ANALYSIS:Noonan is now in a much weaker position to extract better terms from EU counterparts, writes ARTHUR BEESLEY, European Correspondent
THE COMPLETION of the stress tests brings the upfront cost of rescuing Ireland’s crippled banks to some €70 billion. It is truly an enormous sum, but there is little appetite in Europe for radical or risky measures to ease the burden on taxpayers.
For one thing, the €24 billion recapitalisation bill falls well within the €35 billion set aside for banks in the EU-IMF plan. Among Ireland’s European partners, there is no deviation from the line that the programme lies within Ireland’s powers to execute. Implicitly at least, Minister for Finance Michael Noonan appears to have accepted that.
At his first EU meeting less than three weeks ago, he uttered dark warnings that the bank rescue might foist on the State an “unsustainable” burden.
But dire declarations like that were distinctly absent when he addressed the Dáil last evening. The Government would implement the EU-IMF plan, he said, and there could be no half-measures if the stress tests showed the banks needed another €24 billion.
What’s more, he made no mention in his new bank restructuring plan of contentious measures favoured by the Government but opposed by Europe. Thus, the tricky question of tackling senior bondholders was absent and there was no mention of using the European Financial Stability Facility (EFSF) bailout fund to participate in bank recapitalisations.
This reflects the unenviable reality of Ireland’s frail position. While the Minister may yet press his European counterparts to examine afresh initiatives to share the weight when he meets them next week, it is an uphill struggle.
There is plenty of evidence for that. Contrary to expectation, the European Central Bank (ECB) has yet to initiate a medium-term funding arrangement for the banks. Despite clear signals from reliable sources last weekend that such a scheme was in the offing, divisions have surfaced within the ECB over the merits of going down that road immediately.
Thus, the Kenny administration is not as far down the track this morning as it might have anticipated not long ago. This is crucial, for the Government believes the banks cannot reap the full benefit of repeated recapitalisation in terms of attracting large depositors while replenishing much of their funding every fortnight.
Notwithstanding serious doubts over the legal viability of such an initiative, the prospects of the Irish banks are much shakier without it. Unresolved, this has the potential to make a bad situation worse as banks’ reliance on emergency funding expands.
Whether the ECB revisits this scene at its monthly rate-setting meeting next Thursday remains unclear. Either way, a funding initiative that appeared relatively certain very recently quickly receded from the horizon as the ECB’s most hawkish minds exerted their influence.
One element of the equation here is that the ECB is in succession mode before the retirement in October of its chief, Jean-Claude Trichet. As senior central bankers jockey for position before the handover, they have little incentive to engage in radical new policy departures.
All of this means Noonan travels to meet his counterparts in Budapest next week in a much weaker position than he would have preferred. At the same time, the first formal review of the bailout programme starts next week with the arrival of a “troika” mission of officials from the ECB, the EU Commission and the IMF.
It is in Budapest that the Minister must overcome Franco-German pressure to provide a concession on corporate tax in return for a one percentage point cut in the interest rate on Ireland’s bailout loans.
That debate, “parked” last week pending the stress tests, now looms again. Whereas Germany has signalled its willingness to accept something other than a gesture on the tax, France has not yielded an inch.
In all likelihood, Mr Noonan will have to provide something substantial on the fiscal front to get better terms. While he may see potential here in overlooked elements of the programme for government, he needs to avoid being accused of presenting something old as something new.
He might quietly raise the question of burden-sharing with senior bond investors, something promoted with aplomb by some of his ministerial colleagues. Yet there is still no appetite for that in Europe, where leaders felt the heat of an existential threat to the euro only months ago.
Even if the position of Ireland, Greece and Portugal remains unresolved, people at the heart of the battle believe they have brazened out the worst of the emergency. They are not inclined to light the touchpaper of contagion again by going after senior bondholders.
The net point is that Ireland’s lenders retain all the power. Whereas the Government came to office determined to “renegotiate” the bailout, the deal as it stands remains essentially the same.
With more capital than foreseen going into the banks, there is a higher mountain to climb now and little certainty that better terms can be extracted.