It was all smiles today as the missionaries from our bailout creditors, the IMF, the EU and the ECB held a press conference in Dublin to pronounce themselves pleased with Ireland’s progress to date with implementing the bailout programme as set out in the Memorandum of Understanding. Ireland had met all of its tasks for the second quarter of 2011, and we have now seen the back of the missionaries until October 2011 when they will, by all accounts, have a more challenging sets of tasks to review. A recording of the televised press conference may be available via RTE later here. The Troika issued a joint statement, available here. Concluding the love-in, the Irish Department of Finance has issued a statement welcoming the positive conclusion of the review.
So to extract the good from the concluded review mission, Ireland has met all the targets set out in the “Programme” which is the Memorandum of Understanding as amended by the Technical Memorandum of Understanding in April 2011. Contrast that with the position in Greece at the end of May 2011, when the review mission downed tools (or calculators and charts) and threatened to abandon the review because Greece was simply not making progress in its programme. InIreland’s case, it is particularly encouraging that we are meeting deficit reduction targets – the end-June 2011 Exchequer primary balance, that is, the Exchequer balance excluding Exchequer debt interest payments was the subject of a target of -€10.9 billion and the actual result was “was -€8.4 billion meaning this target was met.” It seems truly wondrous that Ireland has performed so well against a target set only three months ago.
Not meaning to be churlish, some of the achievements noted by the Department of Finance during the quarter are pretty hollow at best, and seemingly downright misleading at worst. For example, it is a fact that an “Irish Fiscal Advisory Council was established on an administrative basis” in the sense that on 7th July 2011 (seven days after the quarter end, mind), Minister Noonan did issue a press release stating that five named people have been chosen for the Council but the work and operation of the Council was be given effect by “legislation to be brought forward by Government later in the year in the proposed Fiscal Responsibility Bill”. So the Council may have been (just about) established on an “administrative basis” at Q2 end, but it seems it will be some months before being established on an operational basis.
But it is in respect of NAMA that the Department of Finance seems to have taken real license with its creativity when it says “NAMA is constructively contributing to the restoration of the Irish property market. NAMA has committed to the disposal of 25 percent of assets by end 2013.” To recap, this is listed as an achievement in Q2, 2011. I would have said the view remains that it is NAMA that is holding up the restoration of the Irish property market with delays in agreeing business plans with developers, and even greater delays in releasing property onto the market. The proposal to create a new mortgage product by the end of this year is apparently just that, a “proposal”. Bank of Scotland (Ireland) and its asset management company Certus has done infinitely more than NAMA by holding two Allsop/Space auctions which have aided price discovery and apparently led to a restructuring of asking prices which is likely to lead to a more realistic market in which transactions can take place. What has NAMA done in the quarter to restore the Irish property market? There is still uncertainty about the agency’s plans with suggestions that disposals will be focused in the UK rather thanIreland. This is just plain misleading and the 25% disposal plan has been around since NAMA published its second business plan in July 2010, a year ago.
But aside for the present, what was striking about the news conference today was the apparent rift between the IMF and Europe. There is a “need for a European solution to a European problem” said IMF deputy European chief, Ajai Chopra. It seemed like a well-rehearsed line as Ajai allowed himself a little smile as soon as he had uttered the phrase. This is in line with previous IMF pronouncements, but it is significant that it has remained the line after the recent appointment of former French finance minister, Christine Lagarde as managing director of the IMF. Ajai also urged Irelandto remain “robust” in its stance on burden-sharing, which seemed diagonally at odds with the stance of the man from the ECB sitting next to Ajai at the conference. And it was the man from the ECB, Klaus Masuch that perhaps provided the most interesting contribution to the news conference.
The ECB is plainly aware of local feelings towards using state finance to repay senior bondholders in banks, and in fairness to Klaus he genuinely seemed to take a step back to explain the ECB’s stance. It’s unlikely to make the Irish audience any happier but here was the reasoning:
Ireland benefits from over €100bn of non-standard liquidity provided by the central banks (the ECB and the Central Bank ofIreland) at rates from 1.5%. This is a massive intervention from the ECB, and wereIrelandnot part of the Eurosystem, this intervention would not be available to its banks which are unable to source financing elsewhere. And as part of the Eurosystem, the ECB requires the repayment of senior bondholder debt lest a default cause contagion throughoutEuropeand drive up funding costs for European banks generally. The ECB is there to protect the banking system for 330m people, and of courseIrelandgenerally benefits from a sound European banking system.
The above is debatable, but it was striking that the ECB did not just refer to “the plan, the whole plan and nothing but the plan (which on paper at least doesn’t even mention bondholders)” but that the ECB has moved at least in its communication strategy and seems keener to explain its position.
Of more interest domestically was the well-placed question from Emmet Oliver at the Irish Independent who asked if there was any point to Minister Noonan seeking a discussion with the ECB in the autumn regarding imposing haircuts on senior bondholders at Anglo and Irish Nationwide. The answer from the ECB was that it had a position on that, that that position had been explained and that that position had not changed. So it seems Minister Noonan can seek to open discussions until he goes blue in the face – the ECB has effectively stated the matter is closed.
And lastly, it was striking how many times during the press conference that the recapitalization of the Irish banks was mentioned. The recapitalization has now been deferred three times – remember it was originally to happen at the end of February but then-Minister for Finance, the late Brian Lenihan decided to defer the recapitalization until after the election, after the election it was decided to defer the recapitalization until after the results of the stress tests were published at the end of March 2011 and after that, Minister Noonan decided to defer until the end of July 2011. The July 2011 deadline was mentioned several times at the news conference and is also mentioned in the joint press statement. It’s not, however, mentioned in the Department of Finance statement and it is to be hoped that Minister Noonan defers again. After all, the next Troika review is not due until October 2011 and the ECB has guaranteed its funding until October 2011 also. In light of rapidly evolving events in Europe and also a deterioration in the outlook for Irish banks (see here), the Minister may well have the freedom to defer the recapitalization for another two months (at least).
UPDATE: 22nd July, 2011. The transcript of the press conference reported above has now been made available by the IMF.
NAMA Wine Lake 