EUROPEAN DIARY:Minister's strategy of playing for time is at odds with that of the European Central Bank, writes ARTHUR BEESLEY
ENTER MICHAEL Noonan. The new Minister for Finance was more than an hour early for his first meeting with his euro zone counterparts. It was 9.30am. Already he had met Olli Rehn, the EU economics commissioner.
After Taoiseach Enda Kenny’s fractious summit debut on Friday, it fell to Noonan yesterday to take up the battle for a better banking deal in Brussels. His arrival into the debt crisis maelstrom comes as Europe takes final steps towards a comprehensive overhaul of its rescue scheme.
EU leaders want a comprehensive deal by a summit on Friday week. There’s just enough time for the new Government to start making its case on the banks but not enough time to win the argument.
Quite apart from its pursuit of lower interest rates on bailout loans, there is considerable anxiety in Dublin that a new round of bank stress tests will lead to an “unsustainable” requirement for new capital in the banks.
The results of these tests will not be available until the end of the month, overshooting the next summit and raising the prospect that the debate on Ireland’s bombed-out banks will continue for some months to come.
At this reading it seems likely that the question of the Irish institutions may not be discussed in earnest until the results of parallel stress tests on European banks are completed in June.
In the meantime, Noonan is pressing European Central Bank (ECB) chief Jean-Claude Trichet to commit to longer-term emergency liquidity for Ireland’s banks and a longer deleveraging process. By stretching out this process, he wants to avert the immediate realisation of losses that would lead to a further requirement for new capital.
His strategy of playing for time, however, runs against that of the ECB, which wants to quickly unwind emergency support for “addicted” banks. Following his meetings with Trichet and Rehn yesterday, he said there was an indication of a willingness to help from his interlocutors. He said no more than that, however.
Thus is the new Government confronted with the reality of the weak bargaining position it has inherited. The sense must be that this will be reinforced again and again in the coming weeks.
Overlooked in the brouhaha over corporate tax – and Kenny’s “good Gallic spat” with Nicolas Sarkozy – is the fact that the wider talks on Friday actually delivered more than most observers anticipated.
Key questions remain to be settled but the debate is at last advancing after months of grandstanding, copious technical studies and denial that any new initiatives were required at all.
If all that betokens a desire to finally shake off the yoke of crisis, it underscores fears about weaklings such as Portugal and anxiety about the fragility of the global recovery.
Thus, five weeks after German chancellor Angela Merkel antagonised many other leaders by demanding they adopt a Germanic “competitiveness pact”, they duly signed up to something approaching her plan. Euro governments have promised to make their first policy pledges under the pact as early as next week.
There is plenty of scope for argument over the detailed elements of the final document and their true import. In Brussels terms, however, an accord in this timeframe is something approaching deal-making at the speed of light.
That’s no small point. Ireland was among 25 countries that voted last Thursday to proceed with plans for a single European patent. The initiative was on the table for more than 40 years. Yes, 40 years.
There is more. After a seemingly endless meandering debate over the scope and scale of the bailout fund, the leaders settled on a modest expansion of its remit and a big increase in its lending capacity.
When the European Financial Stability Facility was established last May, euro zone governments issued guarantees for €440 billion. To maintain triple-A credit rating, however, the fund’s lending capacity is at present limited to €250 billion. They will now increase its lending power to the full €440 billion, something which may well involve increased guarantees by member states.
The leaders also resolved to empower the fund to intervene directly in primary debt markets to buy sovereign debt directly from ailing governments on the primary market. This gives them additional flexibility, although countries that sell paper to the fund will have to sign up first to stringent policy conditions.
The absolute parameters here remain unclear, although the scheme seems to offer potential to shore up a country in difficulty by boosting demand for its debt. Crucial here is whether the policy of conditionality is that of a full-blown rescue programme.
If it is, then the interventions would be made in public, differing little from rescue loans the fund makes. If not, then there may be more potential for discreet interventions along the lines of ECB purchases of existing sovereign debt on secondary markets.
Such purchases were not sufficient to avert Ireland’s bailout, but they may have bought time for Portugal, at least for a while.
Noonan said it was important to recognise that the issues on the table were far wider than Ireland. He is right.