Lowered Ambitions

Ok, so it’s true. The headline in the Times piece says it all.

THE GOVERNMENT has conceded it is seeking a smaller reduction in the interest rate of the EU-International Monetary Fund bailout package than the 1 per cent originally sought, and only on the remaining money it has yet to draw down.

In what the Opposition portrayed as a U-turn and a tacit acceptance that a cut is no longer achievable, Taoiseach Enda Kenny yesterday said the maximum savings the Government could achieve from an interest rate cut were €150 million per annum, compared to €400 million if the rate on the whole loan was cut from 5.8 per cent to 4.8 per cent.

Mr Kenny, speaking in the Dáil, based the reduced figure on the fact the interest rate reduction would not apply to the €15 billion in European loans already drawn down, and only to the €24.6 billion remaining.

Let’s be clear about this. There is no reason whatsoever why the EU could not grant Ireland a one percent reduction on all its borrowings (not just those yet to be drawn down) as was previously granted to Greece. The EU has decided to add a particular margin on to its borrowing costs. The EU can decide to reduce it.

The lowered ambitions appear to be a combination of preparation for a deal barely worth accepting and (more relevantly) an attempt to use a fake argument (“can’t change the interest rate on funds already withdrawn”) to present the “feasible” rate reduction as not that big a deal.

I suspect “lowered ambitions” could prove to be the epitaph for this government.

26 thoughts on “Lowered Ambitions”

  1. quislingesque capitulation to the forces of unconscionable vichyexpropriation.

  2. @ D O’D

    You’re going to need your own dictionary soon!

    Maybe there are elements in europe who feel we should pay more than others since we still pay ourselves more than others….it could just be that simple.

  3. It’s been a great week for Sinn Féin. One mainstream party down, and two more on the way.

    Some of the comment on RTE has been almost amusingly childish. ‘We are the best boy in the class, this is so unfair’ — that sort of thing. When will people learn that nations — and the politicians who govern them — have interests and pursue them; and that if we couldn’t be bothered to do this, then no-one is going to do it in our stead.

  4. The senior EZ politicians, in particular Pres. Sakozy, have painted themselves into a corner on this support package interest rate/Irish CT rate trade-off. It’s classic Mexican stand-off stuff. “If you want a reduced interest rate, you know what to do to your CT rate” and the response “Any change in our CT rate will be made over our dead bodies”. Neither side has the imagination, guts or gumption to change the record. And the galling thing is that Ireland has a good story to tell in terms of its compliance with the conditions of the support package. But a lot more needs to be done – and it is primarily in our own interests (even if dictated by the Troika).

  5. @Kevin

    I agree with you that “nations — and the politicians who govern them — have interests and pursue them”. Could you be more specific about what you think the government should be doing differently to pursue Irish interests?

  6. A bit premature to be talking of ‘epitaph’ for a government that is 3 months in power and is riding high in the polls. I am saying that as a northern nationalist, nearly all of whom would historically prefer FF to FG. Are we going to have a thread calling for an election any day now, like the one back in November?

    Regarding the interest rate v Corporation Tax trade-off debate, it is clear that this is now working heavily to Ireland’s advantage and to the disadvantage of those EU countries that want high business taxation, and who are foolishly highlighting this fact to the business world by making a fuss about Ireland’s Corporation Tax rate. Multi-national companies not only want low Corporation Tax, they want the certainty that it will remain low. This has now been provided by the refusal of all the leading parties in Ireland to even negotiate on the matter, even under great pressure from other countries. This has not gone unnoticed in boardrooms across the world. I suggest that, in the long run, this will be worth far more than the amount of any interest rate reduction (although, naturally, that would help too).

    In recent weeks, FDI has been pouring in to Ireland, and in nearly all cases the companies said that Ireland’s refusal to even negotiate on the matter of Corporation Tax was a big factor. On Monday, 50 new jobs announced at an IT company in Waterford; on Tuesday, 150 new jobs announced at Dell; on Wednesday; 100 new jobs announced at a manufacturing company in Limerick; today, 150 new jobs announced in Cork. It is clear that, even if crooked and cocaine-fuelled adolescent bond dealers in the City of London, have no confidence in the Irish economy, the people who matter in the long run, i.e. those who are at the technological edge of new goods and services production, most certainly do. In the long run, the producers of real goods and services will always triumph over the crooks, spivs and gamblers who dominate the bond markets.

    In addition, the UK government is now moving to give the NI Assembly control over Corporation Tax. The Irish government should move quickly and agree with the NI Assembly a harmonisation of Corporation Tax at a rate of 12.5% across the whole island, and set it in concrete.

    In contrast, by demanding that Ireland increase its Corporation Tax rate, the French and some other countries are only drawing attention to the fact that they have high business taxes and have an anti-business culture. They are shooting themselves in the foot. Some have claimed that French Corporation Tax is actually low in practice. I don’t know if that is so. But, what matters is overall business taxes, not just one business tax. I saw a table recently that gave figures for overall business taxes in EU countries (tried to find the link just now, but couldn’t). Ireland was near the bottom (i.e. lowest business taxes), while France was way out on its own at the top with the highest overall business taxes. If the French government had any sense, they would not be drawing so much attention to this fact.

  7. So if like Ireland you comply with the programme then you don’t get an interest rate cut.
    If like Greece you decide not to properly implement the package then you do get an interest rate cut.

    The answer seems obvious to me, lets run even bigger budget defecits, default on senior debt and buy back eircom! They’ll be offering us a reduced rate in no time! 🙂

  8. @Kevin OR

    Would that be the same political party that wimped out of telling the people like it is – that a threat to the EZ that Ireland might be naughty had to be backed up by a mandate to say “no thanks” to the official funders’ credit line?

    If they had gone on about how much out of line some of the actual and effective government payroll was, and how actually in Ireland there are a LOT of exceptionally highly paid people (all outside their potential electorate) that were a luxury the country could not and should not afford along with ADMITTING that a primary surplus might be required – then you would have a point.

    In fact all they did was engage in cheap opposition politics. If they get popular enough top have a chance of governing, what will they do then for an election strategy?

  9. I don’t have a big problem paying 5.8%. I do think it is unreasonable that , given the funding costs of the programme are (IIRC) 2.8%, the difference fills the coffers of the ‘aid donors’. That said, the ‘aid donors’ risk should be minimised.

    The simple way to reduce the risk is to trap the excess spread (c. 3% p.a.) in a loss reserve. If the borrower defaults, the loss reserve pays out first and additional losses then get passed on to the ‘aid donors’. If no default occurs and the borrower exits the programme, then the ‘loss reserve’ can be used to reduce the outstanding debt.

    This would be fairer to all involved.

  10. @Ahura,

    You’ve raised this some time back and it makes a lot of sense. But I think we all agree that charging a higher rate to Ireland is perverse because it is signalling to the markets that the official lenders attach a higher probability of default to Ireland. Any objective assessment suggests this is nonsense.

    However, just to be a tad provocative, perhaps the higher rate for Ireland might be justified by the fact that some of the official support is financing ‘investment’ in our banks which may be realised at a profit – rather than financing mostly current expenditure as it is in Greece and Portugal.

  11. Securing a reduction in the interest rate on the IMF/EU loans package was billed by Fine Gael and Labour as their top line political objective throughout the general election campaign. It was signalled as the key item for discussion before Enda Kenny and Michael Noonan’s meeting on January 28th with EU Commission President, Jose Manuel Barroso. Although not reported at the time, it subsequently emerged from the clouds of spin surrounding that meeting that the EU President expressed his unhappiness at some of the public statements, including a letter from John Bruton, that were circulating in the Irish media, and effectively told Messrs Kenny and Noonan to shut up, go home, get elected if such was the desire of the Irish people, and implement the MoU, as signed. Ditto result from Mr Kenny’s meeting with Angela Merkel.

    Following the change of government, it has become clear from successive high level EU meetings that Ireland’s political demand for a renegotiation of the MoU, and specifically a reduction in the loans’ interest rate on the current loans’ package, is going nowhere. Blaming ECB intransigence, or the Germans, the Finns, and latterly the French, or making excuses about the issue being overshadowed by the Greek crisis, are all just fig-leafs for an ill-conceived political wheeze in the first instance.

    That’s not to say that the interest rates applied to the Irish rescue package are not ‘unjust’ or ‘fair’ by any standard, or that the EU response to the financial crisis is not flawed, ponderous and politically inept on just about every level you can think of. It’s simply to point out that thunderously shaking your fist at all and sundry for domestic vote-gathering purposes, and in particular at those who are lending you money that you can’t borrow anywhere else, may not be such clever politics in the long run. Especially if those whose ‘generosity’, as they would see it, you’re decrying are likely to feel more than a little bit insulted and grow a bit of a hump over it…as well as perceiving their own domestic electoral advantage in seeing you off.

    It isn’t as if the two parties in government weren’t warned – on this blog and others – that their posturing on the ‘bad deal for Ireland’ might not ultimately result in their being presented with a more unpalatable alternative. Granted, some sections of the mass media – anyone remember those infamous editorials in the Sunday Independent? – were cranking up the momentum for ‘victim’ Ireland in support of the prevailing political rhetoric. There’s a price to be paid, though, for believing too much in your own rhetoric.

    If this Government had a strategy to play hardball with its lenders and the EU on the terms and conditions of the MoU, then the opportune moment came immediately upon their election to office. That moment is gone, as signalled by the climb-downs by the Finance Ministers and by the Taoiseach in their statements on the interest rate issue over the past couple of days. Not that I believe it may do them much harm electorally: we must await the analysis of our most eminent political scientists as to why people voted the way they did in the 2011 general election; but gut instinct suggests that confidence in political promises or the present incumbents’ capacity to renegotiate the bailout was not high on the list of reasons.

  12. @ Paul Hunt

    it also, as noted in John McHale’s recent post, interacts with the ESM facility, specifically the ‘debt sustainability’ analysis. If we assume that private sector investors, and not the EFSF/EFSM, are the ones that take a haircut/loss at that point in 2013, could it not be argued that the EFSF/EFSM gamed the system to augment their position and milk us dry? The higher the rate, the less sustainable the debt, the more chance of a private sector haircut, the better the eventual situation for the official funders?

  13. Kevin O’Rourke: When will people learn that nations — and the politicians who govern them — have interests and pursue them; and that if we couldn’t be bothered to do this, then no-one is going to do it in our stead.

    In fairness, people do know this I think. But very few of us knew, for example, that the interests of bank bondholders took precedence over the interests of sovereign bondholders, to mention just one of the things that have come as an unpleasant surprise to me. I’ve learned a lot in the last few years about the priorities of Irish bankers, civil servants and politicians. I’ve also learned a bit about how the Trichets and Bini-Smaghis of this world see their role. It’s not central banking as I understood the term. And I’ve a nasty suspicion that the next few years will bring new and equally unwelcome knowledge of the same general kind.

    Figuring out what to do about it is not easy. There should be a place for a thinking voter’s Sinn Féin – the sort of party that Arthur Griffith might now be building if he had been born a century later. Obviously the Sinn Féin which actually exists isn’t what I have in mind. I take it that Arthur Griffith would do his homework better than Gerry Adams.

  14. @Kevin Donoghue

    The sad trajectory of the EU from bold international social experiment to blunt instrument of European capitalist solidarity is at least now crystal clear, even to Enda.

    What is not so clear is how we disentangle ourselves from it, especially given how our own political and business classes are both now both more philosophically and personally invested in the survival of current European power structures than in rebuilding functioning national ones. Pat Cox would have severe difficulty separating Ireland’s interests from those of the current European elite and he is not alone.

    Many of those in Ireland who remain fiercely attached to the the Zen of the EU have an idea of it that is frozen in time around 1993. Wake up and smell the Rüffert case my friends.

  15. @ Paul Hunt,

    I think markets can differentiate various factors. And each investor will evaluate things differently. For example, a rating agency might consider NAMA bonds as part of the national debt but most investors would place some value on the underlying assets.

    Another factor we often overlook when talking about the ‘market’ is that it isn’t a homogenous group of risk-takers. Ireland is a million miles away from the type of investors we need to be attractive to.

    With regards to the ECB subsidising Irish banks’ cost of funds, it is true that this is a current benefit. I’m not sure what alternative the ECB has – pulling the plug would hurt them. I’d be wary that they might try to make it more expensive. In reality we need to go back and say the 2008 solo-run bank guarantee knackered us. We needed to share the Irish bank problem with the ECB from the very start.

  16. I was suffering tunnel vision with respect to the daft notion that any reduction in interest rates would only apply to future drawdowns.

    A simple side letter should do the trick.

  17. Nice picture.

    http://www.breakingnews.ie/ireland/cameron-signals-agreement-on-corporation-tax-cut-in-north-508383.html

    David Cameron, on visit to Belfast, shaking hands with Martin McGuiness.

    Dublin 4 academic, Conor Cruise O’Brien, must be turning in his grave.

    Both in agreement that N. Ireland should have control over its Corporation Tax rate. And Martin McGuiness stressing how extremely important it is for investment to reduce the Corporation Tax rate.

    Enda Kenny should now move very fast. Sign an agreement as soon as possible with Peter Robinson and Martin McGuinness for the 12.5 per cent Corporation Tax rate to apply across the whole island of Ireland. Sarkosy may think (probably wrongly) that he can bully Enda Kenny. But, I wouldn’t advise him to try with Martin McGuiness.

  18. @JTO
    I noticed the bulge in MMcGs pocket in that picture you posted !!!

    Sarky is going to be a Da soon so he might be a bit soft when he meets with the Northern Ireland reps ???

  19. @JTO

    Is there anything you don’t get wrong? Conor Cruise a Dublin 4 academic? Visit Dublin sometime. Try walking from Dublin 4 to the Cruiser’s home. It’ll take you a while.

  20. @John TheOptimist

    ‘Enda Kenny should now move very fast. Sign an agreement as soon as possible with Peter Robinson and Martin McGuinness for the 12.5 per cent Corporation Tax rate to apply across the whole island of Ireland. Sarkosy may think (probably wrongly) that he can bully Enda Kenny. But, I wouldn’t advise him to try with Martin McGuiness.’

    +1 but I would prefer 12.00% as a statement of intent – easily understood on the Falls, Shankill, Summerhill and Moyross even if it appears somewhat limp at the mo in the upper-echelons of Leinster House.

  21. @Veronica
    I doubt very much that anybody in the French Government spends 1% of its waking hours thinking about the French-Irish relations ,but I am afraid that at some time in the future the French Government will be obliged to take a part in the” Irish bail-out Part II “.At that moment the tone of the discourse by the Irish ministers and some editorials will certainly be remembered .It is always dangerous to insult your creditors .It should have been possible to disagree on the corporate tax rate politely. Now there is a risk that some in the French Government will be delighted to take their revenge if they are in a position to do so and this irrespectively of the results of the next presidential elections.

  22. Kenny, Noonan, Creighton and Varadkar have made eejits of themselves and each other over the last few months. One hopefs they have learned a lesson, and that if Ireland does play hardball, it will not be done over the airwaves again.

    Ireland can only get what it wants when it shows a willingness to tough things out for real. Only then, and only if our self-immolation threatens them, will the EU/IMF get real and act to alleviate our problems in their own interest.

    Noonan’s belittling of the benefits of a rate cut is a message to Sarkozy et al that we won’t be manipulated. It is in the EU’s interest to lower our interest rate and to support us in our efforts to avoid default. If the EU won’t act in its own interest then there is little we can do other than prepare for the worst. Sarkozy wants us to pay ever more to help him.

    I also think it is a correct tactic to paint France’s insistence on the high interest rate as unfair but a fait accompli. It is nor for us to try and persuade France to salvage its own reputation. We asked nicely for them to do the right thing once. On their heads be it if they let their petty domestic politics harm all Europe.

    We should not surrender the high ground by making similar selfish threats and waving our veto around.

  23. Zhou,

    Not all that long ago it was ‘Frankfurt’s way or Labour’s way’ with Jean Claude Trichet pilloried as the ‘mere’ civil servant who would follow his political masters’ orders or else, with more such nonsense to follow when media interest in that particular frame was exhausted. So now it’s all about demonizing the French. And if they conveniently get out of the way of Ireland’s noble quest, who’s next? ‘Enemies’ of our national interest are churned up at a dizzying rate and all to cover up the monumental political failure of this government to achieve its headline election promise because (a) it was an ill-conceived objective from the start, or (b) they got their tactics wrong on the European front post-election and the opportunity to achieve what they wanted has eluded them.

    I do so want to be wrong in my reading of these events, but all the available evidence points an increasingly panicked administration clutching at xenophobic straws to cover up its own political ineptitude.

  24. @Veronica

    I think Sarkozy is demonising the French – there is no need for anyone to help him.

    I agree the Govt made ridiculoud promises they couldn’t keep. I wonder was this Michael Noonan’s increased influence in FG – he has form with his taxi driver payout proposals.

    I just heard a replay of Lucinda Creighton on the radio saying she had *always* understood the rate reduction would only apply to money yet to be drawndown. That is ridiculous nonsense. I don’t know how she can make such statements to the Irish people. The FG position was a rate cut on everything non-IMF, as was achieved by Greece. I am worried that Lucinda is our main voice in Europe in many instances.

    The Govt is incoherent and it does lack the principled vision that Burton and Bruton had. At least if they were in there doing the u-turns one would feel they have no choice.

    The abandoning of pre-election promises could lead to fault lines appearing in this Government soon enough.

    In the meantime, I hope they are learning lessons quickly.

  25. Zhou,

    Lucinda Crieghton is simly repeating what the Minister for Finance and The Taosieach have already stated publicly.

    For example, this exchange between FF’s Michael McGrath and Minister on the applicability of interest rate reductions on 7 June:

    ” Deputy Michael McGrath: I welcome the commitment of the Minister and the Government not to trade our corporation tax sovereignty for a reduction in the interest rate. However, a reduction in the interest rate was held up during the election campaign as a prize worth pursuing and one which was deliverable. A 1% reduction on all the EU sources would mean €450 million a year, which is not insignificant and might help to soften the austerity measures being applied…

    Deputy Michael Noonan: I do not believe the Deputy’s figures are correct. The concession, or arrangement, is that the reductions for Greece and Portugal did not apply to money already drawn down – only to that going forward. Therefore, the Deputy’s figures are much greater than that for the actual available reductions.”

    This point was reiterated by the Taoiseach in the Dail the following day in response to a request for clarification by FF Leader, Michael Martin:

    “A total of €15.6 billion has been drawn down from the financial packages, comprising €11.4 billion from the EFSM and €4.2 billion from the EFSF. This means that any interest rate reduction would apply in respect only of the remaining moneys of €24.6 billion,” the Taoiseach said.

    Now, our leadrs are either telling porkies and misleading the Dail – which is serious – and the public – which is even more serious – or they are correct? And if they are correct, then, as Minister Noonan told Deputy McGrath:

    “The Deputy knows how it works with the different funds in that there is eventually a blend of interest rates. The Portuguese got 60 basis points. If Ireland were to get the same as Portugal, it would mean €148 million a year, and if we got what Greece is supposed to have got but may not retain next month, the figure would be just over €200 million.”

    I have to admit I’m getting a bit confused about what’s going on since Karl Whelan says (above) that: “There is no reason whatsoever why the EU could not grant Ireland a one percent reduction on all its borrowings (not just those yet to be drawn down) as was previously granted to Greece. The EU has decided to add a particular margin on to its borrowing costs. The EU can decide to reduce it.”

    This contradicts the scenario laid out by Mr. Noonan, which suggests that Greece has received no reduction on previous bailout funds’ interest rates and the reduction applies only to a blend of the previous interest rates with reduced rates for future borrowings?

    Perhaps our Minister for Finance has been advised by the EU institutions that any rate reduction for Ireland will be applicable only to future drawdowns? Has Ecofin made a decision on this which the Minister is making public in a roundabout sort of way?

    Incidentally, forgive me, for I must have missed it, but ‘principled vision’ was not something I associated with the previous opposition spokespersons on Finance in respect of the stances they took on solutions to either the fiscal, or the banking crises, whilst they held those portfolios. I could discern the frequently populist political motivation around the policy positions iterated by those concerned, but the vision thing must have passed me by, I’m afraid.

  26. We are compelled to borrow?

    Only insofar as it’s needed to avoid internal devaluation, and stick to the ‘anglo-saxon’ model.

    Our refusal to even have this notion occur to us leaves us beholden to a euro-centrist agenda (my take on bini smaghi).

    EU Imports funnel revenue via Ireland for tax advantages, driving much of the FDI we’ve seen – so in a sense the ECB’s imposition of additional costs to ‘Eire LLC’ is a stopping a leak in balances of trade..

    In other words, the ECB extra percentage is corporation tax by other means, on our geopolitical posture, to defend the broader euro project – but will be paid for more by internal deflation than by internal devaluation it seems.

    Or can someone articulate an interesting opposing view?

    I know this blog avoids politics, but does this not maybe sometimes let the foliage get in the way of the woodwork?

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