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Messages from Europe : Is bailout ‘renegotiation’ realistic any more?

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Do Fine Gael and Labour still believe they can, in government, dismantle the key provisions of Ireland’s memorandum of understanding with the IMF/EU/ECB, at least on the EU end of things? Messages from Europe suggest the scope for changing any aspect of the deal is very limited.

 First, there was Trichet. On February 4th, the President of the European Central Bank sent a message to Ireland’s political class:
“Our message to the Irish government is ‘Apply the plan,’” he said. “The plan comprehends a number of measures concerning the economy and reshaping of the banking sector. Our message remains: ‘Apply the plan.’”
The IMF/EU/ECB deal had been voted on and accepted by these international bodies, he pointed out.

“Implementation of the plan is absolutely essential, in my opinion and in the opinion of the ECB, for the credibility of the country,” he added

.
Just in case of any doubt in Irish minds that the deal on the table is the deal they will have to work with, he finished up:
“We have always a very strong message for all countries in Europe, without any exception, on the necessity to be absolutely credible on fiscal consolidation. We consider that fiscal consolidation is not contradictory with the consolidation of the recovery and with job creation, because consolidation brings about increased confidence, and confidence is the ingredient that is most missing in most of the countries.”
Yesterday, along came Olli Rehn. “I’m of course following the Irish debate closely and I’m aware that in democratic politics we have freedom of speech and freedom of positions,” the EU economics commissioner said. “At the same time, it is clear that the EU has signed the Memorandum of Understanding with the State, with the Republic of Ireland and we expect continuity and respect of the memorandum.”
“It is essential to respect the plan, respect the memorandum,” Ollie Rehn stated, “ and especially for 2011 the decisions are very much framed by the memorandum but concerning the outer years (i.e. 2012 – 2014)there is more room of manoeuvre.”
That room for manoeuvre, especially on the interest rates, may be limited by other political factors in the EU. The rates of interest for loans from the temporary fund to which Ireland applied for assistance in November were set in May 2010 when the fund was established. EU member states who signed up to the fund secured parliamentary approval on the basis that relatively high interest rates would be imposed on any country looking for a loan from the fund. It’s already reported that the Dutch government, for example, is opposed to any changes in the rates applying to the existing loan fund because of the domestic political difficulties this might pose for them.
Yet it’s clear that Rehn appreciates the problems Ireland could run into in servicing debts on loans with  5.8% interest rates and is sympathetic to some reduction, provided everyone else around the EU table agrees to it and the objective of any reduction is for the benefit of the EU as a whole, not any particular concession to Irish gripes.
“If there will be any changes to the pricing policy, which I personally support and the commission supports,” Rehn said, “it will take place for the overall European reasons not specifically because of electoral statements in Ireland.”

The IMF position has been clear from the outset: the interest rates applying to their bailout loans are calculated according to a formula used for different classes of country.While these rates may go up or down over the course of time, they are non-negotiable with any individual country. Further, whilst the IMF will consider adjustments to the details of the implementation programmes, that only applies to initiatives that will, overall, deliver the same result.

The respective approaches of the EU Commission, the ECB and the IMF combine as one stark message : the loans agreement is between the state of Ireland and the institutions, irrespective of any government that holds office. There’s a long tradition in Irish politics of governments adhering to commitments made on behalf of the state with external parties, of not repudiating international agreements. An example that comes to mind is Charles J. Haughey accepting the Anglo-Irish Agreement on his return to office in 1987, even though he had fiercely opposed it as leader of the Opposition. Will Fine Gael, or Labour, in government repudiate an existing international agreement?
  The second part of the message is equally straightforward: apply the terms of the memorandum. The unspoken ‘or else’ is that repudiation of the agreement will result in the ECB withdrawing liquidity (that’s cash to you and me) from the Irish banking system, for which it’s in hock to the tune of about 100bn euro already at a 1% interest rate. Cutting off the flow of cash to Irish banks means there would be no money in the ATMs the following day and risks a collapse of the entire economy. Even those who advocate taking a tough line with the EU in the quest for a better deal, or who favour sovereign default now rather than being forced into it later, do not deny that if the ECB stops propping up our banks with cash, there’ll be no cash for anyone the next day. Would either of the parties most likely to form the next government be prepared to risk such an outcome?
  From the outset, Fine Gael and Labour made ‘renegotiation’ of the IMF/EU deal the central plank of their election campaigns. Eamon Gilmore and Enda Kenny, respectively, declaimed that the election was about securing a mandate from the people to renegotiate this ‘bad deal’. Even allowing for election rhetoric – and we’ve been subjected to some egregious examples like ‘Frankfurt’s way or Labour’s way’ – both parties have been forced to shift their positions from their initial stance and acknowledge that whatever possibility for renegotiation may actually exist, it will have to be pursued within the framework of the EU. Moreover, with every statement coming from Europe, the limits on what’s up for renegotiation draw tighter.
  The only remaining institution to which Ireland can turn for some relief from the current interest rates applying to the loan agreement is the EU Council, currently working its way through all the options for a new permanent loan facility. The presumption is that the new regime would either apply lower rates of interest than the temporary fund or that the period of the loans could be extended to a long-term framework of twenty or thirty years. Not so nice ideas also in the ether are for common EU rates of corporation taxes, constitutional provisions to make it illegal for governments to run excessive deficits and the like. What emerges from the current process will be voted on and agreed at an EU summit on 24-25 March.

  But this raises an interesting question: what if the terms and conditions attaching to the new loans arrangement are worse than those which apply to the memorandum of understanding that Ireland has already entered into to secure the 85bn needed to see the country through the next two to three years? What then? And why is nobody putting this question to the parties that make up our government-in-waiting?

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3 Responses to “Messages from Europe : Is bailout ‘renegotiation’ realistic any more?”

  1. # Comment by David Mc Guinness Feb 15th, 2011 19:02

    With the present intrest rate there is a high chance we will default when all the home mortgage start to default leading to a much larger problem. No one has suggested default but renagoation with FF removed evidence of the true extent of the problem coul be presented to europe. It is in no ones intrest for ireland to default it will bring large problems for some European banks who hold much Irish bonds this would lead to problems for other goverments. Would the German people put up with paying for bank dept or would they insist they be cut free.

  2. # Comment by P O'Neill Feb 15th, 2011 21:02

    Note — Brian Lenihan has already broken the terms of the memorandum. It explicitly calls for bank recapitalisation by end of February. He says he won’t do it.

  3. # Comment by Veronica Feb 16th, 2011 09:02

    p,

    We’ve been through this before – having secured the agreement of the IMF, the EU and the ECB, the caretaker Finance Minister has temporarily postponed the recapitalisation leaving it to the incoming government to perform as their first act. While people can argue over whether this was stroke politics or not, the same people would make a general election football of it if Lenihan had proceeded, painting the recapitalisation as ‘FF the bankers party throwing more of your good money into the banks without Dail approval, while robbing the blind, the elderly and the unemployed etc.’ Anyone who thinks otherwise is only fooling themselves.

    Further, since both FG and Labour, in their haste to have the election called, accidentally or deliberately overlooked the inconvenient fact that this recapitalisation was due to take place at the end of February and should therefore be dealt with by the Dail before it dissolved, it’s reasonable to surmise that there was political monkeying going on on all sides. The lenders have since made it clear they expect the recapitalisation to take place as soon as the new government is formed. FG have muttered stuff about waiting until the stress tests are done on the banks as a way of having to avoid taking an unpopular decision as soon as they’ve come in the door, but they’re unlikely to be able to get away with this tack for long in government, especially if they want the banks to stay in business. Whatever sort of deal for the Irish banks payback of the 100bn they owe the ECB is being cooked up between Irish officials and the EU at the moment will impel the new government to make early decisions on the banking system in any case.

    The emphasis on this post is on what FG and Labour will do if both of them, or FG alone, make up the next government. Labour have signalled that they wish to repudiate the agreement if their terms for an extension of the fiscal adjustment are not met and if they are not immediately offered a reduced interest rate. That’s a threat of a substantive breach, not a technical delay in implementation of a particular provision. FG were on the same path, but have steered themselves off it and are hoping that the EU Council will provide them with a new permanent fund arrangement with more palatable interest rates and terms and conditions into which Ireland’s loan package could be transferred. First,that may take a year or two to set up, so what do they propose to do in the meantime? Second, my question: what if the new arrangements are worse for Ireland than what’s already on offer?

    What the caretaker Finance Minister or the FF party do or say doesn’t matter a jot anymore because they won’t be in government and most of them may not even be in the next parliament. The focus has to be on the parties that will, as opinion polls suggest, make up the new government. Because it’s what they say and do that will determine what will happen in all our lives in the next five years.

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