This is an expanded version of a comment piece published in the Irish Examiner 15 November 2013.
The decision of government to exit the bailout ‘clean’ is a curates egg. The good element, and it is an unalloyed good, is that this signals that the worst of the effects of the noughties credit binge on the macrofinances of the state are trul behind us; that the catastrophic bank guarantee has washed through; and that we are capable of contemplating standing on our own two feet again. However, there are downsides.
The context of this is that we are now going to have to go to the markets for money. And we need a lot of money. In 2014-2017 we face up to €30b of government bonds to be repaid. These will be rolled over, which means that we need to borrow that much before we borrow a penny more for any deficits. Exchequer borrowing requirements of upwards of€20b are also required. Thus we will have to borrow approx. 12.5b per annum on average just to stand still. And do it on our own. So what are the downsides?
First, we close off options when we do this. Options have value. A major part of the value of an option comes from not exercising it. Determining that we will exit clean removes any chance that we have of a transition. Should the world economic situation worsen and drag up our borrowing costs, should a major bailout of Irish banks be required , should any unforeseen event come to pass that requires us to seek assistance, this will be a new game. Having gotten away , having to go back would in all likelihood result in harsher conditionality than a tapering off.
Second, there is the cost of debt. We pay an approximate interest rate of 3-3.5% on our existing debt. That is just about the level at which we might now be able to borrow, assuming we can do so. A very large part of the driving down of the interest rates on peripheral country debt is down to the ECB stance. For how will this stance prevail? For how long will rates stay low ; if and when rates rise then so too will the costs. Thus we are likely to see these costs of borrowing of the required 50b rising above the cost of repayment at present. This will result in added strain on the government finances
Third, we face conditionality in any case. We are signed up to a variety of EU level agreements that require us to be overseen. If we are to be overseen then it would be as well to get as much as we can for it, including some cheap cash.
Fourth, we have a poor historical record of managing the economy, over decades. Mass emigration is back, removing the potential pressure value that in most countries causes revolution and evolution of the political system. With no external stick to beat the domestic elites there is a significant danger that they will revert to the bad old ways pdq.
Fifth, much good work in reforming closed shops and technocratic regulatory improvements has been undertaken over the last few years, but all at the behest of the troika. With no external oversight this will cease. We have seen the remarkable resilience of the legal and medical professions, for example, to meaningful change, even with the piper trying to call a tune. What hope a domestic piper?
Moreover, the banks remain, rotting away and poisoning the national flow of funds. Irish SMEs in particular remain under strain, as evidenced by the ECB Access to Finance survey published this week. In a remarkable display of lack of confidence the government have contracted with a German development bank to work towards restoring credit flow. This does not auger well for the health of the pillar banks
Sixth, without any oversight beyond the Six and Two pack, we are on our own. We have given up a tool that could, potentially, have stablised our economy in the event that things go swimmingly and we decide to revert to our bad habits of “when I have it I spend it”
Seventh, we are stating that we are back in business, hale and hearty. Although I never believed it was likely, this makes it even more vanishingly unlikely that we will get any monies from anyone to repay the monies placed in the shattered pillar banks. Why would anyone give us money when we are fine?
Eight, we are no longer eligible for the ECB OMT programme. While the markets shrugged their shoulders at this on announcement, the OMT cannot now protect our bond yields. We have seen how swiftly sentiment can move against a country and we are willingly exposing ourselves to that volatility
The government have decided to jump without a parachute. Lets hope for all our sakes that there is a nice soft landing…. Now where have we heard that before?