Year: 2012

The European Commission has published its new set of policy options here. There is now a four-week consultation period with key stakeholders.

Speaking at the European Parliament on March 24, 2010, former European Central Bank President Jean Claude Trichet held up Ireland as the poster child for fiscal austerity in 2010 and 2011. While trying to push through similar austerity measures in Greece and Portugal, Mr. Trichet endorsed Ireland’s approach to austerity, saying:

“Greece has a role model and that role model is Ireland”.

Some months later, Jurgen Stark agreed with him. We’re the bailout role models.

When the ratings agency Moody’s downgraded Ireland’s credit rating to junk status in July 2011, they explained what was need to change the ratings again:

“upward pressure on the rating could develop if the government’s continued success in achieving its fiscal consolidation targets, supported by a resumption of sustained economic growth, is able to reverse the current debt dynamics, thereby sustainably improving the Irish government’s financial strength”.

Ireland is repeatedly described as a perfect example of a housing boom and bust, a perfect example of a small open economy, a perfect example of how to implement austerity measures, and a perfect example of how a country can manage it’s way through a crisis.

In what other way are we an example?

We are on the road to recovery, we are told, and we are told that are European partners are helping us in this regard. This is certainly true–the European authorities have prevented large scale austerity by loaning us tons of cash, but their cash, like all loans, comes with a price. And that price seems to be that we are held up as both cautionary and salutary example.

Bundesbank Chair Jens Weidman recently said that:

“the impression cannot arise that the ban on monetary financing can be circumvented here…if this is a normal, reasonable market process, then I have no problem with it. Otherwise, it looks difficult to me.”

The impression. After the EU/IMF bailout the fear was the punitive interest rate that Ireland was paying for its loans was designed to scare other European nations considering entering bailout programmes. Loads of people brought this up at the time of the bailout, but here’s Morgan Kelly:

…the sole purpose of the Irish bailout was to frighten the Spanish into line with a vivid demonstration that EU rescues are not for the faint-hearted.

Now we are told the impression must not be given that monetary financing is a route out of funding difficulties. The ECB statement after Minister Noonan’s announcement of the promissory note deal Ireland’s ELA experience mustn’t be repeated across the Euro area is proof positive that no deal on the promissory note repayment schedule will be forthcoming from them:

It is very important that the Irish state will honour the 3.06 billion euro amortisation of the promissory notes. This will reduce the emergency liquidity assistance which IBRC receives from the central bank of Ireland and thus the Eurosystem.

We certainly expect that also in the future the promissory notes will be served according to the schedule to which the government has committed itself.

But at the same time the impression must still be given that Ireland is working its way through its problems. If it doesn’t then how can we be an example to others?

Edited by Kevin Denny, UCD’s latest Research Bulletin is up here.

Minister Noonan’s comments today, as reported by the Irish Times, are worth noting:

Mr Noonan has indicated he may ultimately seek to use the euro zone’s bailout fund to refinance the cost of bailing out Anglo.

“The ECB would favour that because it would improve their collateral significantly,” Mr Noonan said. “But that would be of little use to Ireland unless we got the commitment to ongoing medium term low-cost funding from the ECB.”

I think this is very important (although I would say eurosystem rather than ECB in the last sentence).   Whatever you think of the Anglo/INBS bailout’s, as a financing mechanism the promissory notes/ELA are an excellent deal (with an ultimate interest rate to the State estimated at 1 percent after factoring in CBI profits that go to the Exchequer).   The problem is that we have to pay them down relatively quickly (creating large near-term funding needs as well as giving up a low interest rate), so we want to restructure to lengthen the term.   The ECB sees the arrangement as too close to monetary financing for comfort to begin with. 

There is a danager that restucturing — of whatever kind is on offer — becomes a political imperative.   One wrinkle is that the commitment to keep the ELA in place in a way that is consistent with even the current promissory note repayment schedule might be a bit shaky.  There might be a role for the EFSF/ESM to shore things up.   But any such restructuring must not lose sight of the extremely low interest rate we currently have.