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Brendan Keenan: Unpleasant times ahead if we miss troika targets


WHEN you have eliminated the impossible, Sherlock Holmes observed, whatever remains, however improbable, must be the truth.

This is the brute logic that has forced Germany into suggesting an EU budget "commissar" for Greece, to ensure that Athens complies with agreements on how to cut its budget deficit.

The Russian word commissar may be more sensitive than could have been used from other languages. When Greek finance minister Evangelos Venizelos said the proposal ignored some "key historical lessons", we all know which lessons he had in mind.

With all that history, it is indeed difficult to see why this should be a German proposal. It would have been much better -- although not any less improbable -- had it come from the EU Commission, or even the troika.

Perhaps they could not get agreement. Reports say there is alarm beyond the bailout countries at the nature of the German proposals. It may never come into force, at least as drafted in this plan.

Yet everything else looks impossible after it was decided that no further Greek default would be allowed beyond the 70pc loss that is currently the subject of bitter negotiation.

It is worth remembering that the euro was founded on a strict rule of no bailouts for member states. But the single currency was deemed too fragile for the rule to be applied. So Greece was bailed out -- not just in the normal IMF rescue, which can include default, but with eurozone funds as well. The Irish banking system was so fragile that this country was railroaded into a bailout.

In an attempt to restore lost ground, Germany proposed that, in future rescues, private lenders would have to take a loss. Interest rates rocketed in all the countries where that seemed a clear possibility, including Italy.

Engines rapidly reversed and the principle now is no defaults. That means bailouts in any future crisis, or the continuation of this one.

The logic that led to the latest German proposal is inescapable. Why should a country endure the hardship of severe fiscal correction if it knows the funds will keep coming? If the funds do not keep coming, the country will not be able to repay its debts as they fall due, and private lenders will lose, and that is now ruled out.

This leaves Ireland in a bit of a dilemma as to how to react to the German proposal. It may have missed some targets, because growth was less than expected, but it has carried out the actions it promised the troika in the bailout plan.

On the face of it, we ought to be pleased with a plan that means others cannot just ignore their commitments while we struggle to meet ours.

The Greeks deny that this is what they have done. The new government, like the last, says it is doing its best. Not everyone in Brussels and Frankfurt agrees, although it is true that, as well as violent politics, the Greek administrative system, unlike the post-1980 Irish one, cannot always deliver the tax revenues and spending cuts that the government wants.

It is unlikely, though, that the idea will get much, or any, support in this country. Almost certainly, the reaction will be deeply hostile.

It is indeed an affront to democracy. But democracy, like everything else, becomes severely constrained when there is no money.

Greek Prime Minister Lucas Papademos told his citizens again on Sunday that the "spectre of bankruptcy", where no more money is coming in, would have grave consequences for society, and especially for the poor.

He was talking about the present negotiations, but the German proposal is intimately bound up with those negotiations. The figures involved are staggering -- on both sides of the ledger.

Greece will receive a further €130bn to keep the state functioning. According to the 'Financial Times', it would be expected, in return, to take measures that include shedding 150,000 public sector jobs within three years, cutting this year's budget deficit by a further 1pc of economic output (GDP) and giving debt reduction priority in future budgets.

Irish hostility to the commissar plan will also focus on the harshness and deflationary impact of these austerity measures. That is fair enough but, unfortunately, it is likely to get mixed up with arguments over the existing Irish programme, the new fiscal treaty and the possibility of a referendum.

The fact is that the German plan, like the treaty itself, does not add much to the existing arrangements. It is, at base, another attempt to sell the idea of further large bailout funds to sceptical, worried electorates in Germany and beyond.

As such, it has limited practical relevance to the Irish situation. The Anglo bond payment showed once again that it is not Irish government strategy to defy the agreements reached with the EU and IMF. Nor is it likely to be.

The commissar plan -- or whatever watered-down measures eventually replace it -- should not apply here. For us, the question is what happens if promises of action are kept, but targets are missed.

Will there be further cutbacks, or extra funds from the troika to cover the gap? Could there be, as the Government hopes, relief on bank rescue costs to help the overall figures?

Unlike Greece, Ireland has not yet eliminated all the possibilities. Portuguese bond yields imply that its lenders expect losses to be imposed on them after the Greek agreement is finalised. Irish bond yields imply that our creditors think this can be avoided.

If they are right, there will be no commissar for Ireland. If they are wrong, it will be only one of many unpleasant possibilities.

Irish Independent