.



The full text of that summit statement also declared: "The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme."



According to Kenny, this represented a "seismic shift" in policy which should open the way to "re-engineer the debt burden" on Ireland; it was, according to Eamon Gilmore, a "game-changer".



The culmination of 15 months of diplomacy threatened to explode in the face of the Government in October, however, when German Chancellor Angela Merkel said that there would be no retrospective direct recapitalisation of banks by the establishment of a permanent bailout fund.



Cue mass hysteria back home.



Kenny was swift to act, but the damage was done: concern has reached a new level from which it will not ease – is Kenny being led up the garden path?



A phone call to the Chancellor, followed by a meeting, and another with the new president of France, may have put a lid of the simmering resentment for a while. But Kenny's moment of truth has finally arrived.



The flurry of diplomatic activity has elucidated no more than this: Ireland is a "special" case, which could mean anything.



As the deal secured by Greece has shown, there are signs that Germany can be softened.



Which may be down to the influence of President Francois Hollande, on whom Kenny has pinned his hopes; although the new European Central Bank president, Mario Draghi, is also a significant factor in slowly shifting the sands in Europe.



The so-called seismic shift in June was expected to produce a dividend in October, but Kenny told the Dail last week: "I recall saying that I did not think that was possible and, clearly, that did not become a reality."



Forbearance once again.



If anything, it would seem the real policy shift in Europe is to treat each basketcase as separately "special".



The intractable crisis in Greece has taken precedence.



Which has left the Finance Minister Michael Noonan with little to do these past few months but mooch around the periphery of Europe and put the finishing touches to another austerity Budget.



By rotation, Ireland will start a six-month stint as President of the Council of the European Union on January 1, which presents an unparalleled opportunity to finally deal with Ireland's debt issue.



As luck would have it, the Irish Presidency coincides with a looming landmark, the payment in March of more than €3bn under the Anglo Irish Bank promissory note arrangement.



The advocates of 'Burn the Bond payment holders' have drawn another line in the sand on this one and, it seemed, until last week, that the Government agreed.



Kenny's positioning in the Dail last week did not inspire confidence.



The intention, he said, was to have the matter dealt with by March in order that we did not have to pay €3bn as a consequence of the promissory note.



"I do not wish to give any more details of the discussions that are taking place. They have been ongoing now for some time. That is our target date and I hope we can achieve it."



Kenny may "hope" but the patience of the public is at an end.



The Government has never put a figure on what would be a "sustainable" level of debt, perhaps because, as the Fianna Fail leader Micheal Martin has said, to do so will "undermine" the Government's intention to "claim victory" no matter what emerges.



As the economist Colm McCarthy has said: "There's no point getting debt relief of €5bn-€10bn."



That said, few seem confident to place a precise figure on it.



In the Dail last week, Kenny would only go so far as to say, for the first time, that Ireland wants to "replace an overdraft with a long-term, low-interest mortgage".



According to Micheal Martin, this marks a further reduction in Ireland's negotiating position. It is not the terms of the debt that were unfair, Martin said, but that Ireland had to incur all of it in the first place.



In his diplomatic flurry to dampen the hysteria caused by Angela Merkel's intervention in October, Kenny admitted in Paris that a significant writedown of debt to bondholders would have occurred by now but for the intervention of the ECB and others.



For his domestic audience, however, Kenny has sought to consistently undermine what is, in effect, his strongest argument, that this debt burden was foisted upon us and, for political advantage, he instead chooses to lay the blame with the last Government.



In doing so, however, he has only heightened the public's expectations and, in effect, has given a hostage to fortune.



In her sop to the Government last month, during which she declared Ireland to be a "special" case, Angela Merkel clearly indicated that a final resolution to this issue would not occur until the end of 2013.



The next federal elections in Germany will take place some time between September 1 and October 27 next year, by which time, it may be too late for the economy here, burning oil for more than a year now.



That said, there is no guarantee a sustainable deal can be secured after the German elections.



The arrangement secured by Greece last week has bought a sizeable chunk of time, but the balance of probabilities must still be that Greece may be forced to withdraw from the EU next year, a truly seismic event.



Against that, the package announced for Greece counters years of assurances from German leaders that efforts to bail out Greece would not weigh on German finances.



It will. In fact, a proper attempt to resolve the crisis in Greece – a 50 per cent debt haircut – would cost Germany more than €17bn.



"When there are legal barriers to a debt cut, then there can't be such a cut after general elections either," Wolfgang Bosbach, a senior CDU parliamentarian said last week. "The legal landscape won't change with the election."



Which is why the Government must force a final resolution of Ireland's debt crisis during the Presidency; anything less, and Enda Kenny might as well pack his bags and head off to the sunshine himself.



Sunday Independent

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