THE International Monetary Fund, in its report on Ireland released last Friday week, predicted that Ireland's debt ratio, at the end of 2013, would hit about 118 per cent of GDP, provided that deficit reduction targets are met and that economic recovery has started.
They expect GDP growth at two per cent in 2013 and about three per cent thereafter. Ireland is due to exit the official support programmes at the end of 2013 and will be able to borrow in the markets, whatever is needed to finance maturing debts and any ongoing deficits, from that point onwards.
This benign scenario is founded on a series of assumptions. The first is achievement of the deficit reduction targets, which requires more spending cuts and more tax increases, for at least two further Budgets. The second is a resumption of economic expansion. Implicitly, a third is the assumption that sovereign debt markets will look kindly again on lending to highly indebted eurozone countries. Finally, no allowance is made for extra liabilities, in addition to those already provided for, that could crystallise on the State's balance sheet over the next few years; the State has contingent liabilities for banks and for Nama.
While this benign scenario is certainly possible, nobody can be sure that things will work out so neatly, including the IMF. It writes: "The growth outlook has deteriorated as export prospects are dampened by the recession projected for the euro area and by lower growth projections for Ireland's other trading partners.
Moreover, deleveraging by European banks increases the risk of curtailing already low domestic bank lending and of more costly deposits, undermining prospects for restoring bank viability and for economic recovery. The vulnerability of household and SME balance sheets could increase the impact of such shocks on Ireland's recovery, and a more lasting period of low growth would further increase the difficulty of the medium-term fiscal consolidation and threaten debt sustainability."
The IMF's blunt conclusion is that "debt sustainability remains fragile". So the IMF is hopeful, but not overly confident, that Ireland will graduate from the official lending programme and back into the markets on schedule.
The IMF went on to support the case for a favourable modification to the terms of Ireland's financing of bank rescue costs. Since a portion of these were imposed by our European partners after Ireland's inability to borrow in the markets had become manifest, those who called the tune might, in solidarity, feel bound to assist. Whether solidarity plays any role beyond rhetoric in European monetary politics remains to be seen.
The IMF's case is more practical: they have gone further in public than before in their view that a deal on bank rescue costs is needed to enhance the credibility of the benign scenario sketched above. The IMF's Craig Beaumont was asked at the press briefing about the negotiations under way to ease the burden of repayments on the debt (promissory notes) arising from payouts to Anglo and Nationwide creditors, including unguaranteed bondholders, the burden on the Irish Exchequer imposed by the European Central Bank. This extended excerpt from the IMF transcript is noteworthy:
Craig Beaumont: "Yes, promissory notes are part of the technical work that's ongoing."
Questioner: "At this point would you say you're optimistic about receiving a favourable outcome for Ireland on that or not?"
CB: "We're optimistic in the sense that we continue working quite hard on this issue. Together with the staff of the European Commission, the ECB and the Irish authorities, substantial work is being invested into this, so that I think all parties are working hard to make it possible."
Q: "Are you optimistic about the potential outcome in terms of . . . in the process?"
CB: "Like I said, we are applying a good deal of resources to this on all sides so that I think we all have a positive attitude to achieving this goal."
Q: "Is it a near-term thing? Is it a medium-term thing? Do you think there will be some outcome? First of all, when do you think we'll see . . . produced by the troika, number one? And then when do you think we'll see a final outcome on the . . . prom note issue?"
CB: "No timetable has been agreed for the technical work in progress. We'd like to move it along reasonably quickly, but at the same time we need to achieve a certain degree of consensus among all the parties so that there is no firm timetable."
Q: "Is there a certain amount of consensus at this point or are you meeting some . . . resistance from other members of the troika . . . ECB? Can you give us a flavour of the level of consensus there at the moment?"
CB: "I think that there is a lot of consensus among the staff involved. It's still a work in progress, but fundamentally the underlying concept has attracted a lot of consensus."
Q: "Just to be clear, you're saying there is a lot of consensus within the troika on this particular issue?"
CB: "Yes, among the troika staff."
Mr Beaumont restricted his attribution of support to the troika staff, as distinct from the troika's principals. The significance of this careful distinction became clear on Friday. In The Irish Times, Arthur Beesley reported that: "The Government's campaign to reduce its banking debt is running into strong resistance within the European Central Bank. More than six months after Dublin first raised the matter with the ECB, the Frankfurt-based institution is pushing back heavily against persistent Irish demands for a concession to ease the cost of rescuing the former Anglo Irish Bank. The ECB's stance is crucial because its support is a prerequisite for any deal to restructure the debt.
"Within the ECB, the view remains that alternative avenues are open to the Government to improve its finances, among them reductions in public-sector pay and welfare entitlements. The argument is made that average public pay and welfare levels in Ireland are higher than the average in some of the other eurozone countries that are supporting Ireland's bailout, among them Spain, Slovenia and Slovakia."
Beesley did not name a source but the ECB is a loose-lipped organisation lacking the discipline of a normal central bank in its communications strategy. The source could have been any of a number of executive board or governing council members, many of whom appear to regard leaks to the media as a form of accountability.
If this is an official view from the ECB, its self-bestowed responsibilities are expanding by the hour. They already include the forcible deployment of the resources of a country in an IMF programme to pay unguaranteed bank bondholders, against the advice of the IMF. This latest addition is the provision of free counsel on the harmonisation of public-service pay and social welfare rates across Europe. It is indeed the case that Irish spending on public pay and social welfare needs further economies but it is hardly any of the ECB's business.
However, Beesley's informant appears not to be articulating a settled ECB official view. Last Thursday, reporters quizzed ECB president Mario Draghi on the same issue. He responded merely that the matter was "under study". All that can be said at this stage is that there are people within the ECB, and probably at a high level since the lesser mortals do not leak, who are opposed to any measure of relief for Ireland from debts imposed on it by the ECB. The organisation's president, however, chose not to articulate any such opposition when presented with the opportunity to do so.
Irish Central Bank governor Patrick Honohan reportedly wished to have the matter discussed at the ECB's Thursday meeting in Frankfurt but according to Draghi this did not happen. Instead, as so often in the past, differences of opinion within the upper echelons of the ECB are to be pursued through anonymous leaking competitions in the press.
Should the ECB decide to oppose any modification to the promissory note burden it has imposed on the Irish Exchequer it will have to do so in public opposition to the declared advice of the IMF. The third component in the troika, the EU Commission's DG Ecofin, led by Commissioner Olli Rehn, has appeared in the past to take its lead from the ECB in its dealings with Ireland. It could be different this time.
- Colm McCarthy
Originally published in
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