Michael Noonan's claim it was due to performance is poppycock

Minister for Finance Michael Noonan yesterday said the deal reached in Brussels on Monday night recognised “the efforts being made by well-performing programme countries”.

Poppycock.

Think back to July 2011. Better terms were granted to the euro zone’s three bailed-out countries on their European loans. The Government was quick to portray this as proof of its dynamic diplomacy. It was nothing of the sort.

Greece was sliding and something had to be done. To avoid singling Greece out and to maintain equality of treatment, all three bailed out countries were given easier terms on their loans.

The deal arrived at in Brussels last night is very similar. It will further ease the terms of bailouts for Ireland and Portugal, although it won’t be as significant as the July 2011 move (as the very limited reaction of bond market participants illustrated yesterday).

Growth

The deal was reached because Portugal’s economy is tanking. However diligently the Portuguese government has been in implementing the terms of its bailout, the reforms are not delivering payback in terms of growth.

Worse still, some of the reforms are giving plenty of short-term pain and creating uncertainty, while a credit crunch, austerity, private sector deleveraging and slowing export demand are causing deep recession.

Portugal led the push for this week’s deal because its situation is increasingly desperate. Lisbon focused on the precedent set last November when repayments on Greece’s debts to the rest of official Europe were hugely stretched out. As happened in July 2011, Ireland has benefited from decisions designed primarily to help others.

That said, what happened in Brussels will be good for Ireland and has no downside from this State’s perspective.

Having cleared that up, let’s focus on what the Government has been doing to ease its debt burden.

Twin track

For some time now, it has been following a twin-track approach in its efforts to persuade the rest of Europe to share some of the costs of rescuing the banks, bailing out depositors and most of their other creditors.

One track involves the promissory notes used to prop up the now-dead banks. The second track is to persuade others in Europe to chip in for past and possible future recapitalisations of banks.

The first track has been on the agenda for more than a year, the second since the EU leaders’ statement on June 29th last year on breaking the link between banks and sovereigns.

There is the potential that the first track will reach its end point in March. Whenever the promissory note issue is finalised, the outcome will be beneficial, even if the range of beneficial outcomes remains wide – from more than symbolic to truly significant.

The second track will take considerably longer and there is no certainty that it will ever lead to a benefit for Ireland.

Despite the specific mention of Ireland in the June 29th statement (a genuine diplomatic achievement ), creditor countries have since rowed back on the commitment made then. They are resisting picking up any legacy banking costs.

There is a long way to go. Expect as much talk about securing a deal on bank debt in 2013 as there was in 2012.