Analysis:Yesterday's deal happened only because the ECB agreed to bend rules
Being able to manage one’s debts depends to a very great extent on their repayment terms. A small sum borrowed from a loan shark at a usurious interest rate can quickly balloon into an unpayable debt. An open-ended interest-free loan from a friend or relative can, by contrast, be easily managed and cause little worry.
The new Government IOUs, unveiled with great fanfare yesterday to replace the promissory notes – the three-year-old IOUs issued to pay off depositors and creditors in Anglo and Irish Nationwide – appear at first analysis to be much closer to the latter kind of loan.
While a deal on restructuring the promissory notes has been inevitable since the EU-IMF troika agreed to discuss the matter more than one year ago, the range of potential outcomes of those tortuous negotiations was wide. If the European Central Bank had really put its foot down, the deal reached might have been little more than symbolic.
Achievement
In the event, the outcome finally revealed yesterday appears to be as good as could have been hoped for. It amounts to a very considerable achievement for the Coalition parties and the officials involved in the negotiations, from whom there emanated a palpable sense of relief yesterday at having finally sealed the deal.
The pushing out of the repayment period on the new IOUs for up to 40 years means that the chunk of the national debt that had been accounted for by the promissory note is no longer a near-term worry. As the accompanying chart illustrates, the €28 billion of the national debt accounted for by promissory notes is a good- sized slice of the total debt pie.
For many people, the immediate question arising from yesterday’s deal is whether it will mean fewer onerous new taxes and painful spending cuts in the future. The short answer is that it will. The slightly longer answer is that it will, but the easing of the fiscal pain will be spread out over years and decades.
Under the terms of EU budget rules (which are entirely separate from the terms of the EU-IMF bailout) the Government is committed to introducing new cuts of €2 billion in next December’s budget and new tax measures of €1.1 billion (the respective commitments for Budget 2015 are €1.3 billion and €700 million).
The Government did not change those targets yesterday despite the savings in 2014-15 as a result of the promissory note deal. There was much talk of it being too early to decide on December’s budget and that there are too many variables at play in the complicated matter of framing a budget to say anything with much certainty.
Rules bent
None of this is untrue, but at least as important as anything else will be what others have to say on the matter. If the Europeans insist that the savings must be used to narrow the deficit rather than lessening the scale of the adjustment, then that is what will happen.
Ultimately, yesterday’s deal happened only because the European Central Bank agreed to bend its rules about as far as they can be bent without breaking them. The restructuring of the promissory notes is effectively a very long-term subsidised loan from Europe by the back door.
Having done this, European pressure to maintain the drive towards closing the State’s budget deficit is likely to be strong.
Draghi’s discomfort
The demeanour of the ECB boss, Mario Draghi, at his institution’s monthly press conference illustrated his obvious discomfort at what has been done. Even by central banking standards of giving little away, the non-answers he gave to questions about the promissory notes from many of the international press corps in Frankfurt were uninformative, repeating only that his 22 colleagues on the bank’s governing council had “noted unanimously” what had been done.