Monday 22 July 2019

Siobhan Creaton: EU bailout rumour a tale of spin and counter-spin

Siobhan Creaton

By the time Brian Lenihan sits down with his fellow EU finance ministers tomorrow, he will have had plenty of time to figure out which of their officials have been busiest in orchestrating a campaign in the international media to force Ireland to take an EU bailout.

Ever since a report by Reuters quoted an "official source" as saying that Ireland was in talks to receive emergency funding from the EU on Friday, the Government has been feeling the heat.

Immediately, there was speculation that the country was braced to accept an EU rescue package of between €60bn and €80bn -- effectively signalling that it was broke. Our worst fears were about to be realised.

The Taoiseach moved quickly to dismiss the report. The Government had not made an application for an EU bailout, Brian Cowen said, because it didn't need to. The country has enough money to survive on until the middle of next year, he explained.

It doesn't need to immediately borrow from the bond markets or from the EU stability fund to pay our civil servants and to keep Ireland open for business. And even if it did, the Government could, in an emergency, raid the National Pension Reserve Fund, which contains about €25bn.

In this scenario, the fact that the rate of interest that Ireland could borrow money from the bond markets was now more than 8pc was irrelevant, he implied, and there was no need to make an application to the European Financial Stability Facility for a bailout.

The Department of Finance quickly supported Mr Cowen's comments, saying it was not talking to the EU about accessing the fund. But despite the strength of their denials, they couldn't kill the story.

For while the Irish media reported the Government's strong denials, officials in Europe continued to pile on the pressure, by briefing more journalists about the certainty of an imminent Irish bailout.

By Saturday, the BBC was saying that "it is now no longer a matter of whether but when" the Irish Government formally approaches the fund. The Wall Street Journal said European officials were "encouraging" Ireland to accept a bailout to restore confidence in its solvency and to stop the spread of financial market turbulence to other euro members.

Significantly, Bloomberg reported that officials from the ECB urged Irish Central Bank governor Patrick Honohan to persuade the Government to take the money during a conference call on Saturday afternoon.

The ECB is now the main source of finance for Ireland's banks, having extended €100bn to them. It wants to see this problem solved.

By any standards, the behind-the-scenes pressure on the Government to take the bailout and to ease some of the pressure on other vulnerable European states is intense and will almost certainly be the focus of the European finance minister's meeting tomorrow.

Ireland's problem is that our economic nightmare is now infecting other EU states and proving a drag on the value of the euro. There is a fear among the other EU states of a "contagion" if our financial difficulties worsen. If Ireland sought financial assistance sooner rather than later, it would salve the bond markets and help countries like Portugal to sort out its finances.

So what is behind all of the spin and counter-spin this weekend? Well, there is an element of truth in everything that is being reported.

The Taoiseach has been careful with his words. He didn't say that Ireland wouldn't seek a bailout, just that it hadn't applied for one to fund our sovereign needs.

The unnamed European officials who have been busy briefing journalists have also been right because there are certainly talks going on between Irish officials and the EU stability fund about a bailout, on some level.

It seems the Government may be trying to cut a deal to allow it to access this fund -- but only to keep our ailing banks in business, at least for now. This allows Mr Cowen to state that Ireland is solvent enough to fund itself but not its banks.

IMF managing director Dominique Strauss-Kahn said that the fund was ready to support Ireland and that he didn't see the Irish situation as being "the same thing as the Greece problem", referring to EU and IMF combined efforts to rescue that debt-ridden country in May. The Government will be making the same point to EU finance ministers over coming hours. Our problem is our banks.

It is a high-wire act and there is no guarantee that even if the Government managed to broker such a deal, it wouldn't have to yield to a full bailout, possible as soon as the New Year.

It may buy it enough time to allow it to put its four-year plan together and pass the Budget and hope for the best after that. But the EU finance ministers may take a different view.

Easing investor concerns about Ireland's finances would help German Chancellor Angela Merkel's plan to require investors to contribute toward future rescues.

This plan to burn bondholders in the future injected fresh turmoil into the unsettled markets, although the European finance ministers said last week that it would have "no impact" on existing debt and would not apply until 2013.

This has proved a divisive issue among Europe's political leaders and they may also be divided about whether Ireland should seek aid.

Some may take the view that Ireland should at least take the bailout money as a backstop before it goes back to the market, something that would inject some investor confidence. Others, perhaps those who have been spinning this weekend, may believe the time for talking is over and that Ireland's financial problems must be resolved.

We will have to wait and see how this will play out over the next few days.

Irish Independent

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