Tuesday 24 October 2017

If Europe allows reliefs, it will still want us to stick to the game plan

IT'S the question they ask every Lottery winner: what will you do with the money? It's a question that will be asked of the Irish Government if it does get the money it wants on the Anglo promissory notes.

The lottery result has yet to be declared. Central Bank governor Patrick Honohan warned in his evidence to the Oireachtas finance committee last week that a deal "is not done and dusted".

Yet he made it very clear that a draft deal does exist and is under intense discussion. The terms, he said, would be very advantageous to Ireland and involve a longer repayment period and lower interest rates.

In its projections, the Department of Finance assumed an average interest rate of 4.7pc on the promissory notes used to save Anglo from formal bankruptcy.

It is possible that the costs will be less than that. It is equally possible that interest rates in the market will rise from their present very low levels between now and 2025, when the notes cease to be a major burden on the annual Budget.

The promissory notes are certainly more pressing than the overall debt repayments, which were the subject of the deal agreed this week. The biggest burden comes now, when the effort to close the day-to-day deficit is at its most intense.

There was a two-year holiday, in the hope that growth would be well under way by 2012. This year will see the biggest annual payment of €1.8bn– plus €1.2bn held over from last year – but the anticipated growth has not arrived.

There are other, trying complexities for any commentator who likes to keep things simple. The EU statisticians insisted that all the Anglo borrowings be recorded in one year.

As a result, while the actual borrowing is done on an annual basis, it is not recorded in the general government deficit targeted by the troika, which we all quote. Last year, the difference between the two was €2.5bn.

Everyone would feel a good deal easier if some kind of deal was reached: none more so than the Government. It has laid pretty much all its political capital on the line for this one – even hinting itself that the Coalition might break up if nothing happens.


That was a not too subtle attempt to frighten our Continental creditors, but that is not to say it isn't true. Another Budget of similar proportions is due in 2014. Without some success to report, and some clear evidence of an end in sight, the political tensions could become fractures.

That raises the intriguing question as to what they think they will do if the money comes through and – a different question – what ought they to do.

Goodbody Stockbrokers suggested there was no reason Ireland should not be given a further interest rate holiday, of the kind obtained by Greece. That would bring the deficit this year close to 6pc of GDP.

The real prize would be next year, when the removal of another €1.6bn in interest costs would bring the deficit down to 4pc and more or less guarantee a return to the official EU limits to borrowing in 2015. The debt burden, which is supposed to reach its peak this year, should remain below 120pc of GDP.

Trump card

The Government's trump card is that this could make the difference between a successful return to commercial borrowing in the markets and failure. It would seem to be in the euro- zone's interests to have one bailout country return to normal service.

To tell the truth, the official figures do not really look like a country ready to return to the markets next year. A deficit of 5pc of GDP, a bare balance between revenues and day-to-day spending, plus that debt burden would make Ireland a marginal case even without the looming issue of mortgage arrears.

It would still be marginal after a promissory note deal, but the figures at least would be noticeably closer to what would usually be regarded as solvency.

Preparations are already under way for the attempt, with talks on using the EU's financial backstop for the transition and – more significantly – the ECB's as yet untried OMT plan for holding down interest rates on short-term government borrowing. All well and good, but the stark implication is that the 'austerity' plan would remain untouched by a promissory note deal.

€3bn reduction

That requires a €3bn reduction in day-to-day spending over the next two years (the actual 'cuts' have to be even bigger) and a €4.5bn rise in revenues, helped by stronger growth.

One fears there will be a great deal of disappointment – nowhere more so than in Leinster House – if the triumph of a deal on the Anglo debt is followed by a sign saying 'Business as Usual'. The Government may well take up the trade union argument that using the interest rate holiday to ease the squeeze from fiscal correction would produce better results, but it is likely to get short shrift from the ECB or the creditor countries.

This might lead to more bad blood with Europe but before we all get excited, it is worth pointing out that the politics of any deal are tricky. The rapidly deteriorating relationship between Britain and the rest of the Europe makes them more tricky by the day.

Any reliance on the ECB for a return to the market will require agreement on budgetary plans for the future.

These may not be any different from those required by the fiscal union that Ireland has joined, but they will look alarmingly like a bailout. That would be a wrong interpretation, but it will need a bit of explaining.

This will be after hard-fought negotiations, even if successful with the ECB on the promissory notes. There will be little scope to haggle over the conditions.


More fundamentally, Ireland needs to repair the structural holes in its public finances to give it some kind of hand to play in the fundamental negotiations that will take place on the nature of the eurozone and the UK's relationships with it.

Irish policymakers should note the comments of Carsten Schneider of the German opposition party, the SDP – which is often seen as more flexible on austerity than Chancellor Merkel.

But, said Mr Schneider, speaking of Irish requests for assistance with bank debt, countries that accept community solidarity, but aren't ready to support community initiatives on things like corporate and financial taxation, cannot count on future SPD support.

It will be politically tempting to pocket any relief via smaller cuts in health and welfare or less taxation, and stick to the original plan for achieving the targets in 2015.

That would leave Ireland a supplicant until 2015. It may not be far away but, with so much happening, it also looks uncomfortably long.

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