Saturday 18 November 2017

Ireland on the world's centre stage

Our battered economy has dominated the financial news for the past 48 hours and the pressure is starting to tell, says Emmet Oliver in Brussels

'How can we give an answer, when we don't have a question?" This curt, but frustrated, comment from the Belgian finance minister, Didier Reynders, yesterday summed up the attitude of many in Europe towards Ireland this week.

They believe Ireland simply must accept the need for outside assistance and once Ireland concedes this ground, why bother delaying?

While most European ministers this week in Brussels stopped short of demanding that Ireland take outside help, the inferences were clear -- it's time to throw in the towel, however unpalatable this may be.

As 16 eurozone finance ministers arrived in Brussels on Tuesday afternoon, it was clear that virtually none of them believed Ireland could avoid this fate (with the honorable exception of Finland)

Speaking to hordes of reporters penned behind a barrier at the Justus Lipsius building, finance minister after finance minister made it clear Ireland's financial stock was only moving one way, down.

While Ireland is seen as a jaunty, open, euro-friendly country by most Brussels figures (the first pub you hit outside the European Commission building is Kitty O'Sheas for instance), the sense of impatience with this country was palpable everywhere over the last 48 hours.

Some finance ministers smiled and sounded warm towards Ireland, like Christine Lagarde of France, but others were more hard headed about what needed to happen.

The Dutch finance minister Jan Kees de Jager, for example said the IMF had to be involved and strict conditions should be attached to any bailout for Ireland. Whether wrapped in soothing words or not, the comments were essentially an ultimatum to Ireland: take the assistance and help us secure the euro and save our own countries from surging debt costs.

While the words used were somewhat ambiguous, the body language bordered on the funereal on Tuesday, with Jean Claude Juncker, chairman of the Eurogroup and EU president Herman Van Rompuy, entering the EU buildings with mournful faces and little to say.

While senior European figures were happy to talk to the media on Tuesday and Wednesday, few of them could describe the actual problem or come up with a market solution.

Olli Rehn talked about "serious problems" in the Irish banking system, while Brian Lenihan himself talked about "market disturbances".

The Irish Independent understands there are a myriad of problems in the Irish banking system at present.

Corporate and retail deposits are being lost in large numbers, inter-bank deposits are not being renewed, bonds cannot be issued and short-term forms of liquidity, like commercial paper, have dried up. Adding to this, dependence on the ECB is expanding at an alarming pace.

But what has become clear from the last 48 hours is that few of those commenting on the Irish situation publicly have a solution to the precarious position of the banks. All week the minister himself has shied away from any attempt to pin him down on what might work to deal with these issues.

Only after questioning from this reporter on Tuesday evening did the minister admit that additional capital was among the issues being looked at.

On its own, additional capital won't be enough to end the crisis, but it is likely to form some part of it. More direct attempts to help the banks re-enter the funding markets will also be needed.

Any idea of sharing losses and restructuring the banks via bondholders was given no hearing during the week, but it could not be ruled out in the long term.

Debt for equity swaps, where bondholders are effectively handed the keys to the company they originally lent to, are the normal form of restructuring for companies with too much leverage, but it seems this cannot be countenanced for banks, no matter what their state of disrepair.

On the margins of this week's Brussels meetings, some of the finest minds in Europe found it difficult to conceive of a solution that would solve the Irish banking problem.

Even those with solutions were worried that these solutions might irritate other member states, many of whom have problem banks of their own.

As the weekend approaches and Dublin-based negotiations get under way involving the IMF, the EU Commission and the ECB, the problems look insurmountable, unless these large well-resourced international bodies have a plan nobody in the markets has thought of yet.

The problem, as ever in banking, is one of trust. Lenders to Irish banks are not prepared to advance funding to these banks as they are currently constituted. It's trying to win back that trust, at the least expense, that the talks in Dublin will be all about.

Outside observers believe just ring fencing the banking issue on its own is an odd way of moving forward. But for now, Finance Minister Brian Lenihan seems to have convinced his EU partners that the banking piece of the puzzle is the only one that needs to be solved.

There are a range of problems with this idea. Firstly, is it really feasible for Europe to provide, via the Government, assistance for the banks in the short term and simply wait and see what happens to the Government itself, which is currently locked out of the bond market?

If that is the way events unfold, it will mean the EU engaging in a two-stage bailout, which really has no precedent in Europe and very little precedent elsewhere either. But that is how events are set to play out as of now.

The more bearish voices in Brussels this week believe an all-in bailout package is more likely, seeing as Irish bank and sovereign debt are so closely related following the guarantee decision of September 2008.

To get a sense of how Ireland's difficulties have become Europe's nightmare, one only has to visit the international press centre housed in the Justus Lipsius building this week.

Italian journalists were becoming expert at reading the mood in Donegal South-west, while French journalists were becoming well versed in the funding challenges present at AIB and Anglo Irish.

Most of the international press corp were also becoming adept at reading the professorial statements of former barrister Mr Lenihan, who simply refused all week to talk specifically about what might fix the Irish banking "problem".

The usual defence for such shyness is that too much openness could hurt market sentiment for Irish banks and Irish government bonds, but with all these securities trading near all-time lows, this was hardly a problem in the circumstances.

While the Government escaped political humiliation by not having a full-scale national bailout forced upon it mid-week, there were plenty of blows still raining down on the national psyche.

For example the offer from George Osborne, the UK chancellor, of extensive "bi-lateral" assistance was no doubt well meaning, but hardly strengthened Mr Lenihan and Taoiseach Brian Cowen in their battle to present Ireland's problems as simply a eurozone issue.

Mr Osborne's own Brussels press conference was dominated almost entirely by the Irish issue and some of the UK media commented that wasn't Mr Osborne lucky he had not been humiliated in his own parliament as Mr Cowen had been this week.

While Mr Cowen was telling the opposition in Dublin there would be no bailout, the comments from Mr Osborne seemed to undermine this entirely. Speaking at the press conference, Mr Osborne said the UK was "looking at a number of different avenues" for helping Ireland and he had already held "a number of discussions" with Mr Lenihan on the subject.

He also pledged his support to Mr Lenihan "personally'' and this was reciprocated by Mr Lenihan a few minutes later as he left Brussels, as both men engaged in something of a euro love-in.

As the components of a rescue are put in place, Mr Lenihan will need this kind of support and one formed the view at the end of the 48 hours that Mr Lenihan is a reasonably popular figure among European finance ministers, even though many of them are exasperated at how Ireland has gotten itself into this fiscal and banking mess. In contrast to the public debates in Ireland, European opinion, reflected in newspapers and through the comments of European politicians, has little interest in dissecting the reasons why Ireland got itself into such a quagmire.

All debate, conversation and argument is about how Ireland can be pulled out of its fiscal hole. What future actions can be taken to relieve the pressure on Ireland and the eurozone is where the intellectual energy is being spent in Europe.

The problem, of course, is that despite the problems in Greece and weaknesses in UK and German banks in 2008, very few of the EU Commission staff or even the ECB have dealt with a banking crisis as severe as Ireland's.

Mr Reynders, the Belgian finance minister, made it all sound so easy yesterday when he said European politicians simply had to use their "toolkit" from 2008 to fix the problem. But Ireland's banking problem is even more insoluble than the banking morass of 2008.

In this case, the market seems to have lost all faith in the balance sheets of the Irish banks, even though locally based regulators like Patrick Honohan and Matthew Elderfield stress-tested these balance sheets earlier this year and gave them financial roadworthiness certificates.

What Mr Lenihan and the others need is time, but that is the one commodity they don't have. European economies like Spain and Portugal will be issuing bonds again in December and early next year. They will not put up with elevated funding costs -- partly because of Ireland -- for much longer.

With other much larger economies impacted by Ireland's apparent failure to attract any market confidence, the Irish story has become a European story, arguably a global story. Reflecting this was the sheer number of media outlets hanging on Mr Lenihan's every word this week, with large US networks like CNBC, Bloomberg and the UK's BBC broadcasting live in Brussels, with only one story on their agenda.

Ironically, the only thing that will now take Ireland off that international media agenda is outside assistance from its European partners. But that is the one thing Messrs Cowen and Lenihan spent the last 48 hours resisting.

Irish Independent

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