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The spin on a possible troika deal obscured some potentially very bad news
Last Tuesday, the news from Europe was meant to make us smile. A possible deal from the troika. They might give us longer to pay back some of the money we borrowed. Finance Minister Michael Noonan said it could save us billions. All good so far.
What got less attention was something else he said. Something far more important. On the recapitalisation of banks by the European Stability Mechanism (ESM), we would still bear some of the risk. The chance of offloading, to the ESM, some of the €64bn we've poured into the banks was more remote.
Tuesday was a success, though not for us. For Angela Merkel, who got her way once again. And for the Government press office, which successfully tucked some potentially very bad news behind the fig leaf of the troika deal.
Pointing this out, as I did on the day, was not appreciated on Kildare Street. The Government is keen on "positive sentiment" from the public. If we were all just a bit happier, goes the logic, we'd spend more. That would lift the economy, create jobs and make it easier to pay our debts. So the spin, really, is for our own good.
Trouble is, it's still spin. Let's start with the troika deal. Here's how it would work: we're borrowing from them at an interest rate of 3.3 per cent to 3.5 per cent . And we're due to start paying them back in 2015, when over €6bn comes due. We don't have this €6bn, so we'll have to borrow it. In extending the repayment schedule, the troika would essentially be letting us borrow it from them, still at the 3.3 to 3.5 per cent. Otherwise, we'll have to get it from the global money markets, who could well charge us more.
In assessing the value of this deal, we should consider a few things.
First, the potential savings are pretty small. It might be worth €1bn over the next 10 years. That's an average of €100m a year, which wouldn't even cover the increases awarded just this year in public sector pay rises. Of course, it might be worth less. The National Treasury Management Agency (NTMA) has just borrowed €2.5bn from the markets at 3.3 per cent. If it continues to be able to do this, there would be no savings from this deal. Though there would be disadvantages, as the troika might insist on all sorts of conditions that private lenders don't.
Second, the European Central Bank currently supplies long-term money to European banks at 0.75 per cent. That's four-and-a-half times less than the troika rate.
Third, last Thursday we passed a Bill in the Dail which gives Ireland's support to lowering Greece's borrowing rate (on some of its loans) to 0.5 per cent. So our troika deal is to continue to borrow at an interest rate seven times higher than the new rate for Greece.
How has this been allowed to happen? Greece, we are told, is a special case. And it is. The country's debt is 190 per cent of GDP, which means it is going to default, and in a big way. Greece needs our support.
But then we're a special case too. We're the country that stumped up all the money to stabilise the eurozone banking system. Recent analysis by Eurostat shows that Ireland and Germany have each provided over 40 per cent of the total European contribution to the economic crisis. As it happens, the analysis missed a chunk of Ireland's contribution, which brings our share to 50 per cent. But even going with its figures means that, per person, we have contributed 18 times more than the next biggest contributor, Germany. It is because of this, the €64bn we committed to the banks, that we had to borrow from the troika in the first place.
But having done this, having met the terms of the troika loan, and having worked hard to close the budget deficit, the 'deal' on offer is to continue to borrow at seven times what Greece will now borrow at. This really doesn't feel like much of a win.
So what of Noonan's other announcement? The one about us bearing the risk on ESM bank recapitalisation. Rem-ember the 4am announcement last June? The one that said, "it is imperative to break the vicious circle between banks and sovereigns". The one that promised to "examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme". The one Noonan heralded as a "seismic shift".
It opened up a great opportunity for Ireland. If the ESM could recapitalise Spain's banks in the greater interests of Europe, then surely it could retrospectively recapitalise Ireland's banks too. Ideally, the ESM would take on some of the €64bn we poured into the banks since 2008. If, let's say, €20bn could be offloaded here, and another €20bn via a writedown on the promissory notes, then we could reduce our national debt by €40bn. This would reduce our debt to GDP ratio from 120 per cent to 95 per cent, effectively putting us back in the game – economic recovery, job creation and off we go.
However, just hours after last June's announcement, Germany's finance minister, Wolfgang Schauble, poured cold water all over it. He stated that sovereigns would still be on the hook for their banks in any ESM recapitalisation. A few months later he was at it again, this time flanked by his Finnish and Dutch counterparts. This was heavily criticised, including by the President of the European Parliament, Martin Schulz, when he addressed the Dail a few months ago. How, he argued, could Europe be taken seriously if agreements of the combined heads of state meant nothing? How indeed. Yet last Tuesday morning Noonan confirmed that Ireland would have to carry some of the burden in any recapitalisation.
How much of the burden is unknown, but the politics are ominous. First, the statement is in direct contradiction of June's announcement, regarding breaking the vicious circle between banks and sovereigns. Second, the new head of the Eurogroup, the group of 17 eurozone finance ministers, is Dutch, and in September the previous finance minister made Holland's position quite clear on the ESM taking on 'legacy debts'. Third, the decision on getting a longer time to repay the troika will be made in March – right around the deadline for any deal on the promissory notes. So an excellent time to give us the 'good' news, if the outcome of the promissory note negotiations is not so good.
If we don't secure a sizeable reduction in the banking debt, our economy will underperform for years to come. That means double-digit unemployment for another decade and underinvestment in critical sectors like education. And we are in danger of setting our expectations so low that no sizeable deal will transpire.
Getting more time to pay the troika back at interest rates seven times higher than it lends to Greece is not a win. Getting longer to pay €31bn in promissory notes to a dead Anglo is not a win. Paying 18 times more per person than Germany to prop up the eurozone banking system is not a win. But securing a deal which reduces our national debt by €40bn to €50bn is. It is a Herculean task. Yet others have managed it. Now, so must we.
Stephen Donnelly is the independent TD for Wicklow and East Carlow.
