Taking Ireland’s bank debt off the national balance sheet will have a huge impact on our debt-to-GDP ratio
BEFORE HEADING off to Brussels for this week’s crucial EU summit Enda Kenny stressed that patience and timing were essential in the pursuit of a better deal on Ireland’s bank debt.
At that stage he was aware that Italian prime minister Mario Monti was shaping up for a do-or-die battle to wrest concessions from German chancellor Angela Merkel to save the Italian and Spanish economies from being shut out of access to borrowing.
Finding an opportunity to use that confrontation to press the Irish case for changes in the bank debt terms was the challenge facing the Taoiseach going into the meeting.
Kenny and his Minister for Finance Michael Noonan had for some time been resisting political and media pressure at home to stage a public confrontation with our EU partners over Ireland’s bank debt.
Instead Kenny bided his time and waited for events to present an opportunity to win a concession on the bank debt. Just as the Greek crisis last year opened up an opportunity to get a reduced interest rate on the sovereign debt, the Spanish banking crisis created an opportunity on the banking side.
From the beginning of the Spanish banking crisis Kenny has been calling for direct investment from the European Stability Mechanism into the troubled banks rather than having it channelled through the sovereign state as happened in Ireland.
If a new approach was taken with regard to Spain the obvious knock-on effect was that the Irish situation would have to be revisited.
The big play at the summit was made by Monti, who was determined to force a change of policy by the EU to ensure that Italy would be able to continue borrowing on the bond markets.
In the weeks running up to the summit he built a strong network of support across the euro zone for a showdown on the issue if necessary. Ironically the German chancellor, who had played such an important role in installing Monti as Italian prime minister in place of the discredited Silvio Berlusconi, found that he had developed into her most formidable opponent.
The election of François Hollande as French president also played its part in changing the dynamic. Together with Monti and Spanish prime minister Mariano Rajoy a formidable front was presented to Merkel.
The first stage of the summit involved all 27 EU leaders discussing the growth pact being promoted by Hollande. There was no major disagreement on the terms although the Italians and Spanish insisted that they would only agree to it if there was also a deal on bank debt.
After dinner the 17 euro zone leaders negotiated into the early hours on the bank issue as the other EU prime ministers went off to bed. It was during this critical phase of the talks that Merkel was persuaded to make the crucial concession in principle to differentiate between sovereign and bank debt.
Kenny intervened at this stage of the meeting to insist that Ireland should be allowed to claim the same concession retrospectively and Merkel did not demur.
The vital thing from an Irish point of view was to have the new position spelled out clearly rather than some implicit understanding that the wider deal would apply to this country.
In the event there was a direct reference in the summit conclusions: “The euro group will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme.”
While the precise details will clearly take time to work out, the fact that there is agreement to allow Ireland’s bank debt to be taken off the national balance sheet will have a huge impact on the country’s debt-to-GDP ratio, and that in turn will also make it easier to meet the agreed budget debt targets.
It would be dangerous to assume that this means an end to tight control of public spending. Any sign that Ireland was slipping back to old profligate ways would have an adverse impact on the kind of deal on bank debt that will emerge in six or nine months.
At his post-summit press conference Kenny was adamant that the outcome would not have an impact on next year’s budget, but he stressed the potential benefits to the country in the longer term.
He pointed to the fact that the country’s adherence to the troika programme was an important factor in persuading the other euro zone countries to make the vital debt concession in the first place.
Another important factor in helping Kenny to get the concession for Ireland was the outcome of the referendum on the fiscal treaty. Other euro zone countries were impressed by the emphatic manner in which the Irish electorate was prepared to endorse fiscal discipline and that fed into the mood of the meeting.
Kenny was the only euro zone leader who had to seek the endorsement of his electorate for the treaty. While some of his Ministers urged him to delay the referendum until the autumn the fact that he got it through before the summer was a huge help in setting the right tone at the summit for a concession to Ireland.
The Italians have naturally been playing up the summit outcome as another victory over Germany, following the soccer triumph which preceded the summit decision by a few hours.
The Germans naturally don’t like that interpretation. Instead they stress that while Spain and Italy will benefit in the short term in the longer term both of those countries and the rest of the euro zone have signed up to bank supervision at a European level.
Kenny was careful not to lay too much stress on winners and losers, saying instead that the leaders of Europe had jointly stepped back from the abyss.
However, he couldn’t resist a little dig at his domestic critics. “The naysayers who were saying you should be beating the Lambeg drum up and down the streets of Europe have been shown there is another way of getting a result.” Hopefully the fine print of the deal, when it is worked out, will bear that out.