Friday 24 November 2017

Do we really need another 'safety net' from Europe?

Noonan is being urged to clarify the terms and conditions of a €10bn credit line, writes Colm Kelpie

Colm Kelpie

Colm Kelpie

WE'RE in the final months of the current bailout and the Government has placed great emphasis on the fact that the international money markets are looking upon Ireland much more favourably these days.

But to ease the transition from bailout to full market access, Finance Minister Michael Noonan has said the State may need a precautionary credit line of about €10bn – roughly equivalent to the estimated 2014 deficit.

The plan is to never have to use it, but it will serve as a safety net and insurance policy for the markets in the case of some unforeseen international event that could drive up borrowing costs.

Whether it's called a safety net, a precautionary credit line, a so-called backstop or an overdraft, is it not simply a bailout by another name?

And do we really need it?

"From the point of view of access to credit, I don't think so. I think Ireland could get funding on the market at sustainable interest rates," says Dermot O'Leary, economist with Goodbody Stockbrokers.

"I don't see us needing to use it. But there are always risks. Could the Spanish stress tests highlight some massive problems in the Spanish system that cause concerns to come back at a European-wide level?

"At the current time, we've seen the Irish bond market to be very resilient, even in light of different shocks that have happened, so, at the moment, we wouldn't see the need for the Government to draw down those funds."

Both Mr Noonan and Taoiseach Enda Kenny have stressed that the plan is to never have to use it, and that it is simply prudent financial management.

The political reaction to the announcement of the €10bn figure was swift, with both Fianna Fail and Sinn Fein quite rightly focusing on the terms and conditions – despite Mr Noonan's claims there wouldn't be any above and beyond the stricter budgetary rules already being applied to countries across Europe.

Sinn Fein's finance spokesman Pearse Doherty, who branded the plan a second bailout last week, concedes it would be foolish to say that we didn't actually need it. But he says the Government must clearly set out the terms of any credit line to the public.

"We have a big unknown, which is the banking stress tests, and it would be very hard to second-guess what would be the outcome of those tests," he said.

"We also have another unknown in relation to the liquidation of IBRC and the valuation of the assets, which will be of less significance but will still be significant.

"So, to have access to cheap funding is something we should be grabbing. But it all depends on the conditions that the State has to enter into for that cheap money. That's what the minister has to publicly inform the people at this point."

There are a number of options open to the Government, with both Europe and the IMF providing precautionary credit lines.

The European options involve the continent's bailout pot, the European Stability Mechanism (ESM), which offers two possibilities – a Precautionary Conditioned Credit Line (PCCL) or an Enhanced Conditions Credit Line (ECCL).

Both have an initial availability of one year, and can be renewed twice, each time for six months.

According to ESM rules, access to a PCCL is limited to countries where the economic and financial situation is "still fundamentally sound".

Countries would be judged eligible via several criteria, including having a sustainable general government debt, a track record of access to international capital markets, and no bank solvency problems that could pose systemic threats to the stability of the euro banking system.

Access to ECCL will be open to countries which don't qualify for PCCL, with the rules stating that the country would have to adopt corrective measures aimed at addressing weaknesses.

Where an ECCL is granted or a PCCL drawn, the country would be subjected to "enhanced surveillance" by the European Commission, and would also be subjected to regular review missions by both the Commission and IMF.

Wall-Street giant Cantor Fitzgerald believes that Ireland would have to go for the ECCL option, given that the road to accessing the European Central Bank's bond-buying programme, OMT, involves an ECCL.

"While it may be the Irish Government's preference to apply for a PCCL, due to the less onerous oversight levels, it is our belief that the dual role of the ECCL makes it a more efficient option," the finance house said.

The first step would be to apply to the head of the Eurogroup, Dutch Finance Minister Jeroen Dijsselbloem, the chairman of the ESM board of governors. The European Commission will then be tasked with assessing if some form of aid will be given.

The outcome of that deliberation seems positive, if comments from Mr Dijssebloem last week promising support can be believed. The Government will discuss the finer details with the troika during its next review mission in October, including the specific amount required and, one hopes, what the specific conditions will be.

While Mr O'Leary agrees with Mr Noonan that stricter budgetary conditions are in force across Europe at present anyway, he said access to a credit line was likely to bring more specific, as yet, unknown terms.

"You may call it a programme-light or bailout-light. It won't be seen to be as intrusive, but the kind of policies are going to be the same," he says.

"The scale of intrusion will not be as great in a precautionary programme, but there will be some intrusion into domestic policies.

"They can set specific conditions. For example, the stress tests next year will be part of the programme. Maybe even things like water charges would be part of the precautionary programme for next year. That level of detail would not be included in the 'six-pack' and fiscal compact."

As Mr Doherty puts it, the devil is very much in the detail.

"What is he signing us up to? Even if it is contingency, if it isn't called upon, what are the conditions that he (Mr Noonan) is willing to enter the State into? The devil is in that detail."

While there are legitimate concerns about what further conditions the troika may impose, the consensus is that seeking some form of credit line is a prudent financial move.

Politically, however, it remains to be seen. "There are more benefits than drawbacks in doing it," Mr O'Leary says.

"From a politician's perspective, there are drawbacks. Politicians campaigned to get into power and make decisions, whereas for the last couple of years, those decision-making powers were largely taken out of the Government's hands and they want to get them back.

"At the end of the day, it is a political decision."

Irish Independent

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