Business and Finance Article on EU-IMF Negotiations

Here‘s an article I wrote for Business and Finance on the ongoing negotiations with the EU and the IMF. I wrote the article before last Thursday and have to admit to being a bit less positive now that I was when I wrote it but the general point about the need for a careful approach to ongoing negotiations over the coming year or so still stands.

26 thoughts on “Business and Finance Article on EU-IMF Negotiations”

  1. Karl

    In your article you suggest the following

    “..The new European Stabilisation Mechanism that comes into existence in mid-2013 may require countries that borrow from it to default on existing sovereign debt.”

    I’m not entirely sure that this is correct.

    My reading was that following a debt sustainablity exercise along the lines of previously adopted IMF practices a decision would be made at that stage whether to go down the route of debt restructing with the Member States creditors.

    As a result a prior default is not a requirement to access ESM assistance.

  2. I would expect that saddling the ECB with chunky losses would preclude “obtaining an agreement to lend additional money to Ireland while we deal with our ongoing fiscal problem.”

  3. @Karl W, Yields OB

    The debt sustainability aspect of ESM really gives away the extent to which they are making this up as they go along. My assumption is they will insist on rescheduling at a minimum, but if they insist on or even “sanction” what you might think of as “enough” of a default then the state going into ESM might then not actually need to because it could maybe then access the market.

    That then makes you wonder what, in those circumstances, would ESM be for except to allow what would happen anyway without all the EZ market rigging and political interference.

    Oh, sorry, thats not allowed. We must think of the can and the road.

  4. @ Karl

    Very interesting. Awaking to news of Portugal’s fingernails being scraped towards the trapdoor. If I have you right, you think this might potentially ease the ‘punitive’ nature of the package, as Ireland is seen (rightly or wrongly) as less of a stand-alone delinquent?

    Tiny thoughts: I wouldn’t use the word ‘conceded’ with the regard to the lowering of Greek interest as I’d think it would be best to get away from heirarchical transactional language. I wouldn’t use the phrase ‘final solution’ in any article to do with contenporary Europe where an alternative can be found.

  5. @ Karl Whelan

    QUOTE Ireland is borrowing from the EFSF, which is an EU-wide organisation designed to have the same borrowing terms for all applicant countries. The arguments over Ireland’s interest rate just complicate the situation in relation to Portugal and other future borrowers and the widely perceived “bullying” of Ireland during its hour of difficulty also has not done much for the popularity of European integration in peripheral countries. UNQUOTE

    These sentences contain several errors of fact which confirm a wider problem of overall appreciation in your article.

    The EFSF is not an EU-wide organisation but a body established under Luxembourg law by the countries of the euroarea. At present, only one country, Ireland, is in receipt of loans from it. The body that is intended to replace it, the ESM, will be established by way of international treaty “under public international law” (cf. page 22 of conclusions of the recent European Council).

    The argument over Ireland’s interest rate has no bearing whatsoever on the Portuguese situation cf. today’s press coverage. As to the impact of the “bullying” of Ireland, this story was built on the back of an injudicious comment by Juncker saying that he found the “torturing” of Ireland unpleasant or something on those lines. He undoubtedly said it because he has been in another torture chamber organised by the same countries – France and Germany – in the matter of banking secrecy in Luxembourg. He also has refused to submit. What the coverage reveals is the blinkered, parochial and insular nature of the debate hitherto in Ireland, a debate which is changing rapidly under the pressure of events.

    On the wider issue of the overall judgements made in the article, they are wide of the mark because they do not take into account the fact that it is a euroarea problem which is being left to the euroarea to sort out. Indeed, Bill Cash has come out publicly to say that the UK should not participate (through the Commission/EU budget mechanism of the EFSM) in giving assistance to Portugal. (He must have a poor grasp of history. Wellington is probably turning in his grave).

    Ireland has little or nothing left to negotiate about except the level of the interest rate and this is because of an evident fault in the design of the EFSF not any sympahy for Ireland. There is no need for such a punitive interest rate because the problem of moral hazard is in-existent.

    What Ireland can bring to the table is a political commitment to implement the IMF-EU deal and to stop questioning her ability to exit the need for aid from the EFSF before the ESM comes into force (if it ever does). We simply do not know what the situation will be when the matter has to be decided. Such a “best efforts” undertaking is what the other side wants and what it needs. The can is being kicked down the road in respect of all countries other than Greece (in a different programme), Ireland and now, almost inevitably, Portugal, for reasons that need no other explanation than a reading of the article in the FT linked by Philip Lane.

    On the broader issue of Ireland’s uncomfortable position in relation to both her finances and future historical situation vis-a-vis the UK and Europe, I would refer you to exchanges on another thread with Paul Quigley.

  6. Karl,
    As always, your analysis of the problems Ireland faces in its negotiations with the EU over the bailout package is eloquent and, as you point out, things have moved on since you wrote the piece.

    I’m not persuaded that “the Coalition is playing its hand carefully and effectively” in its dealings with the EU or that “walking away” from any proposed resolution of Ireland’s bailout deal at the recent EU summit accurately represents what has been going on at these EU meetings. Reports elsewhere suggest such an interpretation of events is more the product of Irish government spin than an unvarnished account of what may have actually transpired. The alternative interpretation that ill-judged and intemperate remarks by the current coalition partners in the course of the recent general election, and the Taoiseach’s posture at his first leaders’ meeting in Europe, have weakened rather than bolstered Ireland’s negotiating hand is just as plausible. It’s an axiom of negotiations that you need to persuade those who don’t want to do what you want them to do to take ownership of the change you are seeking, rather than presenting it as a demand for which you have a ‘mandate’, which is only likely to put their backs up. Last Thursday’s announcement tends to bear this out.

    It seems there is an emerging consensus among economists that the interest rate issue is a distraction. “This is least important of the three key issues,” you write. “The zero-sum nature of the interest rate issue set it up as a political football. And given a political football, politicians can rarely resist the urge to kick it.”

    True, and they intend to go on kicking it, according to ‘senior sources’ briefing the Irish Times yesterday.

    “The Government sees a reduction in the interest rate for the European element of the bailout package as a key priority over the coming months, according to senior political sources” that paper reports.

    “The priority, according to Government sources, is to arrive at a situation where Fine Gael and Labour can claim to have successfully renegotiated the terms of the agreement.

    “Since the prospect of burden-sharing has been rejected by the EU, the new priority is to achieve a reduction in the interest rate.”

    If this report is accurate – and the ‘senior source’ attribution suggests it is, then we have lots of self-serving blather to look forward to from this Government. Understandably, at this stage of their term in office and since there is no viable alternative, everyone, including the mainstream media, want to give them the benefit of the doubt. But, in the interests of all citizens, a more probing and critical media approach to their objectives and performance will be warranted shortly, particularly since their commanding parliamentary majority, as well as the fragmented weaknesses of the parliamentary opposition, give them carte blanche to do pretty much whatever they want.

    Finally, on your proposal re the debt for equity swap, I’m not sure I understand how this is supposed to work. According to other comments I’ve read, there is no legal mechanism whereby the ECB can assume any ownership of any banks under existing Treaty rules and its own rules of engagement. Is this correct? Even if they could, would it be desirable?

  7. You assume that the corporate tax rate issue will go away.I think you are mistaken.

  8. @ DOCM

    “wider problem of overall appreciation”

    You know, some people are just able to say “I don’t agree with you” rather than this pompous “Anonymous commentator has deep understanding of European situation and refers you to other comments on other threads” stuff.

  9. @karl

    “The negotiations of the next few weeks and years will revolve around three different issues: The interest rate on Ireland’s EU loans; the future of Ireland’s banking system; and the funding of the Irish Government. In each case, the job of the Irish economic diplomats will be to avoid self-serving arguments and focus on common goals with our EU partners.”

    You put your finger in the last sentence on the country’s biggest ‘nonmarket issue’ – is Ireland committed to the European project or not? Certainly in the past decade that question must have crossed the desks of many EU ambassadors. The bailing out of a member state suspected of only opportunistic attachment to Europe and still harbouring an atavistic antipathy to the kind of secular modernity and political accountability that typifies Norther Europe polity doesn’t win many friends one suspects. The inability or reluctance by successive national politicians, take one’s pick, to engage with the EU as a potentially cosmopolitan experience, rather than a handout machine, has left the nation exposed and largely bereft of political allies – or at least the sort that count. Catherine Day summed up the situation recently in a series of interviews when she spoke in terms of the ‘shine’ gone off Ireland.

    Incidentally, and apologies for purely an aside, I read yesterday in the IT of a survey of European legal practices that ranked Irish firms up amongst the most profitable. How can a country with about 1% of EU GDP generate such remuneration for the legal sector? How do you make a credible case for debt reduction, if the economy can generate such wealth for one sector??? Didn’t the OECD point out that the legal sector needed reform for the benefit of the whole economy???

  10. @ Karl Whelan

    I make no claim to a deep understanding of the European situation. I set out the facts as I see them and it is up to others to come to their own conclusions by weighing them against the views of others. Neither do I make it a practice to comment on the personal style of other contributors as I perceive it. Of course, people come to their own views on that as well.

    If the views of contributors who are contributing under a pseudonym are to be discounted because of that fact, there is a simple solution; stop such contributions to this blog. (I do agree, however, that there is an added onus on them to observe good ‘netiquette’).

    For the information of other bloggers, the exchanges with Paul Quigley to which I referred (which I thought were rather interesting!) can be found at the end of the thread The Euro Area Crisis: The Agenda for the New Irish Government.

    If any of the facts in my contributions are manifestly incorrect, I will be happy to correct them.

  11. I think the whole article and indeed general media and political focus on the word ‘negotiation’ is a misnomer. A chicken arguing to the fox that it should not be eaten might be a good analogy. The penal 5.8% rate makes our scalping a fait accompli. Perhaps ‘pleading entreaties’ might be better. Negotiation means you have something to negotiate with. Unless you are prepared to burn bondholders, receivership/examinership for banks, take your NPRF and remains of your savings and leave the deal on the table, go your own way, its pointless fooling anyone that we have a leg to stand on. The quality of leadership to embark on that course just isn’t there amongst those already plugged into the goodies that will be siphoned off to them in any deal…..For them, any deal will do:)

  12. We hear a lot of talk that the ECB blocked haircuts on senior debt.

    Have the ECB issued a publicly available opinion to this effect and are members of the Governing Council available to answer questions and respond to criticisms of this policy?

    I think all are agreed that there are grounds for differences of opinion in relation to the issue. However, it seems remarkable that the ECB can play such a significant role behind the scenes but not provide the detailed reasoning behind its position.

    This raises a further question. What is the precise legal source of the ECB’s power to in effect veto a haircut on senior bonds?

    I think the role that the ECB is plying and the manner in which it is performing that role in these negotiations, at the very least needs to be subjected to some serious examination.

  13. @Karl

    Thanks, I had read your article at the time it was printed. I see what you’re getting at. Should this idea not be considered as part of the ‘Grand Bargain’ package that sooner, or later, the EU will have to face up to? But, if the EFSF did this for Ireland, would it not also have to do it for Greece, or any other euroarea country in trouble with its banks? Since it has to be part of an overall package, the next question is what other elements must be included in that package to make it work?

  14. @ Karl
    I see in your Irish times article from yesterday that you are continuing to suggest a proposal that ensures that the bond holders are made whole. I think I get the logic.
    The ECB are not going to allow Ireland to do it to any great extent anyway so lets get the European central bank help us by issuing Euro paper and then taking a loss which in effect spreads that loss among the entire euro area via quantitative easing.
    I think you are presuming that in the end the ECB are going to have to bail us out and that it is best for Ireland if they get on with it fast and allowed us to begin to recover. Your proposal would meet this end.
    I also agree that the ECB is in part to blame for the lack of progress Ireland has been able to make thus far in dealing with bond holders.
    They are putting the interests of bondholders ahead of the survival of the the currency and the interests of the ECB itself. It would be unwise to think they would put the avoidance of an Irish sovereign default ahead of bondholder interests.
    However I don’t think I can be as pragmatic as you. Not asking Bond holders to share heavily is completely immoral and against capitalist and social democratic principles. We would be openly admitting to being their slaves.
    That is why we actually HAVE TO act unilaterally. There is no chance of trying to persuade the ECB.
    In this environment the referendum demands by the opposition are starting to become more palatable to me by the day.

  15. @Eamonn @Karl-

    “Barn door. Stable. Horse.”

    In which case we better get running after the “horse “pretty quickly.

    Chasing the “horse” will take up a lot of energy but probably not as much energy as it would take “trying to persuade the ECB”.

    I suspect not only the opposition are finding the idea of unilateral action increasingly “palatable” compared to the effort of trying to influence officers, crew and diverse passengers of the ECB which direction they should take to avoid the iceberg.

    According to the IT today Gay Mitchell MEP made a very (imho) interesting comment, after a meeting between Olli Rehn and Irish MEPś, when he said “….we cannot take everybodyś responsibilities on board”.

    One can only imagine what was actually said behind closed doors.

  16. Karl,
    This is a good contribution to the debate. If you tot up the total debt burden that is in some way either explicitly or implicitly now our burden it probably will touch 400bn by the end of 2012. This comprises about 100bn of sovereign debt including that incurred over the cycle plus 70bn of bank bail out costs plus 30bn of NAMA bonds plus close on 200bn of ECB and CB funding that JCT wants us to stand over. These are round numbers. This is serviced by about 120bn GDP or about 150bn GDP. In other words we are leveraged 3×1 nearly. As poster Simpleton points out we are on downturn away from the cliff edge.

    Moreover, there is not a hope in hell that private capital will come back to the banks with Sovereigns yields where they are. Indeed the banks could not return to profit with depo rates at 4%, term funding at 10% and with equity costing well into double figures.

    Against this background it seems to me that all discussions of a 1% drop in the rate and burning 20bn of senior bonds, while useful do not alter the math. It is all about reducing the absolute burden and by a large amount. You are right to state that this involves write offs and debt equity swaps -not only in the banks but also elsewhere in the economy.

  17. @tull mcadoo

    what about ‘private’ and ‘real commercial’ [excluding IFSC & MNCs] debt?

  18. On Germans who believe in negotiation …. and in Europe …

    Germany should admit its part in causing European crises, says former minister

    http://www.irishtimes.com/newspaper/world/2011/0407/1224294096707.html

    Mr Joschka Fischer said Berlin was being disingenuous in factoring out the culpability of German banks – particularly state-owned institutions – in the Irish financial crisis.
    “We are currently going about sinking 50 years of European history,” said Prof Jürgen Habermas at a Berlin event organised by the European Council on Foreign Relations.

    Habermas: “Awareness of a historical-moral obligation was the source (in the EU) of German restraint and readiness to adopt the position of others and to defuse conflicts through advance payments,” he said. Pointing to the recently agreed EU austerity measures, he said: “The economic package … was put together with so little sensitivity by the economic model student that neigbours no longer talk of not wanting a Brussels political model imposed on them rather a German political model.”

    Fischer: “In the backrooms in Dublin it was our (state-owned) Landesbanks earning all the money to the delight of our state governments of all political persuasions. No one tells the people here that part,” he said. “I don’t see in this a master plan, but a bit of the reality is being kept from view. Ireland could have gotten away well if Brian Cowen had said, ‘we will save Irish banks but English Banks and German banks are not our problem’.”

    Economics professor Henrik Enderlein went further, saying Dr Merkel’s government was “hushing up on purpose” German involvement. “It’s clear German state-owned banks are a key issue in the (Irish) problem,” he said. “But if this got out into the open we’d have a problem with five state governors and if the German federal system needed to become part of solving European difficulties, then we would have a real problem.”

    p.s. I have learned all I know about ‘negotiation’ from reading Professor Habermas. This intervention in the ‘Irish debate’ is very welcome.

  19. @ Karl
    “Barn Door. Stable. Horse.”

    And there I was thinking that the bank bonds mature at lots of different times over the next few years?

    If you are suggesting that impossible to default because of some agreement the previous government have already made I completely disagree.
    For me the facts remain the same as they did in September 2008.
    The harshness of events that would/will occour if we do act unilaterally still do not add up to the benifits of doing it for the country as a whole (though its a different story for a people of a certain age and class in the short term)

    I also have a problem with your suggestion because it passes the problem from one group who don’t deserve it (Irish Citizens) to another (European Citizens).
    Too often in this country we look for the quickest shortest way out of our problems regardless of the morality. How about for once we do the right thing for the right reasons and let the chips fall where they may?

    P.S. That Stephen Donnelly chap is turning our to be brilliant addition to the Dail.

  20. David,

    that is on the other side of the balance sheet. We are increasingly funding all our debts with the ECB. They are becoming the creditor with whom we will eventually negotiate. We will need a very small room.

    Eamonn,
    Having a fight about the rate or burning a few billion worth of non guaranteed bonds is so last year. It does nothing to change the calculus. there is not much different in the states ability to service 375bn or 400bn of debt/liquidity extended frm the ECB/IMF/EFSF etc. That I venture will be dealt with in 2013. Our hand in this negotiation would be greatly strengthened if we eliminated the primary deficit and invested in a new printing press, just in case.

  21. @tull mcadoo

    Ta for that. I’ve seen for some time that ECB is the ‘elephant’ that we eventually default on … due to EZ policy and inane local Sept 30 …

    we might learn a few lessons from The San people in Southern Africa … one well placed dart and then they simply follow the elephant for a few weeks untill it falls down … tough job is that one has to get under the elephant to get the dart into the soft underbelly … a dangerous operation and split second timing or one gets crushed by the elephant – not great choices are they? (-; so yes, we do need to plan for others …. I have never argued against deficit reduction; only questions are how, where, when, and who[ a different debate] … but I see no evidence of radical changes in ‘governance’ – broadly defined …. nor is such change possible without some evidence of ‘accountability’ …. and I can’t find any!

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