Saturday 16 February 2019

ECB's open hostility damaging us

It has to be recognised that the 2010 deal struck with the troika isn't working, writes Colm McCarthy

Colm McCarthy

Colm McCarthy

Ireland's reliance on lending from the EU and IMF is due to be phased out at the end of 2013.

From that point onwards, if all goes to plan, the State will fund both its ongoing budget deficits and the re-financing of maturing debts entirely from the bond market. The first ingredient in baking this cake is Ireland's compliance with the deficit-reduction path outlined in the agreement with the official lenders, the EU and the IMF, at the end of 2010. The second is the willingness of the markets to resume lending, at sustainable interest rates, once official lending comes to an end two years hence.

The availability of the €67.5bn being borrowed from the EU and IMF is conditional on compliance with the deficit-reduction programme. Failure to deliver would result in a descent into a Greek-style requirement for a revised deal: in effect, a second bailout.

But, even if deficit-reduction goes to plan, there can be no guarantee that a eurozone country with a high debt burden, an ongoing deficit and heavy refinancing burdens will be able to re-enter the market on the required scale.

Thus, there are two ways in which things could go wrong. The Government could falter in its execution of the programme. But it could also succeed, only to discover that the markets are not sufficiently reassured and are unwilling to fill the shoes of the departing official lenders from 2014 onwards.

This is the scenario to which Willem Buiter of Citicorp has drawn attention and his view is not eccentric or "ludicrous", it is widely shared -- not certain to happen of course, but a perfectly plausible picture of what may lie in store.

The favourable verdict from the troika last Thursday relates only to the first of these conditions. The ongoing deficit has been stabilised and should finally begin to reduce in 2012. But there could be problems in achieving the planned further reductions.

The economy looks fragile and the Government has constrained its budgetary options through unwise pre-election commitments on public service pay, social spending and income tax. Some of those who fear a second bailout are not convinced that the deficit can be cut as planned, either because a weak economy will not yield enough tax revenue or because the appetite for further cuts in public spending will weaken.

Others are sceptical that a State with a debt ratio well over 100 per cent, a continuing deficit and unclear growth prospects will be lent enormous sums in the markets just because the departing official lenders have given the thumbs up.

Even if the deficit-reduction programme is achieved, nobody can guarantee that bond markets will be in better shape next year or the year after, particularly given the certainty of a Greek restructuring (meaning default) and the likelihood of something similar in Portugal.

So Ireland could tick all the boxes and still not be able to finance itself come 2014. It is perfectly rational to both stick with the programme and simultaneously to think through the possibility that sticking with the programme may not be enough.

It is acknowledged by the Government, by credible independent commentators internationally and by at least some members of the troika that the deal acceded to under duress by the Irish Government in November 2010 was infeasible.

The reaction to that deal in Ireland has focused on its unfairness, particularly its unfairness to Irish taxpayers. Fairness is a matter of opinion and a playpen for populist politicians. Feasibility is a more technical business and ultimately a question for the judgment of macroeconomics practitioners. Macroeconomics in real time is, unavoidably, a rather tentative discipline.

The infeasibility of the deal agreed in November 2010 was pointed out at the time and is continually reinforced by events. Two critical components of that deal are unlikely to work out as planned.

The asset disposals by the Irish banks and the deleveraging of their balance sheets are necessary but look to be incapable of execution on the timetable in the programme, a point stressed again by Goodbody stockbrokers in a report during the week.

In addition, it is unlikely that the Government will be able to finance itself in the markets from 2014 onwards, even if the deficit is reduced on schedule. These are two pretty important flaws in the plan and no useful purpose is served by pretending that they can safely be ignored.

The plan needs to be amended, not just because it is unfair, which it is, but because it is unlikely to work. The Government appears to be proceeding on the basis that since the budgetary correction is inescapable anyway, it is best to maintain that execution of this part of the plan will deliver a safe return to solvency, a reattainment of fiscal independence and an exit on schedule from reliance on official lenders.

It is possible, but not certain or even likely, that the budgetary correction alone will do the trick. But it cannot be avoided in any plausible scenario and those who chant that "austerity has failed" have no alternative to offer. No country can proceed on the basis that public spending can hugely exceed public revenue indefinitely. It is an error not to acknowledge that the budget deficit must be eliminated soon, not because that is the commitment in the programme, but because any responsible government must seek to restore solvency.

The elimination of the ongoing deficit, given the extra burden of national debt caused by the bank rescue costs, may not be enough to restore solvency. This robs the Government of what would be a potent argument: put up with the austerity for a few years, and Ireland will escape.

The superior argument is that Ireland needs a balanced budget for its own good and not because official lenders have made it a condition of concessionary finance. After all, the previous Government, with the support of both Fine Gael and Labour, embarked on budgetary correction back in mid-2008, long before the State lost credit-worthiness.

It is now patently obvious that the bank guarantee of September 29, 2008, bankrupted the Irish State and it is the extra burden of the consequent bank-rescue costs that will inhibit a return to solvency for the Exchequer.

For the Government to simultaneously stick with the programme while seeking to amend its terms by getting out from under the reckless bank guarantee is politically awkward. It amounts to demanding public support for a policy which cannot be assured of attaining its declared objectives. It is time to acknowledge that a positive European response to the Government's proposals on financing the bank rescue costs is a necessary condition for the programme to succeed.

Next week, the media attention will focus on another pay-off to holders of unguaranteed and unsecured bonds in the collapsed Anglo Irish Bank, who will collect 100 per cent of the due amount on their inspired investment, back in 2007, in this highly leveraged property hedge fund.

The European Central Bank continues to insist that reimbursements in full be made to those who hold bonds issued by Anglo Irish -- bust many times over, closed down and under garda investigation -- at the expense of an insolvent State. This will in time come to be seen as one of the strangest episodes in the history of central banking.

The ECB has chosen to persist in regarding the insolvency of an EU member state as a minor sacrifice in the great cause of pretending that Europe does not have a banking crisis. The policy is now entirely pointless and failing to achieve its unexplained but presumed objective, continued access to the bond market for European banks.

Nobody at the ECB appears to understand that this policy is increasingly seen as an act of straightforward hostility towards this country, notwithstanding Ireland's errors and failings in the stewardship of its banking system.

The policy does not even enjoy the justification of succeeding on its own terms, since hardly any European banks can any longer sell bonds into a market thoroughly disenchanted with the myriad failures of the European response to the crisis.

There are three eurozone member states in bailout programmes. The programme agreed for Greece in May 2010 has failed and Portugal is unlikely to exit its programme on schedule. Would the ECB like to have even one success?

Sunday Independent

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