Leaving the bail-out
Michael McKernan shares his perspective as the Republic prepares to regain its economic independence.
It’s official. Ireland has decided to leave the ‘bail-out’ as and from 15 December 2013. It is a decision the Irish Government is entirely free to make based on its own assessment of when it can return to the capital markets.
For the past three years, Ireland has been one of four EU countries on financial ‘life support’ from the rest of the EU. In Ireland’s case, the requirement for help came about dramatically in 2010 when the country could no longer meet its commitments from internal resources and had lost the confidence of the financial markets, preventing it from any further borrowing.
At that time, the Irish financial situation was dire. The Government was running a massive and unprecedented budget deficit (around 30 per cent of GDP) and the national debt mountain had risen rapidly and was still increasing.
Added to the Government’s own enormous debt was the fact that Ireland’s banks were drowning in a sea of bad debt as the property bubble burst around them. And householders were also struggling to cope with a mountain of private indebtedness and negative equity.
Three years later, with £60 billion of assistance received from the European Central Bank and the IMF, several swingeing austerity budgets in succession, strict compliance with fiscal targets set by the EU-ECB-IMF troika and recapitalisation of the Irish banking system, the outlook looks much more hopeful.
And there is no doubt that the Government, and indeed the Irish people, can take some satisfaction from the fact that the country is now in a position to regain its economic freedom. Few will forget the anger the electorate visited on the previous Government for losing Ireland’s economic independence.
Ireland is also leaving the bail-out without accepting any precautionary facility: effectively a credit-line which would support the Irish Exchequer should there be, for example, an adverse shift in market sentiment.
However, any precautionary facility would have come with continuing fiscal conditionality, meaning that the recipient would not quite have returned to full economic independence.
The Irish Government, following a round of consultation with EU leaders and financiers, concluded that it could leave the bail-out without any precautionary credit-line because it was not an important issue for the markets and, in any event, the Exchequer had amassed a cash pile of €20 billion (£17 billion) which was capable of meeting borrowing needs until the end of 2015.
But there are, however, some who worry that the patient is leaving the hospital too early.
Certainly the public finances are still a major cause for concern (the debt-to-GDP ratio has risen to 125 per cent) and growth is still slow and unsteady. The current budget deficit is still €13.5 billion (£11 billion), some 8.2 per cent of GDP. Greece’s deficit is 9 per cent. Perhaps of greater importance is the fact that the Irish banks, despite the injection of billions into their coffers and their non-performing assets being off-loaded into NAMA, may not yet be back to good health.
The problem of domestic debt and mortgage arrears has been ‘kicked along the road’ and it is undoubtedly another serious problem facing the banks in the near future.
The biggest problem of all, perhaps, is the Government actually having new freedom to act.
Although Ireland’s financial correction is far from completed, a sense that austerity is now officially over will leave the Irish Government facing considerable pressure to loosen the purse-strings and ease up on austerity. Without the discipline of having to look over its shoulder at the troika, there is a danger that the Government may do just that. Hopefully, the patient will not relapse.
