Sunday 22 September 2019

We must fight back to renegotiate bailout

Dithering on the ECB's incompetent deal will only lead to further financial heartbreak, writes Colm McCarthy

If international economic diplomacy was as straightforward as a schoolyard fight, the kid who shouts loudest and plays toughest will often win. But the likelihood is that, in the grown-up dilemma that confronts it, no unilateral course of action is available to the Irish Government that will work.

There is no 'get out of jail' card, and those who demand that the Government should burn the bondholders, leave the Eurozone, tell the IMF/EU to take a hike, have simply failed to come up with a policy programme that has a decent probability of working to Ireland's advantage. There are things that can be done unilaterally, but they can only usefully be done in the context of a continuing engagement with the official lenders, the EU Commission, the European Central Bank and the International Monetary Fund. This is frustrating but the loss of sovereignty is real and one consequence is that go-it-alone policy prescriptions need to be treated with scepticism.

The 'troika' of EU, ECB and IMF, who are jointly funding both the State and the banking system, are no longer in agreement that Ireland should 'stick to the programme'. The IMF regard the programme as unrealistic and in need of fundamental re-design and it is pretty clear that this has been their view from the beginning of their involvement with Ireland last November.

The EU Commission seems to be less wedded to the ECB line than had been the case in the earlier phases of the crisis, while the ECB itself is quite simply the world's strangest central bank, constrained by the inadequacies in the design of the single-currency zone over which it presides. There are other actors, in particular the outgoing governments (both look likely to lose office as soon as their electorates are consulted) of France and Germany, the traditional leaders of European integration of which the common currency is the showcase project. It is Ireland's misfortune to have left itself reliant on political leadership from a Franco-German European 'engine' which is running on empty.

The outspoken criticism of Ireland's November 2010 deal with the troika which the IMF officials placed on the public record last Friday week is a hugely significant development. If there is no one-shot salvation strategy for Ireland, the patient re-negotiation of that deal is the only rational course of action open to the Government over the next few years.

It helps a lot if the IMF experts agree that the deal as it stands is unworkable. The essence of any rescue for a distressed sovereign borrower is that the sources of distress are addressed and removed. In Ireland's case, the problem is a banking collapse whose rectification is now beyond the financial capacity of the State. The IMF officials have acknowledged this in unambiguous terms. The ECB policy is to pretend that everything is fine, stick to the programme and Ireland will be an attractive borrower in the bond market inside 18 months.

Some ECB executives were pushing this line on Ireland last week as certain of their colleagues publicly threatened Greece with a peremptory discontinuation of liquidity support to Greek banks! The flawed design of the euro system cannot fairly be blamed on ECB officials, but their dysfunctional communications strategy has gone on far too long. There is no other central bank in the world that would tolerate uncoordinated public musings about market-sensitive issues from its non-executive directors and full-time executives. The ECB appears to have somewhere between 20 and 30 spokespersons on policy questions, free apparently to disagree in public.

The professionalism of the IMF stands in stark contrast. In any event this is the sea in which Irish policymakers must swim, and the bones of a policy strategy are beginning to emerge. The first plank in that policy must be an insistence that the November deal will not work, was flawed from the beginning and must be revisited, not just because it is unfair to Irish taxpayers (although it is) but because it is an incompetent piece of work whose revision is inevitable.

This is not just an Irish view. It is clearly shared by the International Monetary Fund and has been supported almost unanimously by respected international commentators on economic and financial affairs. The Wall Street Journal, the Financial Times, The Economist magazine and numerous prominent economic commentators around the world have left our European partners quite friendless in the court of public opinion.

The Government needs to capitalise without apology on the intellectual bankruptcy of the EU and ECB position whose media support appears to extend only to the Bild Zeitung and its Finnish counterpart. The deal with Ireland was a botch-job, will not work, and needs to be modified, not just in Ireland's interest but in the interest of a Europe which wishes to handle crises seriously. Sharon Bowles, a British Liberal Democrat MEP who chairs the European Parliament's committee on economics and finance, said as much on her visit to Dublin during the week and she is no more than the latest in a long line of economic and political figures to have concluded that Ireland is at the receiving end of an incompetent deal from our European partners.

The IMF officials have identified two specific features of the November deal which need to be modified. The first is the rate of interest being charged to Ireland on the European loans. It is absurd to charge a distressed borrower a rate of interest in excess of what could be afforded on market re-entry, the declared objective of the programme. None of the distressed eurozone members will come off official financial support until they can borrow freely in the markets, at longer maturities, at affordable interest rates, which in practice means rates below five per cent. Emergency funding from official lenders at rates above this figure is a clear statement to the markets that the official lenders have no confidence in their own programme. This is not just about fairness, it is about competence. The second requirement is medium-term liquidity support to the Irish banks. Withdrawal of liquidity support to Greek banks was threatened, in public, by an ECB official last Friday week, an act which would have provoked instant dismissal in a real-world central bank. There is no reason why market lenders should return to funding the Irish banks while the current grace-and-favour arrangement with the ECB remains in place. The recapitalisation and deleveraging plans will not work unless this question is addressed.

The sovereign debt crisis in Ireland is in large degree a manifestation of the excessive guarantee extended to the banking system in September 2008. The European Central Bank remains wedded to the repayment of all bank bonds but approximately €20bn in unguaranteed debt is still on the books. This can only be paid at the cost of further risk to sovereign bondholders. It is time to acknowledge that the guarantee has exhausted the fiscal capacity of the State and that those who bought Irish government bonds, at modest yields, have superior entitlement to those who lent to badly-managed banks, chasing fancier yields.

The IMF report endorsed the agreed pace of budgetary tightening, which will see the Government continuing to add to the debt mountain until 2015 and beyond. The Irish economy is as flat as a pancake and will not begin to recover until the public begin to regain confidence and the normal availability of credit is restored. Everyone knows that further spending cuts are on the way and that tax burdens need to increase again. Accelerating this inevitable process, already discounted into the plans of every household and business firm in the country, could help as much as hinder recovery.

The Paris-based OECD, an intergovernmental think-tank, produced a sober assessment of the economic outlook for Ireland during the week and it is tempting to argue that accelerating the budget adjustment will make things worse. But the alternative view is that everyone knows what is coming, and that no extra damage is done by getting it over with. It took 10 years to face the music and deal with the last public finance crisis in the 1980s. Who believes that the dithering achieved anything?

Sunday Independent

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