In the dirty little scrap that took place last week after Citibank economist Willem Buiter said Ireland should be planning for the possibility of a second bailout, it seemed to be lost on us all – regardless of whether or not Ireland needs a second bailout – we will need to continue borrowing. Even by 2015 when we plan to have a 3% budget deficit which will amount to €5bn-plus, we will need borrow. Plus we have debt maturing and we will need to start paying back our first bailout. So we will need to borrow. That’s an unassailable fact.
The argument is about whether or not we will be able to borrow from the open market, mostly the sovereign bond market, at so-called “sustainable” rates. But should we really be concerned whether we get the funds from the open market or a second bailout though? The perceived wisdom is that a bailout will have strings attached, and we don’t want foreigners sticking their noses into the running of our country, we don’t want them turning up each quarter assessing our progress and we don’t want to have to ask permission any time we think of a policy. We want to, in the words of An Taoiseach Enda Kenny, “wave goodbye to AJ (sic) Chopra and the IMF”
But let’s step back for a moment and consider the immense benefits – both achieved and in prospect – of the bailout
(1) It’s cheap. Whilst Irelandis paying an average interest rate of just 3.7% on its bailout, the mugs in Italyand Spainhave been paying 6-7% in recent months on the issuance of new long term debt. France’s 10-year bond closed at 3.1% last week, and it may come under renewed pressure following the confirmation of the S&P downgrade. Ireland’s 10-year bond is at 7.8%, and hasn’t been much below 5% in the past five years. So 3.7% is an absolute steal.
(2) Independent fiscal advice council. This was announced last July 2011, just about meeting a commitment date in the bailout Memorandum of Understanding. The Fiscal Responsibility Bill is currently wending its way through the Oireachtas but what we should have by the end of March 2012 is an expert economics panel who will give their views openly on Government projections and the effect of any policy announcement. The existence of this council should combat the tradition of gombeenism which promises and legislates in a way which runs counter to the interests of the country as a whole, in favour of short-term electoral victories and benefits to vested interests.
(3) The legal and medical professions. Some pretty limp-wristed legislation was introduced last year to combat the high cost and competitive distortions of our two leading professions. Limp-wristed but a start. It will be at least a couple of years before we see the effects of the new measures, but if we still end up with the second highest legal costs in Europe (after Moscow), it will not go unnoticed by the IMF.
(4) Personal insolvency. Ireland had the most draconian personal insolvency (bankruptcy) legislation that I have seen, which was effectively non-existent judging by the very small number declared bankrupt each year (single digits were not unusual annual figures). Last year, under pressure from the IMF, the Government made some light amendments to the legislation, but this year, we expect to have spanking new legislation that will haul Irelandinto the 20th century, and allow people with unsustainable debts a humane and economically efficient means of getting on with their lives. Do you think this would be happening without the IMF breathing down our necks?
(5) House prices! By mid-2012 we should finally have an open database of house prices in this country. Called for at least since 1973 with the publication of the Kenny Report, successive governments have superficially all welcomed the Kenny Report recommendations but somehow seem unable to enact them when they get into power. It was laughable during the previous government’s term to hear data protection being held up to shield the administration from enacting something promised in its programme for government, Hand on heart, I don’t believe we would now be getting a House Price Database unless it was required by the Memorandum of Understanding.
(6) Political pigtroughery. Despite having an independent media in this country, it is still only occasionally that we get an insight into the ludicrous cost of Government, which will naturally enough act to protect its own perks and privileges. At least with the IMF controlling the purse-strings, we may have whipsaw pressure from the public and the IMF, so that we can have get the cost of Government down to a reasonable level.
(7) NAMA. There had been signs that the Government last year was going to politically interfere in NAMA on a grand scale, farming out its asset management functions to 3-4 asset management companies for example. Although Government interference has increased and NAMA has a dedicated contact number for politicians and rumour has it that ministers do ring the NAMA CEO Brendan McDonagh to ask for decisions to be expedited and in some cases reversed. But for all of that, the IMF understands NAMA’s objectives and will help the independence of the Agency by identifying damaging political interference. NAMA was one of the first bodies to meet the bailout teams last week; if Brendan McDonagh complains of political interference, it is likely the comment will appear in the IMF’s assessment.
(8) Stress tested banks. Remember before the bailout, our own financial regulator, Matthew Elderfield had overseen not one but two stress tests of the banks. The first turned out to be hopelessly inaccurate in underestimating the losses in our banks, and the second suffered from poor credibility after the first fiasco. The IMF and EU oversaw the stress tests in March 2011, which received no small amount of welcome from markets.
(9)Croke Park (agreement with unions to protect pay levels in return for reforms), social welfare and income tax rates. To close the budget deficit, it is likely that Ireland will need some form of wealth tax. It is also likely that top salaries in the public sector will need be significantly cut. But even that will not balance the books and the view on here is that Croke Park which protects salaries amongst all levels of the public sector, social welfare rates and income tax levels will need be adjusted. All are political hot potatoes which governments will try to avoid. The IMF will make it happen.
(10) Our economic sovereignty. On current projections, it will take eight years, from 2008-2015 for Ireland to adjust to the collapse of our financial and property sectors. Eight years. And it will be a challenge to have a near-balanced budget by 2015. But without the up-close-and-personal involvement of the IMF, do we think we could balance the books ourselves under the traditional standard of Irish political competence? Whilst remaining a member of the euro?
So the next time politicians poo-poo the notion of a second bailout, perhaps we can remind them of the politically difficult but beneficial reforms the IMF has effected in this country, not to mention the rock-bottom interest rates charged on the bailout. The reforms however are far from complete, so a second bailout and further oversight from our friends at the IMF, might just be in the interests of the country as a whole.
Amen
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