The Government has only itself to blame for the disappearance of a deal on bank debt, says Colm McCarthy
BACK at the end of June, when European leaders agreed to 'break the vicious circle' between bust banks and struggling governments, EU Commissioner Olli Rehn predicted that a deal on Ireland's bank-related debt would be concluded before the end of October. The deal for Ireland, in other words, would have been finalised at the Brussels summit, which concluded on Friday.
It is a measure of the backsliding which has followed the June summit that not a single element in the agreement has moved closer to implementation. There is no agreement on the vital matter of centralised bank supervision, where the Commission's proposals have been resisted by Germany among others. There has been no progress either towards a common system of bank deposit insurance. No deal on Ireland's bank-related debt, a portion of which was imposed on the Irish Government by the European Central Bank, is now likely until well into 2013, if ever.
Recapitalisation of bust banks at European, rather than national, expense has been (not for the first time) ruled out by Chancellor Merkel. It is clear that Germany, and some other eurozone countries, plan to renege on what was agreed in June.
European leaders appear to have adopted a strategy of announcing important reform measures whenever one or more of the larger eurozone countries face imminent exit from the sovereign debt markets. These announcements restore confidence for a while but the impetus for reform weakens and politics as usual takes over until the next crisis in the debt market.
The communique from June's summit meeting contained a commitment to "examine the situation of the Irish financial sector with a view of further improving the sustainability of the well- performing adjustment programme".
There was also a commitment to centralise responsibility for recapitalising failing (read Spanish) banks and a commitment to equal treatment of similar cases.
The council of finance ministers held a follow-up meeting on July 9, after which EU Commissioner Olli Rehn gave his interpretation, at length, to Arthur Beesley of the Irish Times in the following terms: "That's very positive. It's positive for Ireland, its chances of succeeding in its reform programme, and thus it's positive for the whole of Europe."
Mr Rehn told reporters at around 3am in Brussels: "As journalists, you know that it's the deadlines that run the world, so it's important that we have a very clear timeline. It was by unanimity -- by consensus -- agreed that the timeline for looking into solutions for debt sustainability of Ireland is now in the course of September, with a view of decisions in October.
"Let these negotiations between the Irish authorities and the European partners move forward. I'm confident that we will find a solution that, as the statement today says, will help to improve [the] debt sustainability of Ireland and thus make Ireland a success story again."
The Government interpreted the June communique as promising relief from an (admittedly unspecified) portion of bank-related debt. It has been taking extensive criticism for over-interpreting the agreement. If Irish ministers have over-interpreted the June 29 summit decisions, then so has Commissioner Rehn. He was not corrected in July by any German spokesperson to my knowledge, nor were Irish ministers at the time.
The German backsliding did not commence straight away but was deferred until September, after the ECB bond-buying decision on September 6. Since then, a succession of German politicians and officials has sought to back-track from what was agreed unanimously by the heads of government on June 29 and further developed by the finance ministers on July 9.
An anonymous official in the Chancellor's office was quoted during the week to the following effect: "With respect to Irish banks, the problems occurred in a time when they were overseen at national level and thus the responsibility is at national level."
Chancellor Merkel was questioned about Spain after the latest summit on Friday morning, and said much the same thing. The net position is straightforward: the German government has made it as clear as possible that there will be no retrospective European assistance with the bank-related debt imposed on Ireland. This was reiterated, yet again, by a German Chancellery spokesman to RTE on Friday night. There is no basis for accusing the German government of any lack of clarity in recent weeks.
Why then, in the light of what has since emerged as the German position, did Chancellor Merkel accede to the June 29 communique? The reason she felt compelled to do so is that Spain was on the brink of exit from the sovereign bond market, with potentially terminal consequences for the eurozone.
During August the bond market calmed down and a rally followed the ECB bond-buying announcement on September 6. The improvement in sentiment in the sovereign-bond market has enabled German politicians to back off from the commitments which caused the improving sentiment in the first place.
This is disheartening for those who would like to see decisive action to create a durable monetary union in Europe. Of the 17 members of the eurozone, three (Greece, Ireland and Portugal) are already in rescue programmes, Cyprus is negotiating a programme, Spain will probably have to follow suit, as will Slovenia, which is experiencing a banking crisis.
Six of the 17 could be in bailout of one form or another within a short period. The unwillingness to follow through on the measures needed to stabilise the eurozone is a dangerous game, since it invites the next crisis.
Who will believe the late-night communique from Brussels the next time nervous breakdown strikes the bond market?
Credibility is a precious currency in a financial crisis and is being dissipated with abandon. The German unwillingness to deliver on the apparent commitments of June will be justified on the grounds that no binding commitments were made. It does not matter greatly if Germany is seen to have made a monkey of the Spanish and Irish governments. It's just politics. The bond market could turn out to be less forgiving.
Since the resort to an EU/IMF bailout in November 2010, the Government has pursued a strategy with two central components. The first is that Ireland's debt is sustainable, since the economy is recovering and budgetary adjustment will be delivered on schedule. Ireland will re-enter the bond market and exit the programme at the end of 2013. The second is the pursuit of relief from a portion of the bank-related debt, on the grounds that it was improperly imposed.
Last week's events should highlight once again the inconsistency of this strategy. If things are going fine, why is there any need for debt relief? The best case for debt relief (Greece was relieved of €100bn) is inability to pay.
The insistence that things are fine, that budget adjustments are on schedule, three-month Treasury bills can be sold and Ireland will exit the rescue programme next year, is a serviceable domestic political message. But it is also an open invitation to our European 'partners' to offer no assistance whatsoever outside the terms already agreed.
A better negotiating platform, and one with at least equal plausibility, is the following: that the debt is not sustainable and will reach 150 per cent of national income; the economy is flat and will remain so; the politics of further retrenchment are getting too difficult and debt relief is inevitable. The Government should quit behaving like the marketing arm of a debt-management agency.
The fact that a sizeable portion of the Irish debt burden was improperly imposed is well understood by the electorate here and continues to hinder the public acceptability of budget tightening.
It is not, however, well understood by our European 'partners', since the Government has done such a poor job in explaining what happened in the European media.
The Government, uniquely, was bounced by Jean Claude Trichet's ECB into paying off unsecured and unguaranteed bondholders in bust banks which had already been closed down. Most of the Irish public debt represents accumulated budget deficits -- true sovereign borrowing. The extra pseudo-debt contracted under duress is the bit that has pushed the sovereign into the red zone of potential default.
The Government should long since have initiated legal action at the European Court against the ECB's actions towards Ireland in the summer and autumn of 2010, which exceeded its statutory powers.
It is not too late to do so.