Archive for March 5th, 2011

Although RTE is describing Enda Kenny as the Taoiseach-elect, the manoeuvring and brinkmanship at the ongoing negotiations between Labour and Fine Gael don’t make that position a certainty. And that must make the events of the last 24 hours a unique record – not only has Enda failed in his attempts to deliver the central plank of his election platform, the renegotiation of the IMF/EU bailout, he has failed before even becoming Taoiseach. It’s surreal. Just like the congratulatory note from the president of the European People’s Party, the grouping to which FG is affiliated and which is meeting in Helsinki –  “I would like to warmly congratulate my good friend Enda Kenny for Fine Gael’s historic victory. At a moment of great economic difficulty in Ireland, voters chose a completely new political direction, after the disastrous FF (liberal) governments of recent years”  – “completely new political direction”? Fianna Fail “liberal”? Relatively perhaps, but is FG any more or less “liberal” than FF?

At yesterday’s meeting of the European People’s Party in Helsinki, Enda told a reporter that there were strong objections by some EU countries (and remember he was meeting with the leadership of France, Germany and Italy) to the burning of bondholders – RTE report that there were “strong comments” and the proposal is a “non-runner”. So countries whose banks own bonds in Irish banks don’t want those bonds burned. Well that must elevate the views of the German, French, Italian and Dutch governments on the matter to a place hitherto occupied by the Pope and some bears in the woods. And what now for the manifesto pledge to renegotiate the IMF/EU bailout?

Essentially there are four elements which can be renegotiated:

The principal
We’re borrowing €67.5bn externally to fund the deficit and the bank bailout, and in addition taking €17.5bn from our reserves to make for an overall package of €85bn. So if we want to reduce the principal we need reduce our deficit (simplistically what we collect in tax each year versus what we spend on public services including social welfare) or we need reduce the cost of the banks. What Enda was tentatively exploring yesterday was reducing the cost of the banks : the reasoning is that if the banks don’t repay the bondholders then the cost of the bank-bailout reduces. Enda was left in no doubt that this proposal was not welcome by his European counterparts (representing the incumbent governments in Germany, France, Italy, the Netherlands, Belgium, Sweden and elsewhere). So where does that leave the principal? Enda can either raise taxes or reduce government spending which leads many to be concerned that Ireland will enter a deflationary cycle and a stagnant economy for a decade. What else can Enda do to reduce the principal? At this stage, arguably nothing. In passing I am extremely disappointed that Eamon Gilmore who was meeting his counterparts in the European socialist grouping (which includes the incumbent governments of Portugal, Greece and Spain) didn’t come out with a counter statement. Shouldn’t PIGS stick together?

The interest rate
There are two elements to the international bailout of €67.5bn. The IMF which is offering €22.5bn has a standard interest rate and it doesn’t matter if you’re Ireland, Burkina-Faso or Japan the interest rate is the same. There was a change to the IMF rate this week as a result of a reorganisation of quotas – this well-signposted change effectively brings the rate charged on the IMF element to 5.5% and we may see a further reduction later in the year. The remaining loans from Europe (European Financial Stability Fund, European Financial Stability Mechanism and bilateral loans with the UK, Denmark and Sweden) are presently priced at 5.7-6.1%. And this is for funds that cost our lenders 2-3%. The rates are punitive and designed for naughty countries that have let their expenditure run ahead of their income; living beyond your means is to be punished and you must suffer tough love aimed at restoring a balance in your nation’s finances. Fair enough, most would say but why should this apply to our banks’ debts which after all were amassed under the noses of not just Irish regulators, but regulators in Frankfurt, Paris and London. Why should Ireland alone be punished? Particularly since there is a moral argument for cutting the bank debt loose from the nation’s debt on the basis that banks produced inaccurate information upon which the guarantee, which joins bank debt to national debt, was given? A 1% reduction in rates might well lead to savings of billions over 10-15 years. And this would appear to be the element most prone to renegotiation. But our friends in France, Germany and the UK may require “conditionality” which effectively means conceding our corporation tax rate. What is the point in agreeing to a reduction in the interest rate if the country will lose much-needed industry and tax revenue?

The term
This is the period over which the loans are to be repaid. It is NOT the period over which we have to reduce our annual deficit: GDP to 3% – remember FG famously want that to happen in 2014 and Labour want to push it out to 2016. No, the term is the period of time to pay back the €67.5bn. The present agreement is that the IMF element is to be paid back by 2020. I have seen some rubbish written about getting the IMF out of Ireland by 2016, the centenary of the 1916 Rising. Even under the present plans we won’t have repaid the IMF until 2020, so we will have to endure until then what some see as the humiliation of external lenders walking the streets of Dublin as they attend meetings to ensure we are acting in a manner which will see full debt repayment. What Enda is talking about is extending the repayment period by decades. And as anyone who has a mortgage will know the longer the period to repay the loan, the smaller the monthly payment but the larger the overall repayment.

Okay, this is not a formal part of the existing debt package or mentioned in the current debate. Sweeteners don’t really apply to the IMF bailout which is very workmanlike, you borrow the money because you’re in a bind at an interest rate which is fixed globally, you follow your own determined plans to fix your economy and you pay back the IMF – simple. We don’t have any real leverage with the IMF but we do with the EU because it is mostly EU banks (okay some of them might be centred in Ireland’s “Liechtenstein by the Liffey”, the IFSC) that are mostly exposed to Irish bonds. So you could argue that in that case we do have leverage and might enter into amicable discussions with our European partners about ways in which we can grow our economy to ensure we, the citizens, repay our banks’ debts – I express the matter in these terms to emphasise the feeling that foisting bank debt onto citizens is unfair and in these circumstances it might be proper for our benefactors in Europe, who are lending to us to enable us to repay their national banks, to consider a stimulus package for example.

So what happens next? Enda asked our friends in France and Germany if we could burn the bondholders and they said “no”. Should he ask again and say “pretty please”? Should he unite with European leaders who might support a burning of bondholders and would the resulting union have a better chance of its voice being heard? Should he act unilaterally or threaten to act unilaterally? Or was that it yesterday, was that the delivery of the manifesto commitment to renegotiate the bailout? Surreal.

UPDATE: 6th March, 2011. It is being reported by the English-language Greek newspaper Ekathimerini that European Monetary Affairs Commissioner Olli Rehn is now advocating lower interest rates and longer repayment period “There is a danger we could overburden both countries with overly strict credit conditions … [The eurozone must] lower interest on loans for Greece and Ireland” he is reported to have said. Reducing the cost of our bank bailout with burden-sharing with bondholders is markedly not mentioned. Olli apparently has an interview which will be published in tomorrow’s in edition of Germany’s Handelsblatt business daily.

Read Full Post »