Last week, I sat down with the troika for the second time and was struck with a severe case of deja vu. It all felt, and sounded, very familiar. But there was one new item up for discussion: what could be done about Ireland’s debt.
The troika had the pleasure of meeting opposition parties on Wednesday morning, including the technical group. We sat down with them in tastefully decorated, high-ceilinged chambers in the Department of Finance. Both parties had six men and one woman around the boardroom table — gender discrimination is as alive and well in European bureaucracy as it is in Irish politics, it seems.
The Troika’s take on haircuts – the normal type
Their song mostly remained the same. They stressed the need for further structural reforms to the “non-tradable sector”. Technically, this phrase includes non-tradable services — such as haircuts — but it was clear that the reference was to our public sector; Government, healthcare, education and so on. “Structural reforms” meant wages. As before, the message was very clear: parts of Ireland’s private sector boast “outstanding productivity”, but when it comes to the “non-tradable” and “sheltered” sectors, we need to “help the market find the wage level that creates jobs”. Let me translate that: we could hire more frontline workers if we paid market-level wages.
What was different this time was how open the troika were about Ireland securing a write-down in our national debt. In January I made the case that shifting the cost of the banking crisis from private investors to the State was immoral and amounted to economic lunacy. Arguing that some of the debt must be shifted back to the banks and investors, we might as well have been shouting our concerns at the sea. We were reminded of the generous bailout programme and the on-going funding of our ridiculous banking system by the European Central Bank (ECB).
But not this time. Just six days previously, at the EU leaders’ summit in Brussels, a decision was taken to keep bank debt and sovereign debt separate. The European stability mechanism (ESM), which enters into force tomorrow, will now be able to directly capitalise banks. It would appear that Germany was ambushed by France, Spain and Italy, and conceded on this critical principle.
Had this policy decision been agreed a few years earlier, the Irish Government would not have poured €64bn of public money into failed Irish banks. It is entirely possible that we would not have been locked out of the markets, and that the troika would not have been sitting opposite teams of TDs in a Department of Finance meeting room.
I asked the troika if they believed the new EU decision could be applied retrospectively to Ireland. They were quick to point out that the ESM would have its own board and make its own decisions. But they said the decision was an “important breakthrough”, and suggested Ireland was well placed to take advantage of the policy change.
While they were unclear how things might play out, they spoke of the decision as an “important achievement” and a “cornerstone”. Old habits die hard, of course. When pushed by another TD on applying haircuts to senior bondholders, we were reminded of the €15bn loss incurred by junior bondholders and the “extremely favourable funding” of the bailout package. This was a bit rich, considering the European Commission initially lent to us at 6 per cent, when it could borrow at a fraction of that amount. Nonetheless, the general tone regarding a reduction in the national debt had changed utterly since January.
Credit where it’s due
The decision taken at the EU leaders’ summit was significant, and the Taoiseach, the Tanaiste and the Irish delegation are to be congratulated for their work. It may have been the combined forces of Italy, Spain and France that managed to finally move Germany’s Angela Merkel, but the 4am statement contained a very important reference to “further improving the sustainability of (Ireland’s) well-performing adjustment programme”. The Irish team deserves credit for this addition, which it seems was not in the initial drafts of the statement.
The biggest game in town now is getting the conditions on bank recapitalisation, which were essentially agreed for Spain, applied retrospectively and in full for Ireland. That means getting the €64bn we poured into the Irish banks off our national debt. That would bring our debt to GDP ratio for next year (when the troika programme ends) down from 120 per cent to 85 per cent. Still high, but a fundamentally healthier position from which to recover. Assuming an average borrowing rate of 4 per cent, it would reduce our annual expenditure on interest payments by €2.6bn. That’s a lot of teachers, life-saving operations and job stimulus.
If the Government is to achieve this, I would suggest a change of negotiation tack is required. Up to this point Ireland has adopted a pretty sycophantic approach to the core European countries and institutions. It would seem that we were very seriously threatened. Although Minister for Finance Michael Noonan admitted to me in the Dail that no threat of any kind had ever been made, the suggestion from both the previous and current governments is that if we didn’t pay the bondholders, the ECB would take back its cheap money, destroying our banking system. This is the “no money in the ATMs” line.
In the face of this implicit intimidation, Ireland gave in. We acceded to pretty much all foreign demands. In some bizarre version of Stockholm syndrome, while the IMF publicly admonished the ECB for insisting Irish taxpayers pick up the banking tab, certain Government TDs publicly defended the ECB, pointing out how generous they were in propping up the Irish banking system. Foreigners were told how we all went mad with greed while being assured that Ireland was a country that paid its way.
This strategy hasn’t worked out too well for us so far. At every point in this crisis, Ireland has had the worst, or joint-worst deal. The initial interest rate Ireland was charged by the troika in 2010 was extortionate, and only came down six months later when Portugal entered a bailout programme. Greece secured a write-down on its debts of €105bn, versus zero for Ireland. Spain managed to negotiate the deal described above, with the added bonus of not having strict conditionality.
Some argue that the size of Portugal and Spain, and utter chaos of Greece, meant that they were always going to do better than us. This is nonsense – Iceland managed to push €85bn of banking losses back on to the bondholders. Iceland’s population is one 14th of ours, and they’re in neither the eurozone nor the EU.
Bad deal for Ireland
When it comes to bailing out banks, we’ve also come off worse. The €64bn we’ve put into the banks is more than €14,000 for every man, woman and child in Ireland. That’s three times more than the per-person cost in Iceland, four times more than in Greece, 23 times more than in Portugal and 200 times more than in Italy.
We have a worse deal, not because we are small, but because we have played the wrong negotiation. There are signs of that now changing. Before the Taoiseach met with the other EU leaders at the recent summit, he spoke publicly about Ireland needing a deal on the bank debt. This was a major change in public positioning. Maybe he knew he was on to a winner, demanding something publicly which he knew was on the way. But maybe he decided it was time to change the tone and fought, and motivated the Irish delegation to fight, for a better deal. Let’s hope it’s the latter and we can avoid any further deja vu from the Government and from the troika. It’s going to take a lot more hard work, but maybe — just maybe — things are beginning to shift.
This article originally appeared in the Sunday Independent, Sunday July 8.