ANALYSIS:The Government built up its credibility and waited for the right moment to push for concessions
THE 307-word communique, issued at 4.20am yesterday by euro zone leaders, is the most significant development in the euro zone crisis since an equally brief statement was issued after a similar gathering in February 2010.
The statement 2½ years ago signalled the abandonment of the no-bailout clause that was a cornerstone of the euro edifice. EU leaders ignored the bloc’s treaties and committed to rescuing Greece. Yesterday morning’s statement signalled the full Europeanisation of some national debt. It is a genuinely historic step.
It was as surprising as it is significant.
When the euro crisis flared up yet again in the spring, it brought Italy and Spain to the edge of a precipice that Europe has teetered on for far too long. Collapse of the European financial system was at hand, and with it the single currency and, most probably, the entire European integration project.
The latest flare-up led to serious talk of change – with political leaders openly discussing fiscal, banking and political unions. But in the past couple of weeks there had been a downplaying of expectations, as Germany pushed back against doing more. By this week previously high hopes had been dashed. Nobody I spoke to in Brussels in the days before the summit gave the slightest indication that major change was at hand.
Then, early yesterday morning, Europe’s much-changed power dynamic delivered. Angela Merkel no longer had her slavishly reliable ally Nicolas Sarkozy to depend on. He has been replaced by a more normal French president who believes his country’s interests extend beyond maintaining Franco-German harmony at any cost. With Spain’s banking woes weighing all of Europe down and Italy’s Mario Monti proving that he punches in EU summitry’s super-heavyweight class, Germany’s isolation was complete.
Merkel could say nein no more (there is no little irony in that Merkel was instrumental in installing Monti as Italian premier, a position he has used to isolate her).
If the trio of leaders from France, Spain and Italy encircled Merkel and pushed her to conceding more ground, the main reason yesterday’s giant step took place was to address Spain’s bank woes.
The deal reached two weeks ago to lend the Spanish government money to bail out its banks was a clear failure. The first line of yesterday’s short statement is a blunt, if implicit, acknowledgement of this: “We affirm that it is imperative to break the vicious circle between banks and sovereigns.” From Ireland’s perspective, Spain’s troubles have proved to be a great opportunity. That a specific mention of Ireland is made in the first paragraph of the short statement is very significant, particularly as other bailed-out countries were not mentioned. It caused plenty of surprise around Brussels, including to those closely involved in Ireland’s bailout. If it leads to as big a change in Ireland’s public indebtedness as it promises to do, it amounts to a diplomatic triumph for the Government.
The near giddy exhilaration of one sleep-deprived Government spokesman said much. His sense of vindication on behalf of his employer appears to be warranted.
Having built up credibility by effectively implementing the terms of its bailout and then waiting for the opportune moment to push for concessions, the Government seems to have got it just right. Although luck played a big role, quite a few people here in Brussels – Irish and non-Irish – were impressed by how Enda Kenny handled the situation.
But just how advantageous this turns out to be in money terms remains to be seen. Given how brief the statement was and how little emerged in Brussels over the course of yesterday, there is a huge amount of detail to be worked out. There are also potential pitfalls – the Finns are particularly unhappy and could be sticklers on the extent of debt Europeanisation in the inevitably tortuous negotiations that are to come.
That said, the maximum gain is now far above anything that could have come from what looked like a best-case scenario before – a bilateral deal on the promissory notes used to prop up the banks.
Some numbers may give a sense of an upper limit of what could be achieved.
The Irish Government currently owes €170 billion. Of that, €45 billion was borrowed for the banks. Another €20 billion came from the pension reserve fund. At a very maximum, therefore, approximately €65 billion could potentially be on the table.
But as most countries have recapitalised their banks, it is almost inconceivable that every cent every government has pumped into banks would be pooled. Unless that happens then all of the €65 billion that Irish taxpayers have paid out to prop up the banks will not be up for Europeanisation.
So what is realistically achievable? When Ireland was bailed out in late 2010, €35 billion of the €67.5 billion rescue package was ploughed into the banks (this is included, not on top of the total bank bill of €65 billion mentioned above). Although any conclusion at this juncture is purely speculative, that €35 billion could be the maximum figure that might be lifted from the €170 billion of total debt.
How does the new arrangement materially benefit Ireland? First, and perhaps most importantly, it is a meaningful step towards addressing the underlying causes of the euro crisis. As the worst thing that could happen to Ireland is the collapse of its currency, this is very good news.
Second, as the overall debt dynamics are likely to change significantly, the deal reduces the risk of Ireland defaulting (although it is far from eliminated). Third, it also lowers the probability of a second bailout by improving the prospects of convincing private investors to lend to the State for the first time in two years. The very large fall in yields on Irish government bonds yesterday augured well for the Government’s re-entry to the bond market within weeks.
If the deal reduces the amount of taxes that will go on servicing debt and paying it back over the long term, it will do little to change the current budgetary position. No matter how much of Ireland’s bank-related public debt is Europeanised, the size of the gap between spending and revenue remains huge. If it is not closed, the gains to come from bank debt relief will soon be lost.