Saturday 24 August 2019

Bailout has fallen at first hurdle

EU leaders must accept that the deal cannot be implemented and a debt crisis now looms, writes Colm McCarthy

MEETING: While the Taoiseach
was grabbing headlines, Minister
Brendan Howlin was holding talks
with EU and IMF officials. Photo: Tom Burke
MEETING: While the Taoiseach was grabbing headlines, Minister Brendan Howlin was holding talks with EU and IMF officials. Photo: Tom Burke

While the Taoiseach's trip to Washington and the May return fixture in Moneygall grabbed the headlines, the most important meeting of the week took place in Merrion Street, where Ministers Michael Noonan and Brendan Howlin hosted the International Monetary Fund, the EU Commission and the European Central Bank.

This was an unscheduled meeting held at the initiative of the new Government. It is clear that the principal purpose was to explain to the troika that the bailout deal for Ireland agreed on November 28 last cannot be implemented and needs to be revised.

Whatever about the EU Commission and the ECB, this will have come as no great shock to the IMF, whose officials have been making no secret of their unhappiness with the November deal.

The immediate priority in that deal was the restructuring and re-capitalisation of the banking system, whose losses had reached levels beyond the State's financial capacity, triggering the bailout.

Even if the deal had contained adequate funds to restore the banking system, it would have been touch-and-go whether the State could have executed the terms and re-entered the sovereign debt markets before the end of 2012 as envisaged.

But the assumptions underlying the bank refinancing have come apart. Bank loan assets, mainly mortgages, cannot be sold off at acceptable prices, the banks cannot be deleveraged and recapitalised within the sums available under the terms of the deal, and a zombie banking system will undermine any prospect of economic recovery.

The urgency of resolving the banking mess was highlighted in the first few paragraphs of the Memorandum of Understanding with the IMF/EU: "At the root of the problem is a domestic banking system which at its peak was five times the size of the economy and is now under severe pressure. The Irish-owned banks were much larger than the size of the economy. The fragility of the banking sector is undermining Ireland's hard-earned credibility and adding a severe burden to acute public finance challenges. Decisive actions to restore the strength of the financial sector and re-establish fiscal credibility are needed now."

The memorandum's strategy can be distilled into just three priorities. Sort out the banks immediately; get the budget deficit down as rapidly as possible; and restore competitiveness through cutting business costs.

This horse has fallen at the first fence as the impossibility of executing the strategy for the banks has emerged with unusual speed. That a three-year deal on which the ink is barely dry is already up for re-negotiation reflects no credit on its authors -- or at the very least on some of them.

Official bailouts are meant to be decisive and final, adequate to restore the country concerned to market access and sustainable finances without endless renegotiation. The conditions on the assisted country may be severe, but they must be feasible. The tripartite structure of EU, ECB and IMF has not been used before and the Irish experience will certainly persuade others to steer clear if they can. It is surely too cynical to suggest that this was the intention.

Spokespersons for both the EU Commission and the ECB had been voluble until a few weeks ago in their insistence that budgetary adjustment alone would do the trick and that Ireland should simply 'stick to the plan'.

Comments along these lines are no longer heard from either party, suggesting possible sources for the weaknesses in the plan's design. The Government is now plotting a strategy for the inevitable renegotiations. European leaders are focussed more on prevention, or, if that fails, the resolution of future banking and sovereign debt crises in the eurozone. This is unfortunate to say the least for Ireland, where the current and unresolved European banking crisis is having its most damaging effects.

Policy must seek to prevent crises, but also provide least-cost mechanisms for resolution should prevention efforts fail.

The Irish authorities should show willingness to support measures which address future crises, including constitutional limits on budget deficits, higher capital ratios for banks and the centralisation of bank regulation and supervision in the ECB. If this ultimately means the abolition of national central banks in eurozone countries, so be it. All of the Irish political parties could usefully signal their willingness to support treaty changes at referendum when the time comes.

The quid pro quo for the Irish would be a serious effort by the EU Commission and the ECB to assist with the resolution of the banking and sovereign debt crises in the here and now, in a manner that would permit re-entry to the markets within a short number of years.

This would require acceptance at European level that Ireland (and Greece) now faces a sovereign debt crisis with no realistic prospect of escape. The adoption by the European authorities of a neutral role between debtor countries and their bank and sovereign creditors is essential if an early resolution is to be achieved.

The perception that our European 'partners' represent the bank creditors has helped to subvert the November plan and is a direct source of the sovereign debt crisis.

Colm McCarthy lectures in economics at University College, Dublin. He has headed an expert group examining State assets and chaired the Special Group on Public Service Numbers and Expenditure Programmes, aka An Bord Snip Nua

Sunday Independent

Today's news headlines, directly to your inbox every morning.

Don't Miss