Is Ireland achieving its targets?

Rory O'Farrell: Sometimes in the debate on the plan with the Troika people point out that we are in recession so the plan has failed. However, the stated aim of the Troika plan is not to return us to growth. The stated aim is to return us to the markets, in order to finance the national debt. Therefore when we criticise the Troika plan we must distinguish between whether the aims are appropriate aims, and whether the plan is achieving these aims.

We are often told that that Ireland is meeting its targets, the plan is on track, and so the plan is achieving its stated aims. Is this the case? In March the EU released its winter review of the Economic Adjustment Programme for Ireland. Page 63 of the document (page 66 according to adobe) shows Ireland getting a clean sheet, hitting 6 out of 6 targets, a performance any hurling All-Star would be proud of.(Click graphic to enlarge)

So should we give the Troika plan a medal? No. Page 62 of the pdf (Adobe page 62, document page 11) containing the ‘Memorandum of Economic and Financial Policies’ shows the original targets from December 2010. Ireland was on target up to 6-months after the plan was introduced, but has missed all other targets. Rather than hit 6 out of six, we score a measly 2 out of 6.

When we are meeting the targets, it is only because the targets are being changed. It is as though the ref sees the sliotar sailing right and wide, and so signals to the umpires to move the posts to meet the sliotar. That’s not lovely hurling.

Ireland's financing alternatives - the EFSF

Tom McDonnell and Michael Taft: In our first post, we outlined some of Ireland’s financing alternatives; namely through the IMF and the European Stability Mechanism. There is, however, a more compelling source of institutional funding in the eventuality of a No vote: the European Financial Stability Facility (EFSF).

The EFSF is one of four external sources of funding for the current Irish bail-out (along with the IMF, the European Financial Stabilisation Mechanism, and bi-lateral loan agreements with the UK, Sweden and Denmark). The EFSF remains a source of funding for all Eurozone countries until the middle of next year.

The EFSF stands apart from the ESM and the Fiscal Treaty. Ireland, and all countries who are members of the EFSF, has access to this fund as of right, depending on the following conditions:

• They cannot access funding at reasonable rates on the international markets
• They have negotiated a Memorandum of Understanding with the EU and the IMF

A further stipulation is unanimous consent from the Finance Ministers of the Eurozone (Eurogroup), which would follow on from an agreement with the EU/IMF. Applications for this funding can be made up to the end of June 2013. After that the EFSF will only administer funding that has already been agreed.

According to the recent Eurogroup statement (the Finance Ministers of Eurozone countries):

‘For a transitional period until mid-2013, it (the EFSF) may engage in new programmes in order to ensure a full fresh lending capacity of EUR 500 billion (for the ESM).’

This is confirmed by the EFSF itself which states:

‘ . . . following the Eurogroup meeting held on 30 March, it was decided that the EFSF would remain active until July 2013 . . . For a transitional period until 2013, EFSF may engage in new programmes in order to ensure a full fresh lending capacity of €500 billion . . . after June 2013, EFSF [will] not enter into any new programmes.’

Therefore, were Ireland to apply for a second bail-out prior to July 1st 2013, it would be granted if such an application were accompanied by a Memorandum of Understanding negotiated between Ireland, the EU and the IMF – similar to the first bail-out. This funding is not contingent upon the ratification of the Fiscal Treaty.

In all probability, funding for Ireland’s second bail-out – whether it approves the Fiscal Treaty or not – will be routed through the EFSF. The EFSF (the temporary bailout fund in place up to July 2013) and the ESM (permanent bailout mechanism) are different companies. The EFSF has €440 billion (see page 1 of the EFSF document) of which €192 billion already committed to Ireland, Portugal and Greece (see the diagram on page 20 of the EFSF document). The remaining lending capacity of the EFSF for programmes initiated before July 2013 is therefore €248 billion. The EFSF will remain in place to manage its existing programmes (see diagram on page 20 of the EFSF document) and any other new programmes approved prior to July 2013, until such time as all these programmes are all wound down.

The ESM itself has €500 billion and is scheduled to enter force on 1 July 2012. As stated above, the intention would be to ensure the ESM retains its full lending capacity of €500 billion. This no doubt refers to the prospect of larger countries, in particular Spain, needing a bail-out. The ESM would require full capacity to accommodate new countries’ need for a bail-out.

Ireland’s continuing access to institutional funding beyond the current bail-out programme has been guaranteed not once, but twice, by the Heads of States and Government; first, on July 21st of last year when the establishment of the European Stability Mechanism was agreed, and most recently on January 30th of this year – after the Fiscal Treaty was signed:

‘We welcome the latest positive reviews of the Irish and Portuguese programmes which concluded that quantitative performance criteria and structural benchmarks have been met. We will continue to provide support to countries under a programme until they have regained market access, provided they successfully implement their programmes.’

This is an important and helpful guarantee. There is no condition set on continued support until we return to the markets – except that we implement agreed programmes. If continued support were contingent upon acceptance of the Treaty, we should have expected it to be highlighted in this statement.

This helps explain another issue we highlighted in the first post. The drafters of the European Stability Mechanism Treaty inserted clauses that provide manoeuvrability in negotiations with any Eurozone country in need of financing, regardless of the Fiscal Treaty. In particular, they inserted references to ‘new programmes under the European Stability Mechanism’, a clause which would have been unnecessary if all financing under the ESM were strictly conditional on a yes vote. They have seemingly factored in a situation whereby a second bail-out for Ireland (and potentially Portugal and Greece) would constitute ‘rolled-over’ financing, rather than ‘new’ financing. This buttresses the guarantee given by the Heads of States and Governments – namely that Ireland will continue to be supported until we return to the markets.

This is an important debate as there is a high probability that Ireland will require a second bail-out. We are expected to return to the markets in late 2013 and fully by 2014. However, the IMF is cautious:

‘Debt sustainability remains fragile, especially with respect to medium-term growth prospects . . . In this context, the prospects for regaining the substantial access to market funding that is assumed in 2013 remain uncertain.’

Were a second bail-out required, we estimate that it could be as large as €45 billion and possibly more for the years 2014 and 2015, taking into account the Exchequer balance and bond redemptions. This does not include bank payments. While this is less than the current bail-out provision it is clear that Ireland, without access to either market or institutional funding, would not be able to cope with this fiscally. We would be heading into a default – quite possibly on both sovereign and banking debt. This would have negative spillover effects for other Eurozone countries.

We reiterate the point from our first post: there is no reason to resort to counter-posing ‘appalling scenarios’. Some argue that Ireland will be frozen out of both market and institutional funding if we vote No. Clearly, this would be an appalling scenario. Others argue that it would never come to this because of the impact on the Eurozone (defaults, contagion) – another appalling scenario.

This is not a satisfactory way to debate this issue. This will trap us in a ‘race-to-disaster’ debate which will be particularly uninformative. We have attempted to outline concrete alternative funding scenarios for Ireland. Whether these would become available is a subject for legitimate debate. However, those who claim that Ireland would be denied access to EFSF funding – or any other funding sources – should provide concrete evidence to this effect. Evidence one way or the other would be a valuable contribution.

The debate over the Fiscal Treaty should be just that – a debate about the provisions of the Treaty. In this respect, it is helpful to note wider European developments. Spain has, unsurprisingly, officially re-entered recession putting at risk their deficit targets; the prospect of a Socialist Party victory in the French second-round Presidential vote raises the prospect of some renegotiation of the Fiscal Treaty; the fall of the Dutch government over failure to agree budget cuts highlights the problems posed by the Fiscal Compact in a major core country.
As Ireland prepares for the referendum vote, the ground under the Fiscal Treaty may already be shifting. Resort to ‘appalling scenarios’ will only confuse the issue when the debate should be focused on whether the provisions of the Fiscal Treaty are good, or even sustainable, for Ireland and the Eurozone.

The EU-IMF Deal Does Not Require Privatisation

Michael Taft: Whatever about the case-by-case merits of the Government’s announcement today regarding the sell-off of state assets, we should be clear: the EU-IMF Memorandum of Understanding does not require privatisation, in whole or in part. In addition, the discussion of the sale of state assets in the Memorandum does not take place in the fiscal section but rather in the section regarding obstacles to competitiveness. In other words, if there is to be a sale of state assets, the objective is not to write down debt but to improve competitiveness. Indeed, it is hardly likely that the Troika would demand that state assets be sold in order to reduce the projected debt of 115 percent in 2015 down to 114 percent (which is what the Government’s announcement today would do).

The quarterly reviews conducted by the Troika make it clear that the provision for selling state assets did not come from them – it came from the Government and its Programme for Government. And it was Fine Gael that was the driver of the privatisation provision in the Programme – Labour campaigned against privatisation in the last general election.

What we have had is an elaborate choreography around the issue of privatisation, shifting blame and inventing targets which have had the effect of obfuscating the issue. Nonetheless, this should not blind us to where the demand for privatisation is coming from. Senator Shane Ross, writing about the meeting between the Troika and the Technical Group of TDs, reported this exchange on the subject:

‘The troika delegates insisted that they had not prescribed any privatisations. They wanted to see certain semi-states "restructured" and competition in the market. Contrary to media perceptions, they were not pressing the Government to raise any specific amount from the sale of State assets. The figures in the public arena of between €2bn and €6bn did not come from them.’

That this is confirmed by Sinn Fein, from their meeting with the Troika, only reinforces this point.
The demand for privatisation – and the paying down of debt – does not come from the Troika. It comes from our own Government.
For a detailed overview of this issue you can read this post I wrote back in October.

Let's Have More Budget Transparency

Nat O'Connor: Seán Whelan on RTÉ Six One News last Friday quipped that democratically elected representatives were the first to see Michael Noonan's budget proposals... except that they were not our elected representatives, but those of the German people.

It is unfortunate that the Dáil did not receive the draft papers before the Bundestag, but a more important lesson from the episode is that there is every reason to increase the transparency of budget documentation and proposals from now on.

Irish democracy did not collapse because draft proposals on VAT increases and other measures were circulated before the Government met to consider them. Instead, the democratic process was strengthened by their release.

Strong democracy is when everyone has the right to participate in the decisions affecting themselves and, crucially, the resources they need to do so. Information is just one of the essential resources people need to understand and meaningfully participate; through discussion, lobbying, etc.

Consider the traditional budget process, by way of contrast:

1. All proposals are initially developed in secret by the Department of Finance. (Drafts may or may not be circulated, but certainly not to Opposition spokespersons or the public).

2. Government Ministers are briefed by the Minister for Finance in a meeting of the Government, and may even be asked to agree proposals at the same meeting - without access to alternative expert opinion, advice, etc. Even if they do not agree them in the same meeting, they have only days to seek advice and cannot avail of a richer public discussion with analysis from all perspectives.

3. Some, all or none of the budget proposals may be discussed by Government Ministers with their colleagues on the backbenches of the Dáil. Advice from chosen experts may or may not be sought, at the discretion of each Minister.

4. The final Budget is kept secret until read out by the Minister for Finance on Budget Day. In fairness, the IMF/EU obligation to publish a four-year plan has created more openness.

5. Opposition spokespersons and economic commentators prepare most of their responses in the absence of information about the Budget proposals, often based on rumours or leaks. They are only given minutes to prepare a response to the actual proposals, and must make off-the-cuff responses without research or advice. This makes for shallow analysis that tends to highlight more immediate proposals, or more populist concerns, while neglecting deeper effects on the economy and society.

6. The Dáil votes on the Budget without most of the TDs having read the documents. Strictly speaking, TDs vote on a series of 'financial resolutions' based on the Budget speech. There will be (limited) time for discussion later when the annual Finance Bill, Social Welfare Bill, etc are introduced to make most the resolutions into law. However, votes on resolutions are sufficient for measures that come into effect at midnight. And legislation is sometimes rushed through the Dáil; like last year's Social Welfare Bill the very next day.

Traditional Budget secrecy is seriously flawed and undemocratic. It is also a hugely inefficient and impractical way to run the Government in an advanced economy!

For example, the proposal to raise VAT by 2 percentage points has a range of complex effects on the economy. It requires TDs to know what goods and services attract the standard rate of VAT, as well as to know that VAT dampens employment in the economy less than income tax but more than wealth taxes. The regressive nature of VAT also needs to be explained - that is, that people on lower incomes pay proportionately more of their incomes. It takes time to put together analysis and briefings for those making the decisions, let along for those whose lives will be affected by them.

This year by accident (and again because of the IMF/EU loan) we have a new and improved process:

1. Draft proposals from the Department of Finance are aired in public.

2. Economic analysts (including think-tanks), sectoral lobbyists and the general public are given time to reflect on these proposals and respond to them. An informed public debate is possible.

3. The members of the Government and TDs on both sides of the Dáil can learn from the public discussion and expert analysis. The Government has the option of fine-tuning or even changing proposals.

4. The Budget Day proposals are likely to be less of a surprise and Opposition spokespersons will have had access to information and advice to prepare more detailed and considered responses.

5. TDs have had the benefit of public discussion and contact from their constituents before voting on the Budget.

Does anyone have a problem with making this more open approach permanent?

There are a couple of issues raised by more openness, but in balance I don't think they outweigh the benefits.

The Government is not weakened in its ability to choose to accept or modify proposals. Getting more feedback from lobbies, experts and constituents can only be a good thing. The Government is not exhibiting weakness by changing proposals in the face of evidence, although they would have to justify decisions that appear to simply cave in to politically powerful lobby groups.

(In practice, capitulation to lobbyists tends to happen between Budget Day and the final Finance Act three months later, which often contains quite different proposals - especially on the minutae of tax law - than were in the Budget. However, media and public scrutiny of the Finance Act is very limited).

One tricky issue relates to the 'midnight' proposals: changes that will apply with near immediate effect. For example, excise might change at midnight to prevent people stocking up on alcohol beforehand.

Whether people should get more than a couple of hours warning on such changes is an open question. It may be more effective for raising revenue, but it is arguably more democratic if people know what's being proposed and have a chance to react to it (even if that reaction is a trip to the off-licence). After all, the Government can never fully predict the 'behavioural' effects of Budget changes. And the short-term loss of excise revenue may be off-set by longer-term public understanding and acceptance of how we pay for the services provided by our state.

And if there really are some new taxes that require secrecy before being announced 'with immediate effect', good quality analysis on the day can be preserved through 'lock ins'. They do this in Canada. Several hours before the budget announcements, a selection of Opposition spokespersons and their advisors are locked into a room without mobile phones but with a copy of the budget documents. In another room, a selection of journalists and economic analysts are likewise locked in with the budget. The result is that Opposition responses and expert analysis can be based on the detail of what's being proposed.

Voting on how public money is spent is one of the main purposes of parliament and the Constitution of Ireland makes it very clear that the Government can only spend money in line with budgets agreed by the Dáil.

There is every reason why the vital scrutiny of public money should be as open as possible.

Troika statement: It's Friday, let's go to the pub

From the statement by the EC, ECB and IMF released today:

‘The teams’ assessment is that the program is on track but challenges remain and steadfast policy implementation will be key.’

Oh. I wonder if they are referring to the National Recovery Plan which the three institutions endorsed and became the basis of the Memorandum of Understanding; or maybe there is some secret, super-encrypted plan which the masses don’t have access to. Let’s go through the headings.

The Macro-economic Outlook

The NRP projected growth up to 2014 to be 2.7 percent annual average. The IMF projects an average of just under 2 percent. According to the ESRI, at 2 percent we risk a deflationary spiral. In addition, the IMF is projecting nominal GDP to be some €10 billion less than the NRP estimates – over 5 percent less. There’s hitting targets and then there’s hitting targets.

The Bank Sector

This doesn’t pose too much of a problem for the cheerleaders of the NRP. If €24 billion in new recapitalisation won’t do the trick, then there’s always another €20 billion waiting to be burned up. And if that doesn’t do it, there’s always the Central Bank’s Hibernian QE. There is no shortage of money to be thrown at the problem – and as we all know, the taxpayers’ pockets are black-hole deep.

The Fiscal Front

The NRP claimed it could get the deficit down to under 3 percent by 2014. The IMF projects that on current trends it will be 2017 or 2018. On that small matter of the debt, the NRP hoped to keep it 100 percent of GDP – the IMF says, no, it will be 25 percent higher.

Structural Reforms

But not to worry, the IMF believes this will do the trick. Cutting workers wages always promotes growth – and cutting low-paid workers’ wages via ‘reform’ of the JLC will no doubt double that growth.

* * *

On just about every metric the NRP, which forms the basis of the bail-out deal, is completely defunct. Yet the Troika says everything is just as it should be.

I know why. It’s Friday. What would you rather do? Admit ‘game over’, sit down and work on something new? Or sign-off on a statement and get to the pub? I mean, the Troika are only human.

And let’s forget the small matter of the debt. The NRP was hoping to keep debt at 100 percent of GDP. The IMF projects it to be 124 percent.

Is the IMF changing? A hard-hitting attack on the Washington Consensus

Paul Sweeney: As the IMF is here in Ireland, with the ECB and EU Commission, on a mission of assisting Irish citizens to bail out our banks and thus the banks of Europe, and, as a consequence, our public finances, we need to watch carefully to see what is their overall attitude and the nuances.

Yesterday, the head of the IMF, Dominique Strauss-Kahn, delivered a major speech at George Washington University where he said that the "Washington Consensus" certainties have come crashing down, with the Crash of 2008, and he spoke of the challenges that have been posed for macroeconomic policy, social inclusion and multilateralism.

He said that: “This 'Washington consensus' had a number of basic mantras. Simple rules for monetary and fiscal policy would guarantee stability. Deregulation and privatization would unleash growth and prosperity. Financial markets would channel resources to the most productive areas and police themselves effectively. And the rising tide of globalization would lift all boats.”

Mr Strauss-Kahn said that this “'Washington consensus'” not alone “caused incalculable hardship and suffering” but it did more than this. He issued a major challenge to all economists. For he said that “'Washington consensus' also devastated the intellectual foundations of the global economic order of the last quarter century.” That is some criticism.

It is hoped that this speech is heard wide and far in this land, especially by economists who are still wedded to deregulation, privatisation (and socialisation of private debt), and deflationary cuts as a panacea. I’m afraid that the 'Washington consensus' is not behind us (as he claims) here in Ireland.

In what is a possible reference to Ireland’s deep troubles DSK, as he is known, said “Europe needs a comprehensive solution—based on pan-European solidarity.” That is not exactly what is on offer. Ireland’s elite screwed up but as far as Europe cares, we are on our own, thanks to the bankers, developers, anti-regulation ethos and the government that bailed out the bondholders in our name.

He coined a new expression - “globalisation had a dark side”! This dark side was and is the growing chasm between rich and poor.

Afterwards, in replying to students' questions, he spoke of the IMF's support for countries that adopt temporary capital controls (a real surprise), of the challenges faced by European integration (challenges!! An understatement surely!) and by Greece in particular, and about the IMF's work to design carbon taxes and the issuance of new SDRs for climate-change finance.


Of course, DSK may soon resign and stand for the Socialists in France. Thus he may leave the IMF in the hands of the neo-liberals again. In the meantime, we hope his emissary in Ireland hears his words. But will his comrades in the Troika from the EU and ECB hear it too? I fear not until Ireland sinks a bit lower.

You can read his speech here.

In the meantime, the ECB is actually raising interest rates, in this climate!

And in the business pages, the ex-Anglo Irish and other bank directors are still photographed as if they are still great!. They still stride the land that they impoverished in just a few short years. No bank board member has yet to be held to account for the biggest value-destruction in the history of Ireland. Nothing seems to change when it comes to power.

A suggestion for the EFC boosters

Tom McDonnell: The IMF as an organisation has long been criticised for its dogmatic adherence to the Washington Consensus principles regardless of local context. But a strange thing happened recently. At a recent IMF conference attended by half a dozen Nobel laureates, "Macro and Growth Policies in the Wake of the Crisis", the IMF conceded that their standard prescriptions were at best incomplete and insufficient. In particular, the importance of Keynesian expansion during times of recession was explicitly acknowledged. The IMF’s own research makes clear the damaging impact of consolidation.

Despite this Damascene conversion the expansionary fiscal contraction (EFC) hypothesis of ‘expansionary austerity’ is alive and well, as Paul Krugman points out here.

I would gently suggest that the EFC boosters in the United States should look to the recent Irish experience to see just how successful extreme austerity can be in revitalising growth.

The people have spoken - but what did they say?

Michael Burke: The first clear message of the 2011 election was a rejection of Fianna Fáil, receiving just 17.4% of the first preference vote – also of over 24% of the entire electorate. Given that the unlamented PDs had also been effectively absorbed by FF, and the Greens (who stayed just long enough to help through a draconian budget, but not a weak climate change bill) were also obliterated, there was effectively 30% of the electorate in motion.

Fine Gael was not the main, or even the primary, beneficiary of that dramatic break with FF, receiving just 8.8% of that 30% compared to the 2007 election. The primary beneficiary was Labour, up 9.3%. But the main beneficiary was a generic Left, comprising Labour, Sinn Féin, a majority of the ‘Independents’ and the smaller socialist parties. The combined FF/FG/Green/PD vote in 2007 was 76.3%. That fell to 55.3% in 2011. The combined Labour/Sinn Féin/socialist vote rose from 17.6% to approximately 43% (depending on how many you assign to the Left from among the Independents’ vote).

So, there was a sharp turn towards the Left, but not an outright victory for it. 43% is not 50%.

The key issue was clearly the economy, and the election was held against the backdrop of the recent arrival of the EU/IMF representatives in Ireland, to dictate terms of the bailout of the EU banks. Given that FF was the main architect of the response to the economic crisis and presided over the arrival of the raiding party, then voters were clearly rejecting more of the same. A key aspect of the campaign, and probable determinant of the outcome, was the parties’ attitude towards the terms of that bailout and the further imposition of cuts in public spending to underwrite it. (In another post, the issue of the viability of that programme will be addressed).

In that regard, every single party that stood in the campaign, bar the outgoing coalition partners, argued that that they would at least ‘renegotiate’ the bailout deal. Both FG and Labour spokespeople argued that point repeatedly in the course of the campaign, with Enda Kenny in particular promoting his party’s ties with EU counterparts as the best way to achieve a renegotiation.

Now, it appears from the weekend reports of the EU summit that no such renegotiation is currently possible. Under attack over the 12.5% corporate tax rate, the new Taoiseach and his team seem on the defensive. In any event, the suggested quid-pro-quo of a 1% reduction on the EU portion of the bailout funds would yield a saving of only €450mn per annum. While this is not nothing, it is overwhelmed by the public spending cuts and the bank bailout, the latest installment of €10bn likely to be paid before the month is out.

This payout highlights a clear anomaly in the outcome of the election and the intransigence of the EU leaders, some of whom seem more concerned with their own future tied to the outcome of regional elections or with bombing Libya. Yet, at the election, more than 75% of the population voted for parties or individuals who stood on a platform of renegotiating the deal. The voters of have spoken – but the EU refuses to listen.

Therefore the only reasonable response is to make the same case in a more forceful way. There should be a referendum on the bailout of EU banks by Irish taxpayers, with a rejection obliging a full renegotiation. Then perhaps the EU will listen.

The Irish have suffered enough ...

Slí Eile: Interesting piece from today's editorial in the Observer via the Guardian website here.

Four Truths about the Irish situation (and one possible solution)

Nat O'Connor: The Government's four-year recovery plan doesn't address the issue of the banks. Without addressing this issue, the credibility of the whole plan is undermined. Richard Douthwaite presented Four Truths about the loan negotiations with the ECB, IMF, etc. These remain valid concerns.

In a context where orthodox monetary policy is no longer available to individual eurozone member states, Douthwaite presents 'deficit easing' as a novel suggestion.

In brief:

Truth 1. If Ireland has to pay interest on the loans being negotiated at a rate which exceeds the rate at which the economy grows over the next few years, it will make the country's situation worse, not better.


Truth 2. Any grant or loan to Ireland will only buy time for the eurozone to come up with a cure for the whole sick system. Ireland should not be asked to bear more than its proportionate share of the cost of gaining this time which is for the benefit of every euro user.

Truth 3. The ECB bears a large share of the responsibility for the regulatory failure which led to the property bubble.

Truth 4. There is a Plan B. Ireland doesn't have to take anything that is offered. It can leave the euro quickly and easily.

In a separate article, Douthwaite proposes a solution in the form of 'deficit easing' (full paper). His proposal is for money to be distributed directly to member states by the ECB (through a form of quantitative easing) and used to pay down national debts and to reduce borrowing requirements for expenditure.

It is increasingly clear that the Irish crisis is a eurozone crisis. And Ireland is caught in a damning position. Either we 'go it alone' and insist on major restructuring of the bank's debts we've taken on - and do huge damage to the (mostly European) banks that lent to our banks - or else we do huge damage to the people in Ireland by taking on huge private debts in order to save - for now - other banks in the eurozone. This is a lose:lose situation, and we need to find another way.

A road to a solution is equally clear. When we pooled our sovereignty into the euro currency and ECB, we took an 'we're all in this together' approach. We need to return to the basic principle of eurozone solidarity; and indeed wider European solidarity. Ireland should push for a eurozone-wide solution that would also aid Portugal, Greece, Spain - but equally Germany and all the rest. Some form of quantitative easing (or equally 'deficit easing') could be a major part of the solution.

The logic of the deficit easing proposal is interesting, although the politics would perhaps be more difficult to manage - what would stop politicians wanting to use this approach more and more? Nevertheless, orthodox monetary policy is not available, and innovative approaches should be given serious consideration.

Was it for this? II

Michael Burke: Ahead of tomorrow's Budget, it may be worth taking stock and posing the question, How did it come to this?

The Irish Times leader column titled Was It for This? caused something of a stir by contrasting the national humiliation of the EU/ECB/IMF landing party to the expression of national independence in 1916. The editorial paints a confused historical picture of how this debacle came about, but the context, and contrast, is not misplaced.

It is clear from the 4-year and wholly misnamed 'Recovery Plan' that the intention is to bind the citizens of this state and their elected representatives to a set of economic, fiscal and social policies that are designed to be wholly immutable. Tomorrow's Budget will fill in the awful details, but the main elements are already in place.

The documents agreed between the government and the international bodies who are actually in charge also make it abundantly clear whose interests are being represented. It is stated that the IMF portion of the package will command an interest rate of just over 3%. If, as stated, the average interest rate is 5.8%, then the EU, non-IMF portion (two-thirds of the total) must be at a rate close to 7%.

It is further stated that, of the €35bn in further funds for the banks, only €10bn is for their immediate recapitalisation- the remainder is for 'contingencies' in the banking sector (which is almost exactly the same as the NPRF's former level of assets, just to underline who it is here that is being protected. It turns out the NPRF was 'rainy day' money for the banking sector, not its contributors.).

This further lifeblood for what are already zombie banks will cost over €1.7bn annually at a 7% interest rate. This annual cost is a large proportion of the planned cuts to current expenditure in December's Budget (€2.09bn), including social welfare, public sector job losses, public sector pensions and 'other expenditure' on goods and services.

Or, it is amost exactly the same as the planned reduction of €1.8bn in govt. capital expenditure.

Irish taxpayers are being foisted with a near-doubling of the national debt- in the name of debt-reduction. The government aim is to keep alive a failed banking system so that it will not pull the plug on property speculators. But the ultimate beneficiaries are British, German and French banks who will be paid out in full despite the stupidity of their lending and in violation of the free-market principles which they extol. These are the real 'vested interests' which determine policy.

Prophetically, Liam Mellowes once said, "Ireland, if her industries and banks were controlled by foreign capital, would be at the mercy of every breeze that ruffled the surface of the world’s money-markets." His response was, "The Irish Republic stands, therefore, for the ownership of Ireland by the people of Ireland."

The current arrangements are the negation of a Republic.

The €67.5 (not €85) billion bailout

Jim Stewart: Whatever the Taoiseach thought he was doing at the press conference last Sunday) in announcing the EU/IMF net loans to Ireland of €67.5 billion, he was not as he claimed, addressing ‘the Irish People’. At least the Secretary General of the Department of Finance adopted the right tone by wearing a black tie. Nevertheless in the rather rambling responses there are some nuggets of information.

The Official Announcements

There are a number of very disappointing features in the Government statement about the receipt of EU/IMF Funds for Ireland. The most is the failure to ensure that the debt of all bank bondholders is written down. This follows the poorly thought-out “National Recovery Plan 2011 - 2014”. One feature of this plan is, in places, its simple reflection of narrow sectional interest. For example (p. 94), the view is expressed, as argued by the pensions industry, that tax deferred on accumulated funds for pension provision is not a cost as it is in effect ‘deferred income tax’, and the open invitation to the pensions industry to lobby for ‘alternatives’.

There are some surprises :- Why is the contribution from the UK €3.4 billion rather than the much-publicised €8 billion? Could it be related to the proposed interest rate on UK borrowing? (A direct question on this subject was asked but not answered at the press conference announcing the rescue fund). Or was it reduced to ensure that State discretionary funds were reduced?

There are some perfectly reasonable proposals: we will no longer have to contribute to the Greek rescue fund, although the two documents together repeat the same mistakes that started with the September 2008 guarantee (see endnote)

The Bond Holders

Yetm in dismissing the write-down of the value of bonds to senior debt holders, one argument has been dropped, and that is that Senior Debt cannot be restructured (writen down in value, extending maturity etc.) because it ranks ‘parri passu’ with depositors, meaning senior debt and depositors have the same rights. Other legal issues have been hinted at.

In answer to a question regarding whether the ECB ‘vetoed’ debt write downs by banks, the Taoiseach stated that there was no ‘agreement from the EU for such a policy and, to a second question on the same issue he answered that there was no political or institutional ‘support’ for such a move. Ajai Chopra, the leader of the IMF mission, again in answer to a question refused to categorically say that bond holder write downs might not be an option in a future period (Morning Ireland 28/11/2010). The reported lack of support at EU level for such a policy is surprising, given recently enacted German banking laws which the Financial Times state will ensure that “creditors take losses rather than the State” (Jennifer Hughes and James Wilson, Financial Times November 11).

The Financial Times (November 30) quotes the Central Bank governor as stating that ‘Dublin’ had refrained from taking action against [bond] investors in return for a “liberal attitude” by the ECB – in another article this is explained in terms of funding of Irish banks. This funding is likely to have increased from the reported figure of €130 billion (Irish banks borrowing from the ECB is likely to be less than this) on 29th October, because of liquidity strains on Irish Banks due to large deposit outflows. Similar outflows are likely to be taking place in other countries where government bond prices have fallen such as Portugal, Spain and more recently Italy. In providing such liquidity, the ECB is acting as a normal Central Bank. The ECB has been reported as opposing senior debt restructuring by insolvent banks. As a result, it is in effect imposing private sector liabilities on a sovereign State in the case of those bonds not subject to a government guarantee. There cannot be any legal basis for such a position. There is certainly no economic basis.

It is likely that, in the event of liquidation or wind down in the case of Anglo Irish bank and the Irish Nationwide, any competent insolvency practitioner could reorganise assets so that depositors and bond holders were in separate legal entities. The one with depositors' funds could be rescued. The other not. This is unlikely to require any legislative changes or the introduction of a Special Resolution Regime, as it could be performed under existing law. Bonds with a government guarantee could be written down at the expiration of the guarantee.

As in the case of junior bond holders, no legislation is required to ensure bond holders suffer losses through falling market values. Policy should be to drive down the value of this debt and then negotiate with senior bond holders. The Anglo Irish subordinated debt write down did not require legislation. Nevertheless various statements that legislation to require restructuring is in preparation pose a threat, even though it is currently proposed that this should relate to subordinated bondholders. This action coupled with refusals to categorically rule out such a policy will help achieve the desired objective. More is needed. Some bond traders have been reported as already anticipating such a policy. Many bond holders may have covered potential losses via credit default swaps, passing the ultimate liability to counterparties.

Writing down senior unsecured debt issued by Anglo alone, and not covered by a guarantee, by 80% would reduce required State funds by €3.2 billion. Writing down senior unsecured debt covered by the guarantee would reduce State funding by €2.1 billion (See Parliamentary Answers to Joan Burton, 27 October, 2010). Current actions to write down subordinated debt by 80% will reduce required State funding by €1.88 billion

Some argue a debt for equity swap could be instituted. This is only likely in one case. The Bank of Ireland is in the best-placed bank to raise additional capital and may be able to do so in conjunction with a debt for equity swap. Bond holders would convert debt into equity and subscribe for new shares. A debt for equity swap where bank capital requirements and access to capital from markets are uncertain, would introduce additional complications and cost to bank financing. As in the case of debt write downs, debt for equity swaps are unlikely to result in sufficient additional capital. Any shortfall is most likely to come from the State.

The Austerity Programme: What Options Remain?

One effect of the ‘austerity package’ in the National Recovery Plan and the EU/IMF “Programme of Financial Support for Ireland” (http://www.finance.gov.ie/) (not entitled Memorandum of Understanding as in the case of Greece) is to lock any incoming administration into existing policies, by extensive prescription of budget balances and monitoring, but especially by removing options relating to the use of National Pension Reserve Fund, Options still remain - not all the fund will be used. There are possibilities for utilising the exceptionally high savings rate to partially fund the exchequer borrowing, as noted in the National Recovery Plan, but this could be extended to fund skill enhancing programmes such as placement schemes, work experience and employment creation. The government has control over aspects of tax policy and social welfare policy; initiatives can be introduced to create and sustain jobs; further efficiencies can be derived from the public sector; our state owned enterprises could be used to rebuild our economy, as their assets and liabilities are not subject to EU/IMF approval. This could be particularly important as the EU/IMF document, in contrast to the National Recovery Plan, specifically states that “any additional unplanned revenues must be allocated to debt reduction” (p. 13). This assumes that State-owned companies are not privatised - an option discussed in the National Recovery Plan but not in the EU/IMF programme.

An incoming administration will have many problems. One that receives little or no attention in the National Recovery Plan or the EU/IMF Programme is how change may be achieved in the attitudes and outlook of ‘official Ireland’. One symptom of this is the failure to recognise how far out of line pay and conditions of senior personnel in the public sector (academics, hospital consultants, judges, politicians, regulators, senior civil servants, etc) are in comparison with other countries in absolute levels, and as a multiple of average earnings. At at the same time the minimum wage will be reduced and the scope of the “inability to pay clause” widened (EU/IMF Programme pp. 10-11). There are even greater pay disparities in the private sector between those at the top of organisations and those on average earnings. These disparities have been an essential ingredient in creating our economic problems.

An incoming administration will have to work with the existing civil service, the IDA, etc. Some of these have contributed directly to the problems we face, some have a strong economic ideology, disguised as ‘economic science’, but there are many who would welcome change, and would also welcome debate about the policies that have led to the collapse of modern Ireland.


Endnote: some Issues with current Policy

(1) The belief in the austerity fairy’, that is cutting expenditure and raising taxes will lead to an economic recovery, without any other policies; and that recapitalising the banks will lead to economic recovery;
(2) The absence of proposals to create and sustain jobs, or proposals to develop and sustain indigenous firms such as a Loan Guarantee Scheme. Labour market reforms (much loved by the IMF, OECD and other institutions), such as cutting the minimum wage will have little impact on job creation. Wage costs have fallen considerably as acknowledged by IBEC (See Irish Times, 27/11/2010). This is partly due to the growing prevalence of short week contracts (particularly in retailing).
(3) The State is now a major owner of property (hotels, office blocks, houses) yet there is no statement as to how economic value might be obtained from these assets. Where are the plans to vastly expand the tourism sector and visitor numbers?

Michael Burke in the Guardian: who's being bailed out?

Somewhat belated, but here is a link to PE blogger Michael Burke's opinion piece in Saturday's Guardian newspaper.

Ireland, bond markets and democracy

"Making the “market” the actor abstracts from the real world of speculators and financial fraud. It facilitates the mythology that the dysfunctional financial system is not the work of men and women (mostly the former) within institutions with socially irrational rules and norms, but a manifestation of the inexorable operation of the laws of nature that no government can change. This objectification is ideology: it is not “markets” that seek socially devastating budget reductions in Ireland, Greece and elsewhere, but a specific collection of financial speculators whose anti-social behaviour is possible because governments removed regulations of capital markets". You can read the rest of John Weeks' post on Social Europe Journal here.

UNITE letter to opposition parties

Michael Taft: Today, Jimmy Kelly, Regional Secretary of the trade union UNITE, sent a letter to the leaders of the opposition parties – Fine Gael, Labour and Sinn Fein. In it he called on them to make clear that they will not be bound by the terms of the IMF/EU bail-out. He further called on them to commit to re-opening negotiations based on the following principles:

(a) That the Irish Government will refuse to be bound by the debts generated by the banking sector, and

(b) Ring-fence the cash and assets available to the state in the National Pension Reserve Fund and the National Treasury Management Agency’s cash balances. These should be used for economic and social investment only and not to pay off the deficit or write-down debt.

The text of the letter is below.

On behalf of the UNITE trade union, I am writing to ask that your party declare they will not be bound by the agreement reached yesterday with the EU and the IMF. This agreement is not in the interests of the Irish economy, Irish workers or the Eurozone.

We are further asking that prior to the general election your party declare they will re-open negotiations based on the following principles:

(1) The Irish Government will refuse to be bound by debts generated in the banking sector. If no satisfactory mechanism can be agreed with the IMF and the EU, the Irish Government will engage in a substantial write-down of debt held by all bondholders – including both senior and subordinated debt;

(2) The cash and assets held in the National Pension Reserve Fund and the National Treasury Management Agency’s cash balance will be ring-fenced for public investment in the Irish economy. These resources will not be employed for deficit or debt reduction purposes as this will only undermine our ability to generate growth and employment and, so, defeat the objective of repairing our public finances.

UNITE believes that only by removing banking debt from the public balance sheet and employing our cash and assets for investment purposes can we hope to achieve economic recovery and fiscal stability.

I look forward to receiving your response which I will pass on to our 60,000 members in the Republic.

Thank you for your consideration.

Yours sincerely,

Jimmy Kelly

Implications of the IMF deal

Tom O'Connor: The IMF deal which has just being announced should be filed under fairy stories. It is economically unrealistic and would be an impossible burden on the country.

Let’s take the figures. The interest rate on the deal is 5.8% and the deal takes €17 billion from National Pension Reserve Fund and National Treasury Management Agency. Remember, the Greek deal was only 5.2% over five years. The longer time period on the Irish deal forces a significant hike in interest rate. The longer time frame increases the amount of interest significantly also.

Let’s put this figure in to the macroeconomic framework. In 2014 our national income measured by GDP, the measure used by the EU, will be €183 billion. At the end of 2009 our national debt stood at €75 billion. This year’s deficit plus the deficits to 2014 plus the bank recapitalisation will bring the national debt up to 183 billion by 2014, 100% of GDP, according to the government’s four year plan.
Now this 183 billion is the principal owed and doesn’t include the interest. This bailout will fund the 35 billion bank recapitalisation and 50 billion in deficit repayments and is in line with the governments own projections in its four year plan.

The interest on the deal will be €45 billion. The total €69 billion plus interest amounts to €114 billion. This is to be paid by the start of 2020 and covers 9 years. This forms part of the national debt from next year onwards. A further €50 billion will be added to the €100 billion which is not part of the IMF deal and which already exists. The total government debt in 2019 without anything paid off it will be €264 billion.

Now, the government’s own four year national recovery plan shows it will run a deficit by until 2014. It will be lucky to break even in 2015. Even during the best year of the Celtic tiger, the maximum surplus run by the government was €3 billion.
So, the government would be lucky to gather €1 billion a year in surplus from 2016 to 2019. This will give them a tiny repayment capacity of €4 billion to the IMF who with interest will be owed €114 billion. Even the sale of all semi-state companies would only pay off another €5 billion.

The fact that we will owe €114 of our national debt to a ruthless organisation like the IMF is a very worrying prospect indeed, given its track record in Eastern Europe, Africa and Latin America.

Given that all the taxation increases will have been used up to bring down the deficit to 3% by 2014 to please the EU and taxes will then by quite high, there is no other avenue for the government to raise the rest of the money. The government cannot come even remotely close to paying. There are no Houdini tricks.

The government projects GDP will be €183 billion in 2014, based on its growth projections. Now, taking the very optimistic scenario that the economy will grow by an average of 3% in GDP terms to 2019, nominal GDP at that stage would be 205 billion. At that stage the €264 billion in national debt will be 129% of GDP.

This figure would include nine years of economic hardship and cutbacks. At the end of the period, Ireland would still owe one and a third of everything we produce in the country in one year, with the IMF being by far the biggest creditor.

The justification for the bailout is to save the euro and bring our economic figures in to synch with the EU’s Stability and Growth Pact. This is nonsense. True, we will be down to 3% in terms of our general government deficit by 2014. However, in that year our debt will still be 100% of GDP. Five years later it will be 129% of GDP. To achieve a worsening debt, we will have sacrificed hundreds of thousands to the emigration markets and unemployment will stay high.

In addition, at 2014, the government’s own four year plan shows that the amount of taxes going to service the interest on the national debt will be 20%. This is based on a rate of interest of 4.7%. This will rise to 25% just to pay the national/IMF interest bill only!

To make matters worse, by 2019 the pension bill will have risen considerably, given the ageing of the population. In fact, the National Pension Reserve Fund was set up to cover some of this cost. Even when the NPRF hadn’t been rifled by the government to recapitalise 7 billion to AIB/BOI and Anglo in the past two years, its total assets then of 25 billion was only equivalent to covering 25% of the pension bill by 2025.

This means that taking the NPRF money to pay the banks under this plan is ludicrous. There would be a strong case to take 8 billion from the fund to stimulate the economy and replace it in five years. This would drive down unemployment by 10,000 for every 1 billion spent and would improve the government finances. Squandering it on the banks, having already taken 11 billion from it for them, is nothing short of a national disgrace.

Even if we achieved an interest rate of 2% from the IMF, sold our semi state companies and ran an exchequer surplus of 6 billion by 2019, our debt GDP ratio would be still 107%. We need to fully nationalise the banks, burn the bondholders, amalgamate the big two banks and start afresh. Only depositors should be guaranteed.
We need to use some our NTMA and NPRF cash reserves of €40 billion to stimulate the economy. A partial long term loan without interest with our own un-borrowed reserves needs to be used to cover the deficits. Any partial EU loan should be without conditions over 20 years.
These are real alternatives - this deal isn’t. This deal is a monumental mistake. The deal cannot be passed until legislation goes through the Dail after Christmas to legalise it. It would be a national scandal if this government’s last sting of a dying wasp was to legally impose this deal on Ireland.This is an edited version of an article published in today's Irish Examiner

Never a reckless lender be

Tom McDonnell: One of the images below is from Patrick Honohan's paper in the Economic and Social Review June 2009.  If you combine the two you can see how the foreign banks (as they were the main holders of the Irish banks' bonds) were what funded the last 1/3 of the Irish bubble, i.e. its wildest phase.[click to enlarge images]

The other gives the BIS's latest figures available on foreign banks claims on Irish banks (see the second line in the Ireland section). (See the bottom of the page for the reference). Some of this has been paid back, especially in August-September as a considerable amount of bonds were redeemed then at Irish people's expense, but most still remain.

In other words, the Irish people are bailing out the German, UK and other banks for funding the most crazy stage of the Irish bubble, which simply could not have happened without their investment in it. Now they want the Irish people to bail them out fully for their bad investments and the damage they have done. This is what the IMF/ECB loan is essentially about.

The clear implication is that these private institutions fuelled the boom through their unwise lending. They are at least partially responsible for it. Bubbles will go to the extent that banks will lend – that is the primary determining factor. So it is these private institutions that must take the vast majority of the pain – not the Irish taxpayer. If the ECB wants them bailed out then they should do it themselves.

We shouldn’t exonerate the IMF from blame either. We need to bear in mind the IMF's clean bill of health and encouragement to the Irish banks and their regulation in their assessments of the Irish banks (Honohan Report).

With friends like these ..... Michael Burke on the view from the UK

PE's Michael Burke has an article on the Socialist Economic Bulleting putting the Irish situation into context for British readers:

Like Greece before it, the population of Ireland will experience the true nature of the bailout; a form of international loan-sharking. The economy and government finances have spiralled downwards because huge transfers of wealth and incomes have been made to the rich, led by the banks, to soften for them the effects of the recession. These transfers were from the poor.

The downward economic spiral naturally ran out of control, as incomes plummeted and new debts mounted. These were reflected in the soaring costs of government borrowing in the bond markets as investors viewed eventual default as an increasing likelihood. Now Irish taxpayers are being forced to take on even greater debts and to accept the extremes of further ‘austerity’ measures in a doomed attempt to pay for them. The Dublin government is the borrower - but the funds will be offered to existing creditors. As the Financial Times’s Martin Wolf remarked of the earlier Greek crisis, this is worse than Argentina’s debt crisis, as the creditors are being paid to escape, and there is no-one to replace them.

Click here to read the full article.

Krugman on the bailout - and why the markets aren't impressed

"The basic situation is that given the cost of rescuing Ireland’s banks, and the damage harsh austerity is inflicting on Ireland’s economy, investors are understandably skeptical that the Irish government will actually be able to meet its commitments. That’s why rates are high — to compensate for a possible default." You can read the rest of Paul Krugman's post today here.

FT on bailout and banking

"Ireland’s uninvited helpers seem set on perpetuating Dublin’s dysfunctional policy of throwing good money after bad and filling holes into which creditors refuse to step". You can read the rest of today's Financial Times editorial here.