The Irish Times - Monday, July 11, 2011

How to avoid a second bailout? Make the first one work

JOHN McMANUS

BUSINESS OPINION: There’s a case for trying to unpick as much as possible of our not-very-good rescue plan

IRELAND, AS Ruairí Quinn is fond of pointing out, is in receivership. To paraphrase the Minister for Education, we are dependent on the support of our bank to continue trading, and this week the bank manager is in town paying us a visit.

He wants to know about current trading and whether we are keeping to the terms of our loan, particularly the bit about cutting costs. If we have not kept to the terms of the agreement he may threaten not to give any more money – as he nearly did with Greece recently.

The bankrupt company/ bankrupt country analogy actually starts to break down at this stage, as it’s not really possible to liquidate a sovereign state. And again, as we saw with Greece, the fear of spillover effects means there is always another rescue.

But the fundamental point is valid. The country is being run on a three-month financing cycle and if we do not meet the quarterly targets specified in the terms of the European Union-International Monetary Fund rescue package, then we are in trouble.

It is surprising, then, that the current visit by representatives of the European Commission, European Central Bank and IMF (known as the troika) should attract such little attention. Or is it?

From the Government’s point of view, the less done to draw people’s attention to the visits, the better. Nothing underscores the humiliating loss of control over our own affairs that came with the rescue as effectively as the three-monthly reviews. Pretending they are not happening is good politics, and the troika seem to be playing along. That might change, however, if we start missing targets.

But it might also make good sense to kick up as much dust as possible around the agreement and the nature of the engagement with the troika.

It helps create an environment in which the agreement is seen as a work in progress rather than something written in stone that must be followed to the letter.

This is sensible, because it is not a terribly good agreement or plan. It is worth keeping sight of the fact that it was negotiated by a punch-drunk government under tremendous pressure. It was also unchartered territory for the troika, representing a different level of engagement from the first Greek bailout.

The fundamental problem with the deal is that it provides a short-term solution to Ireland’s funding problems but adopts a fingers-crossed approach to the underlying problem of Ireland’s solvency. It is not impossible that, if the plan is implemented, Ireland’s debt dynamics will return to a stable path, but it’s not very likely either.

Hence, there is a case for constant engagement with the troika on the terms of the Irish bailout, and for the logic of unpicking as much as possible. The best way to avoid a second Irish bailout is to make the first one work.

The big game is, of course, to try to find a cleverer way of funding the €70 billion cost of the bank rescue which has blown up the national balance sheet.

And there seems to be some hope that, between developments connected with the second Greek bailout and the changing of the guard at the ECB, something might happen in that regard later in the year.

It’s a pretty appalling state of affairs, however, when economic sovereignty amounts to whatever wriggle room you can find in a bailout agreement with the EU and the IMF. But that is the reality.

Rather worryingly, this vital wriggle room may well be wasted on backsliding on commitments that cause domestic political difficulties.

There is a real danger that the apparent willingness of the troika to renegotiate the agreement will be squandered on matters of short-term political expediency.

Many businesspeople, for example, are puzzled as to why the Government has not used the cover of the EU-IMF agreement to push through unpalatable economic reforms with greater rigour, particularly as so many of them are specifically mandated in the memorandum of understanding with the troika.

The impasse over labour agreements is just one example, although last week’s ruling that they are unconstitutional seems to have offered a way out.

But there seemed to be a real risk the Government would duck the issue and seek to renegotiate the commitment on a “revenue neutral” basis, as was the case with the minimum wage.

The next big test in this regard is shaping up to be the commitment to reform the medical, legal and pharmaceutical professions by the end of the third quarter. This will not happen unless the Government is prepared to push the changes through and accept the political consequences.

The sight of backbenchers engaging in pointless political theatrics last week over the reform of rural hospitals only serves to raise fears that despite the last three years, the penny has not really dropped for many in the Cabinet and among Government backbenchers – Quinn excepted – as to just how much trouble we are in.

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