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Archive for June 19th, 2011

This is the second in the weekly GreekWatch series (first week here, plus there was a special this week here). So first up, the timetable ahead

Today (19th June) – Meeting of EuroZone finance ministers (“the Eurogroup”) inLuxembourgwhere our own Minister for Finance, Michael Noonan will represent Ireland’s position. The leader of the group, Luxembourgish prime minister, Jean Claude Juncker has warned against countries and institutions “playing with fire”. In other words, this is serious.

Tomorrow (20th June) – continuation of Eurogroup meeting, don’t be surprised if the meeting continues beyond its scheduled finish time. Some think it might continue until the Summiton 23rd. On Monday the Eurogroup will be joined by non-EuroZone finance ministers including the UK’s George Osborne

Tuesday (21st June) – confidence vote in the Greek prime minister. Betting is he will prevail. If not, perhaps new finance minister Evangelos Venizelos will care-take government during crucial votes. Otherwise domestic turmoil.

Thursday/Friday (23-24th) – Summit of EU leaders in Brussels where Taoiseach Enda Kenny will represent Ireland’s position. Expect the bones of a second bailout for Greece to emerge.

Wed/Thu (28th/29th June) – When Greece is understood to have concluded its debate, (re) negotiation, vote and agreement and consensus on new austerity and privatisation plan. The 29th was also the original date of the next draw-down of Tranche 5 of Bailout 1, totalling €12bn bringing the cumulative total to €65bn from the €110bn Bailout 1.

“Early July” – when the IMF indicated Tranche 5 of Bailout 1 would be drawn-down, this after the staff level agreement on 3rd June

15th July – when Greece is scheduled to start repaying maturing debt and which it claims it can’t without Tranche 5. This is probably the backstop date for any agreement, because if maturing bondholders don’t get their moolah, there will be messy sovereign default.

What’s likely?

Following the joint announcements by France and Germany on Friday last, it seems that Greece may get a second bailout of €120bn, with €30bn coming fromGreece’s own resources (additional privatisation) and the remainder coming from the EU and possibly, the IMF. On a voluntary basis, private bondholders may contribute to the bailout by agreeing to extend the maturity of their bonds, possibly in return for higher interest rates, better collateral and greater protection. About a week ago, the talk was that €30bn of the second bailout would come from private bondholder participation. The thinking in the market is that bondholders will not participate unless there is “an element of compulsion” which would greatly upset the ECB and more importantly ratings agencies. So from this perspective, it seems that there will be a second bailout of €120bn with €30bn from Greece and most of the rest from the EU, and possibly the IMF. And by the looks of things, it might not be an EU-wide bailout. The Finns and Dutch will be unhappy about contributing more, so it might fall to the Germans, French and a handful of other EU nations to stump up for Greece Bailout number 2.

As for the Tranche 5 of Bailout number 1, I think the betting is that the €12bn will somehow be drawn-down by 15th July. Despite all the noise in Greece this week, at the end of the day it was not a huge protest – the impression given by the Irish media is thatAthens is ablaze, it is no such thing and life is continuing more or less as normal.Athens is a city of 4m and the estimates of protesters on Wednesday seemed to be in the 50-100,000 range. In Ireland, where we don’t really protest much, we mustered 100,000 in a city of 1m in 2009, and 50,000 last November when the IMF deal was negotiated. Regardless of the anger, Greece must in any event close its primary deficit, that is, what it collects in tax less its public spending and welfare (primary deficit excludes interest on debt). And Greece seems to be at least a year off that. So if Greece doesn’t agree a plan with the EU/IMF and defaults, then it will need balance its budget immediately and probably withdraw from the euro. Set against that scenario, I think the betting is Greece will accept a plan, but plainly it’s not assured.

And what about the “purely voluntary” bondholder initiative touted on Friday byFranceandGermany? The view by bond traders in Ireland is that there will be no take-up if it is purely voluntary without any element of compulsion. But if faced with default or arm-twisting, there may be some participation.

What about Ireland? Although the Taoiseach will spend two days in Brussels this week and Minister Noonan will spend at least two days in Luxembourg, we’re likely to be told again “too bad, so sad, no time to discuss your issues”. Will Taoiseach Kenny decide to create some noise and demand a 1-3% reduction in our interest rate on ALL EU borrowings, that is the €17bn already received and the €28bn that may be drawn down in future? Who knows.

And lastly, what contingencies has Ireland if this all turns pear-shaped? On RTE’s This Week radio programme today junior minister at the Department of Finance, Brian Hayes didn’t say, when asked that question. It seems that the scenarios are too horrendous to contemplate : a collapse of the Euro, withdrawal of ECB non-standard liquidity, the collapse of Irish banks. All are horrendous but hopefully our Government is nonetheless planning for eventualities as it seems agreed that the EuroZone is confronting the most serious crisis in its 10-year life and that we are in waters last navigated in 1992 when there was partial breakup of the EMU.

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Last Monday, we witnessed Enda Kenny’s greatest public gaffe since collecting his seal of office on 9th March. In a setting within earshot of British and Northern Irish MPs and MLAs, many of whom will have NAMA property in their constituencies, the Taoiseach held forth on skullduggery in NAMA, and developers buying their property back below market value. Enda went on to say that he was going to refer the matter to the Minister for Finance, who has particular legislatively-derived power over NAMA. The headlines reverberated around the world, with the Irish Examiner splashing the story across its front page the next day and in investments centres from New York to London, an impression was given that something was rotten in the state of NAMA. On Tuesday, the NAMA chairman who happened to be speaking at the same two-day conference in Cork diplomatically refuted the claims, and the Taoiseach’s spokesman sheepishly pronounced the Taoiseach satisfied. NAMA has gone to the trouble of creating a Northern Ireland committee especially to defuse concerns about the impact of NAMA on the small Northern Irish economy; NAMA is reportedly concentrating on the sale of property in the UK “sooner rather than later”; what British MPs and Northern Irish MLAs thought of Enda Kenny’s stupid, ignorant and damaging gaffe isn’t known. But a gaffe it was, and the opinion on here is it is the first public gaffe since Enda took office just over 100 days ago.

The first 100 days in office came after a general election in February that was signalled last November, and which had been in the offing for well over a year, and were specifically held out by Fine Gael to herald radical change. Key to the FG manifesto and subsequent programme for government was re-negotiating the IMF/EU bailout agreement “The current deal is bad for Ireland – and bad for Europe”, “We will seek a reduced interest rate”,  bondholder burning “could be extended – as part of a European-wide framework – for senior debt, focusing on insolvent institutions like Anglo Irish and Irish Nationwide that have no systemic importance” and after 100 days we seem no closer to changing the IMF/EU deal in any significant way at all with first, the abandonment of burning senior bondholders, secondly not seeking an extension of time to repay debt and thirdly effectively abandoning the campaign for an interest rate reduction.

And during that 100 days, one of the most unedifying sights I have seen of a leader any place was the Taoiseach standing up in the Dail two weeks ago to plaintively moan that the bailout deal was “unfair”.  It made him and by extension all of us look child-like and helpless. All Enda needed to complete the image was an oversized baby’s bonnet and an oversized lollipop which he could fling to the floor in a tantrum before storming off in an oversized diaper secured by an oversized safety pin.

Is the deal unfair? It probably is by comparison with Greece’s, but let’s step back a moment, slip off the Green Jersey and play Devil’s Advocate. The deal provides funding toIreland for 7 years at a rate which is now about half that available to Ireland on the open market. Most of the bailout is required to tide the country over the period to 2015 when the State is collecting less in tax than it is paying for public services and social welfare. But our State’s finances collapsed in 2008 and it will take the best part of a decade to re-balance them; what sort of nation takes a decade to deal with an “economic” deficit, “economic” as opposed to a deficit resulting from war or natural disaster. Our social security, public (and indeed private) sector wages and cost structures make us a laughing stock inEurope. Here we are, a country broke and in need of a bailout for day-to-day spending and we have a smile-and-wave president paid more than the president of theUnited States. And as for the losses in the banks, it was OUR regulatory system which allowed a bubble to form, OUR government allowed an uncontrolled systemic risk to the economy to develop, it was OUR government that gave the bank guarantee much to the chagrin of our EU partners and it was OUR government that created NAMA which crystallised losses now which need be addressed with recapitalisation. Ireland is not some banana republic ruled by a dictator. Yes, our democracy is imperfect but we have a constitution, democratic representation, two (expensive) chambers of government to debate and vote on legislation and a president who can intervene.  And last November 2010, when negotiating the bailout deal we supposedly had enough funding to last us for six months. And with that impressive democratic armour, we still agreed to the bailout terms and they were ratified in our national parliament. And now six months later, we complain it’s unfair. Add to this the fact that we sometimes suffer from Small Dog Syndrome and don’t understand how insignificant we are to larger players – remember that Ireland is to France what Vanuatu is to Ireland, in other words small and not all that significant.

Relative to the EU treatment of Greece, however our bailout deal is inconsistent and runs counter to the spirit of solidarity on which a united Europe can function – we loaned €375m to Greece last year as a contribution to that country’s bailout, we have demonstrated our bona fides in taking extraordinary measures to increase taxes and cut costs, with complying exactly with the bailout terms in respect of our fiscal correction, with paying back every red cent of bondholder debt to date and preventing contagion to other European banks, with refraining from violence and societal unrest, with providing truthful reports of our circumstances and co-operating fully with others; when set against all of this, our bailout might indeed look unfair compared with Greece, who secured a 1% cut in its rates in March, who had misrepresented its financial position, who has failed to implement reforms and austerity measures in accordance with its bailout agreement and that now needs a second bailout and has displayed anything but national consensus. Very unfair indeed.

With respect to a lowering of our interest rates, we are publicly given to understand that unless there is unanimity amongst our creditors to a reduction, then a reduction will not be forthcoming. And France and to a lesser extent Germany are said to be vetoing any reduction unless Ireland raises its 12.5% corporation tax rate, a lynchpin of our economic policy and a key reason that Ireland is exporting itself to recovery. But is our corporation tax the real obstacle to France relenting, or is it more to do with what was a disastrous personal encounter between Enda Kenny and French president, Nicolas Sarkozy on 24th March where there was according to Enda Kenny, a “Gallic spat”. But did Enda, who had only the previous week experienced the sometimes-overwhelming atmosphere of Washingtonfor St Patrick’s Day, puff out his chest too much in a display of self-importance which just irritated the French president? There is certainly speculation that this was the case, and judging by the disgraceful speech delivered by Taoiseach Kenny in Washinton the previous week – dissected here, a toe-curlingly bad speech delivered to Barack Obama which featured to the point of nausea a slave motif and in the end it was surprising that Enda didn’t, Father Ted-like, whip out a slide projector and show a still of Kunta Kinte and nod “a fine lad” – it might certainly have been the case that Enda personally misjudged President Sarkozy. The European Union generally supports a reduction in Ireland’s bailout interest rate and looking at EU president, Herman Van Rumpuy’s diary over the past week which features two meetings of significance, with Nicolas Sarkozy on Wednesday and with Enda on Friday, you might wonder if Herman the president is acting as a go-between to mend the fences which Enda knocked over in March.

One commitment that Enda Kenny has not delivered on was to provide transparency to the people because “Paddy likes to know what the story is”. Yet Paddy must still repay €60bn-plus in bank bondholder debt all because of what the governor of the Central Bank of Ireland referred to a week ago as “influence” exerted by “the people” during the bailout negotiations. Surely if “influence” is going to cost us potentially tens of billions of euros, in a democracy we should know what that “influence” was or is. Plainly it wasn’t appropriate to give effect to that “influence” in the Memorandum of Understanding because there is nothing there about repaying bank bondholders, but was it given effect in the secret side letter to the agreement – the Irish Times reported “the Government has withheld from publication a side letter agreed with the EU and IMF outlining confidential measures for the banks” Paddy does indeed like to know what the story is, and so far Enda is keeping it to himself.

No doubt the above appears critical of our Taoiseach, and it is, but let’s also remember that Enda Kenny has delivered what is probably the most stable government for decades. Yes, it’s still a coalition and there have been a couple of spats across party lines – Howlin v Bruton and Gilmore v Hogan, but for all that both parties are centrist and there is very little practical difference between them. In terms of the general election results, you could argue that Enda stood still and it was Fianna Fail that faltered but you don’t survive and triumph in Irish politics for more than three decades without having some mettle and something special. It is also a fact that we are just 100 days into what looks like a 1,800 day term; Fine Gael is riding high in opinion polls, indeed higher than on polling day in February. There’s the Shakespearan saying that some men are born great, some achieve greatness, and some have greatness thrust upon them. Perhaps it will be so with Enda.

To conclude, this entry marks the 100 day tenure of the new government but it also potentially marks the start of one of the most important weeks in Ireland’s history. Today and tomorrow, Minister Noonan participates in a EuroZone finance ministers meeting in Luxembourg which will be followed on Thursday and Friday this week by a summit of EU leaders. The summit is primarily to deal with the crisis in Greece, and France and Germany are already taking a lead in shaping the solution. But it is also a summit whereIrelandmight adopt more than a rubber-stamping role, it might be a summit where Taoiseach Kenny convinces our EU partners of the collegiate stance we take in showing solidarity to each other, in good times and bad. And in solidarity your colleagues do not profit to the tune of €7bn from your misery by charging you a 3% premium on the cost of funds.

Omitted from the above is much of the minutiae of the first 100 days. We have an expression “look after the pennies and the pounds will look after themselves” but that might be dangerously misleading for the Irish economy. Remember in the next 24 hours, Irelandwill incur just over €3.5m in interest on the drawn-down bailout. That is calculated by reference to the €22bn draw-downs received as set out in the May 2011 Exchequer Statement – shown here. Much of that €3.5m will be wasted as it is interest on funds earmarked for the bank recapitalisation which of course hasn’t happened yet. And between now and the end of July 2011, which is the new self-imposed deadline for recapitalising the banks we will have incurred €150m of arguably wasted interest. The truth is forIreland at present the banks and the bailout are gobbling up sums of money that dwarf more recognisable heads of expenditure. Three weeks ago we repaid €200m in senior unguaranteed unsecured Anglo bonds. So, please forgive the skipping over the pennies in the first 100 days. Right now, it really is about the banks and the bailout.

Oh, and “Noddy and Big Ears”, it’s just the way they look and probably the way they stand, I hope it’s not the way that comes to define their politics. And you might have noticed that there’s no mention of Eamon Gilmore above; that’s just in keeping with his own profile during the first 100 days.

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