The Government may be unwilling to admit it but such speculation is consistent with the facts, writes Colm McCarthy
AND then there were four. Only Germany, the Netherlands, Finland and Luxembourg of the 17 eurozone countries retain AAA ratings after Friday's unsurprising downgrade from Standard and Poor's. The borrowing of the EFSF stability fund, which lends to Ireland, is guaranteed by the solvent eurozone members including France and Austria, both downgraded on Friday. The interest rate the EFSF has to pay gets passed on to the borrowing countries. With lower credit-worthiness for the guarantors, the EFSF will have to pay more, which is bad news for Ireland.
There have been protracted negotiations for several months on a 'voluntary' haircut for holders of Greek sovereign bonds, and the other bad news on Friday was that these talks are going nowhere. There could be a Greek default within weeks. The European crisis management efforts remain firmly behind the pace of the game, where they have been rooted since the botched Greek bailout in May 2010. Friday's events provoked yet another pointless response from EU Commissioner Olli Rehn: it is the fault of the ratings agencies; they are being "inconsistent".
On Monday last, Willem Buiter, a well-known macroeconomics expert and long-time critic of the eurozone's design and management, was in Dublin to speak at a function organised by Citicorp, the US multinational bank for which he works these days. He argued that Ireland is unlikely to graduate from the current EU/IMF bailout programme on schedule at the end of 2013. He saw little prospect of early re-entry to the sovereign debt market and urged instead that preparations should commence for a second bailout when the current one has run its course.
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His prognosis was plausible on Monday, and is more so after Friday's developments. His remarks, however, were promptly dismissed by a spokesman for the EU Commission as "unhelpful", and by Finance Minister Michael Noonan as "ludicrous".
Economists who work for banks have acquired a bit of an image problem, well-deserved in many cases. Buiter is not one of these. Before joining Citicorp last year, Willem Buiter held economics professorships at Yale, Cambridge and the London School of Economics, three of the top economics departments in the world, and served a term on the Bank of England's monetary policy committee. Along the way, he has built a reputation as a thoroughly competent analyst of the international monetary system, one of the best around. He did not come over to Dublin to shred his reputation with some off-the-wall comment about Ireland. With all due respect to Mr Noonan, Buiter's comments are not "ludicrous". They are consistent with the behaviour of interest rates on Irish bonds in the secondary market and with the arithmetic of debt sustainability.
It is difficult for politicians to stick with an unavoidable fiscal adjustment programme in the secure knowledge that it may not be enough to deliver its declared objective -- an end to reliance on official lenders. That, unfortunately, is the position in which the Irish Government has been placed. The budget deficit needs to be eliminated, in any plausible scenario, and as quickly as possible. The small print in the Memorandum of Understanding with the EU and the IMF says that the temporary period of emergency lending will be over at the end of 2013 provided only that the budget tightening stays on track. Ireland will, according to the programme, be able to finance itself in the markets by 2014, without any support from official lenders. You either believe this or you do not. Most Irish economists do not, so Willem Buiter is not saying anything you have not heard before. The Government may well privately agree with this assessment, and their efforts to secure burden-sharing on the massive bank rescue costs suggest that they do. But they can hardly be expected to persist with tax increases and cutbacks while openly admitting that the planned deficit reduction will not be enough.
Of course it is possible that Buiter, and most of the economists in Ireland, are plain wrong. The economy could suddenly begin to grow at a rapid pace, the sovereign debt markets could experience a change of heart and the Government's credit-worthiness could begin to improve. Anyone who believes that Ireland can exit from reliance on the official lenders in 2014 is implicitly assuming this scenario -- or is assuming a sudden conversion to burden-sharing by our European 'partners'. Another tidy $1.25bn (€985m) is due to be paid to Anglo bondholders the week after next, so the latter hypothesis will be tested pretty soon. If you believe that a sudden economic boom is unlikely, and that the ECB will continue its defence of creditors in banks that are bust and closed, the prospect of a renewed bailout deal from 2014 onwards needs to be thought about now. Not because it will happen for sure: no certainty is available in these matters. But there is a fair prospect that this issue will have to be faced, so it would be improvident not to start thinking about it soon.
Instead the Irish authorities prefer to rattle on about an early return to the markets. On Friday morning, before the news of the downgrades and the stalled Greek haircut talks, John Corrigan, who heads the Irish borrowing agency NTMA, announced his intention to sell short-term government bills in the middle of 2012. He also indicated that the plan is to sell longer-term debt in 2013, a timetable consistent with Ireland being able to finance itself fully in the markets from 2014 onwards, with no further help from the EU or the IMF. Not surprisingly, Mr Corrigan also dismissed the prospect of Ireland requiring a second bailout.
Despite three-and-a-half years of fiscal cutbacks, the budget deficit remains at a quite unsustainable level. There is also the looming requirement to roll over large quantities of maturing debt after the current programme runs out at the end of 2013. There is little point to the Government making itself hostage to the promised re-entry to the bill market later this year. Ireland needs to be able, at some stage over the next two years, to sell large quantities of long-term debt at low interest rates if the programme is to succeed. Buiter is saying that there is little prospect of this happening without burden-sharing on the bank rescue costs. His remarks should be welcomed: they help to strengthen the Government's negotiating position.