Deal or no deal?

Some things never change - an election poster from the 1920s showing Ireland under massive debt.

Some things never change - an election poster from the 1920s showing Ireland under massive debt.

It was another dramatic night in the Oireachtas earlier this month as the former Anglo Irish Bank and Irish Nationwide were put to bed after the best part of five years torturing the Irish people.

All-night sittings in the Dáil and Seanad immediately conjure up images of something grave and dramatic happening, such as the Arms crisis in 1970 or the introduction of the bank guarantee in 2008. On this occasion the passing of the necessary legislation to liquidate IRBC was just a prelude to the main business - the conclusion of a deal on the IRBC promissory notes.

High stakes and grave implications

Before considering the calibre of the deal, it is worth recalling just how important it was for the Government to conclude a deal. Ireland was due to make another payment of €3.1 billion in respect of the promissory notes at the end of next month, and every March for the next 10 years. This would have had a crippling effect on the country, wiping out many of the reductions made in the exchequer deficit. It would also have had a demoralising effect on citizens.

From a political perspective too, the stakes were high. Two years into office, the Government could not afford to make this payment, especially in light of remarks in recent months by some ministers. Despite some protestations to the contrary, there was a real danger of the Government collapsing had a deal not been done.

Insider for some time had suspected that the willingness of some ministers to talk up the prospect of a deal, coupled with an acknowledgement on the part of some Government sources as to how high the stakes were, meant a deal was in the offing.

Now that a deal has materialised, there are three important questions to ask. How good is the deal? What will its impact be on the economy and society? What will its political impact be?

How good is this deal?

It is still early days and there is still uncertainty regarding how it will all work out. The deal is hardly a game-changer and probably not a cause for celebration on its own, but it does hold out the hope of being a stepping stone to something better.

The best description Insider heard about the deal is that we are in a better position than at the beginning of 2013 but in a worse position than in 2008 before the bank guarantee.

Prior to September 2008 the State was not carrying the bank debt on the Irish Balance Sheet. Indeed – notwithstanding that those in positions of power and policymakers should have foreseen the dangers coming (Insider sees what happened in the months building up to the panic of September 2008 as being the biggest lesson to learn from all this for the future ) – the idea that taxpayers would be lumbered with a €30 billion debt for two dead financial institutions would have sounded like a highly fanciful notion back in the summer of 2008. Even after this deal, we are still carrying this debt and it will have to be paid back.

On the other hand, at the turn of the year we were faced with the prospect of paying off this €30 billion debt over the next decade. Consider that some of the recent budgets have entailed cutting €3 billion from the economy through spending cuts and tax increases, and you can see what an awful burden it would be on the State and its citizens.

Even the most fanatical supporters of austerity and deficit reduction would regard the whole effort to be something of a waste of time in that context.

By deferring payment of the debt for a quarter of a century or more however, the Government should ensure the true cost of paying back the capital element of the debt is reduced in real terms. Essentially, inflation should reduce the value of the debt over time.

Insider is reminded of the story of how in the summer of 1976 with the IMF having to intervene with a loan to the British government, the then Conservative opposition were dismayed by research showing a high level of contentment among the British public – the reason being that rampant inflation was eating away at their debts! Nobody wants hyper-inflation in Ireland but a repeat of that sensation regarding our national debt is hoped for!

In the medium term though what will be the economic impact of the deal?

The economic impact

Firstly, it gives us breathing space. The mechanics of the arrangement are – to put it mildly – complicated but the outcome should be that the cost to the exchequer is reduced by around €2.3 billion for each of the next 10 years. Therefore we should be in a position to reduce our borrowing – and whatever about borrowing to fund public services, borrowing to pay off private debts taken on by the State would make no sense. There should also be a follow-on reduction in interest charges.

The fact we have reduced our obligations over the next decade should make Ireland a more attractive proposition when it comes to raising finance on the international markets. This should have two benefits.

First, it should enable Ireland to exit the EU/IMF bailout in the next year, which could have an enormous psychological impact on the State. The regaining of our economic sovereignty, the loss of which had such a profound impact on the public psyche in autumn 2010, could mark a significant turning point.

Secondly, it should reduce the cost of borrowing for Ireland so that money borrowed for more productive activities such as investment and public services can be raised at lower interest costs. All of this should lead to a reduction in the exchequer deficit.

To achieve this however, there will have to be an upturn in economic and consumer confidence and a return to growth. This will not be an easy task. The Government’s job is not even half-done in that regard.

The Fine Gael/Labour coalition is still committed to meeting its targets under the IMF/EU bailout. This will mean another tough Budget for 2014. Maintaining economic confidence and growth against that backdrop will not be easy.

There are a number of other issues the Government will have to address in endeavouring to restore growth and confidence. Insider has often noted how there appears to be no clear vision regarding a sustainable banking structure for the future. It is not clear what exactly the banking structure will look like post-crisis; how the banking sector will play its role in economic recovery; and have a bridle kept on it to ensure no repeat of the disastrous lending policies of the noughties.

There is also the matter of the other costs of the bank rescue. Amid all the talk of the IBRC promissory notes, it has been forgotten that the State has incurred billions recapitalising the other banks. How this is addressed in the context of new funding mechanisms at EU level, and whether some form of deal can be achieved, will come into focus now.

So – and we dare not say this too loudly – for the Government it is a case of ‘a lot done, more to do!’ Which brings us to the matter of politics…

The political impact

It is utterly ironic, that the immediate aftermath of this deal has seen Fianna Fáil – the party which got Ireland into this mess in the first place – make its most notable breakthrough since the last election with two separate opinion polls showing it back as the most popular party in terms of first preference votes.

Many people are at a loss to understand this.

In Insider’s view, people have viewed the political impact of the deal from the wrong angle. The idea that the public would reward the Government for doing the deal with an increase in support was a misjudgment. People are in fact withholding judgment on the quality of the deal and what it entails.

Of far more significance to them are the day-to-day economic issues – spending cuts, tax hikes, the impending water charges, and a general struggle to make ends meet, especially in the early weeks of the year when the bills start to bite.

The fall in Government support and increase in FF support are simply a continuation of trends that we have seen since last summer.

If the Government does get a boost from this deal, it will be more long-term in nature. It will be because some of the potential benefits of the deal discussed above will start to materialise and the Government will take advantage of the opportunities that present themselves. If on the other hand the deal unravels or the public does not see tangible benefits, the Government will pay a heavy price.

A final intriguing point comes to mind. It would be cheeky to suggest that even Fianna Fáil would try to claim credit for any successful deal negotiated by the Government. However, could it be that FF would find itself the beneficiary of an economic upturn?

Such an upturn would cause the present Government to look far more competent and in sharp contrast to the last FF government. On the other hand, if the economy were to pick up, could it be that some of the anger over the crash will dissipate and at least allow FF back into the game?

Like so much else about this deal there is much uncertainty and much to ponder.


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