Yesterday the Irish cabinet met to discuss the Irish financial crisis. This was ostensibly to finalise plans as to the breakdown and composition of the planned 15 billion Euros of austerity that is to take place over the next 4 years. However I would imagine that the main subject would have been the prospect of a bailout for Ireland and the fact that there was no longer any alternative. I mean it was apparent there was no longer any alternative to those who are in charge of Ireland as pretty much everyone else had already reached such a conclusion and I had recommended it in my article of the 19th of September, or put another way some two months before. One of the ironies of the situation is that after their many failings along the way perhaps the most important financial decision was taken in Ireland’s history as a sovereign nation by a group of people who if you look at their recent performance are likely to have been the least well-equipped group to have such responsibility.
The Statement by the Irish Government
The Government today agreed to request financial support from the European Union and the Euro Area Members States. The IMF will also be requested to assist in the provision of support.
In the context of a joint programme EU/IMF, the financial assistance package to the Irish state should be financed from the European financial stabilisation mechanism (EFSM) and the European financial stability facility (EFSF), possibly supplemented by bilateral loans to be negotiated by EU Member States.
EU and euro-area financial support will be provided under a strong policy programme which will be negotiated with the Irish authorities by the Commission and the IMF, in liaison with the ECB.
The programme will address the budgetary challenges of the Irish economy in a decisive manner on the basis of the ambitious budgetary adjustment and comprehensive structural reforms that will be contained in the Government’s Four Year Budgetary Strategy. Given the underlying strengths of the Irish economy, decisive implementation of the programme should allow a return to a robust and sustainable growth, safeguarding the economic and social position of the people of Ireland.
A central element of the programme will also be to support further deep restructuring and the restoration of the long-term viability and financial health of the Irish banking system. It will build on the extensive measures taken by Ireland to strengthen its banking sector, via guarantees, recapitalisation and asset segregation. These measures have helped to maintain financial stability of the Irish banking sector at a time the both the banking system and the Irish economy have confronted significant challenges reflecting both domestic and international factors.
The programme will address the potential future capital needs of the banking sector. By building on the measures already taken by Ireland to address stress in its banking sector, a comprehensive range of measures – including deleveraging and restructuring of the banking sector – will contribute to ensuring that the banking system performs its role in the functioning of the economy.
Some initial thoughts on this statement
Those hoping that there has been a fundamental change of heart from the Irish government may well be disturbed as I am by the use of phrase such as “underlying strengths of the Irish economy” and “robust and sustainable growth”. I am afraid that these are not the reasons why Ireland is in such a situation and the real reasons are more like exactly the reverse. Indeed to talk of the measures being taken as having maintained the stability of the Irish financial system appears to ignore the rather inconvenient truth that if events had carried on as they were the Irish financial system was in danger of collapse. Perhaps the worst example of rewriting history here is the implicit mention of the blanket bank guarantee that the Irish government provided in 2008 as something that has helped events. Let me be clear rather than helped it is likely to go down in history as the worst financial decision made by an Irish government.
What will happen next?
The detail available is still somewhat patchy. I suspect that the dithering by the Irish government meant that there was no time to come up with a formal agreement. What we have is a suggestion that the aid will be less than 100 billion Euros, however caution is needed here as the Irish government have underestimated virtually everything as her crisis has developed. Indeed they have done this so often it has felt like a deliberate policy.
The agreement between Ireland and the Troika ( this is the name used for the IMF/European Union/European Central Bank when they operate together) will be finalised in the next few weeks, which is the time likely required for a full assessment on the state of the banks (that will involve new and more severe stress tests and seems to forget the irony that so far they have proved a failure as a concept as the last set passed Irish banks only in July) and for the European rescue funds to raise the funds/loans in the financial markets.
If we assume a loan amount of 90 billion Euros then Ireland would receive 30 billion from the IMF and 60 billion from the EU/Euro zone if the agreement struck back on May 10/11th is adhered to. It will be interesting to see how the bilateral contributions of the UK and Sweden are incorporated in this. The Chancellor has said that we will offer around 8 billion Euros and an equivalent offer by Sweden would be around 1.5 billion Euros. If this was outside the EU deal then we would be just shy of the 100 billion Euro size established as a maximum by the Irish government. But the detail is very vague.
I have written recently about the fact that I feel that the Euro zone’s “shock and awe” rescue vehicle the EFSF has quite a few flaws. I first wrote establishing serious flaws in it on the 25th of June and have more recently followed this up on the 17th of November and in the letter I sent to the London Evening Standard. I notice that there has been little confirmation so far that it will be used and with the twists I have highlighted above the Euro zone may be able to get away without using it so once again the boasts of her politicians are not backed up be any semblance of reality. After all isn’t some shock and awe exactly what Ireland needs?
I wrote about the vehicle that looks as though it will be used the European Financial Stability Mechanism or EFSM on the 18th November and it too has issues just not quite so many as the EFSF! Accordingly it will be brought into action first and everybody may yet be grateful that the IMF can respond more quickly which is one of the reasons I have recommended in the past that Ireland should go to the IMF. It is also likely that funding from the IMF will prove cheaper maybe much cheaper as the interest rate at which the Euro zone will charge remains mired in confusion ( as it does not know itself it accordingly cannot tell anyone….)
There is an interesting feature of the EFSM in that it will issue bonds which should get a AAA rating as
Borrowings are direct and unconditional obligations of the EU and guaranteed by the 27 member states.
Yes that does include the 9 European Countries that are not in the Euro and I wait to see how this is explained……
What does this do for Ireland?
In the short-term this news is plainly good for Ireland as she now has access to foreign sovereign funding to help bailout her ailing banking system and to support her own national situation. However as time goes by there are dangers in this. If the same “Ship of Fools” to quote a recent book title remain in charge then we are likely to see more mistakes as time goes by so I feel that real improvement will require a lot of reform and change of which,sadly, there is little or no sign.
In the longer or medium-term there are dangers both for Ireland and for those who will loan the money. The essential problem over this period is Ireland’s solvency which this deal helps only marginally and depending on the interest rate charged may in fact actually damage it. If the package does not lead to fundamental reform then Ireland may be taking loans that she cannot repay to put her in the same situation as Greece. Just to illustrate the difference between fantasy and reality I notice that the Greek government is talking of issuing government bonds again in 2011 just as her situation has taken further lurches downwards.
These initially took the news well with equity markets rallying although I notice that some of the euphoria appears to be already wearing off. However it is early days. The Irish government bond market has improved by less than one might have expected as its yield at the ten-year maturity has only just edged below 8%.
If we remind ourselves of what happened after the “shock and awe” package was announced back in May of this year then equity markets surged and government bond yields in the peripheral Euro zone nations fell substantially. However around a fortnight later Greek government bond yields began to rise again. As markets tend to learn from experience more quickly than politicians then Ireland is likely to get a shorter window of opportunity.
The UK’s involvement in helping Ireland
I have expressed my views on this subject in my letter to the Evening Standard which was on Sunday’s article. If we now look at the amounts the UK might be exposed too we get.
1. IMF: Our quota here is 4.94%.
2 EFSM: We are one of the 27 nations which guarantees this facility and the funds it borrows. As some of the 27 are in no state financially to be able to borrow anything our real share grows.
3. Any bilateral aid to Ireland: We will have to borrow this on financial markets and it will is used be added to our borrowings. Our government bond yields have been rising recently and the prospect of us borrowing more is likely to have been a factor.
What Ireland did in 2008: Her blanket bank guarantee weakened UK banks
This feature has turned out to have contributed to Ireland’s current position. However back in 2008 the advent of this bank guarantee was used by Ireland’s banks to poach deposits by UK banks. Let me give you an example of some advertising in the UK by Irish Nationwide Building Society as quoted by the Financial Times.
As Irish Nationwide qualifies under this scheme we now represent the safest place to deposit money in Europe with a AAA guarantee from a country with the lowest national debt to GDP ratio of any AAA country…………Money in these accounts are guaranteed regardless of the size of deposit and represent the best value in the UK market.
Back in October 2008 the FT suggested this.
British bankers said there were already signs that some Irish lenders were approaching corporate and private banking customers in the UK and encouraging them to move their money.
So there you have another objection to our Irish assistance they have not always been the friend that we are now being to them. Back in 2008 they strengthened themselves at the expense of UK banks. These are the same banks the UK taxpayer had to bail out. I repeat again I wish the Irish people no ill but their government has acted to weaken UK banks in its failed efforts to save itself and we should be reminding them of that in my view.
In the short-term this is likely to help Ireland with her problems. Unfortunately as time goes by Greece has not proved to be a good omen because as developments have emerged the aid to her now looks permanent and that is the danger for Ireland that she ends up with ever more obligations that she cannot settle.
There is much to emerge in terms of detail as time progresses but many of the principles established already look worrying to me.