IRELAND’S PUBLIC indebtedness is unsustainable and will prevent economic recovery unless it is relieved. This State’s debt greatly expanded when it gave a guarantee on all bank deposits in September 2008, called on when the banks were nationalised. Efforts to pay out less than the face value to bank bondholders were blocked by the European Central Bank for fear of contagion. Last June’s decision by the European Council to break the connection between sovereign and bank debt offered a multilateral way out, but creditor states are now resisting applying it retrospectively. The Government must insist this promise is kept.
The arguments for debt relief are persuasive at national and European levels, even if there are real difficulties in getting it agreed. Ireland faces a huge problem to achieve a primary surplus on its public income and expenditure through spending cuts and tax increases. This has to be tackled irrespective of what is done about public debt and is the principal focus of the support programme from the European Union and the International Monetary Fund. But it will not be possible to stimulate recovery and growth on the basis of a more competitive economy if the burden of debt remains. That in turn would undermine returning to the markets, in a signal the programme had failed.
Such an outcome would be a real setback for the EU and the euro zone as well as Ireland at a time when international confidence is badly needed and in short supply. It would be compounded by a loss of trust and confidence in the European Council’s ability to deliver on its agreements. The undertaking to “break the vicious circle between banks and sovereigns” after a single supervisory system for EU banks is established came in the context of Spain’s search for help with its financial crisis. German, Dutch and Finnish finance ministers now say this cannot cover legacy debts but only prospective ones. Ireland, Spain, Italy and France dispute this, as do leaders of the European Commission, Parliament and Council. It is a matter of high politics to be argued out at three EU summits before Christmas.
THE GOVERNMENT’S campaign for debt relief was dealt a fresh blow yesterday as Germany, Finland and the Netherlands said national bodies should remain liable for most bank losses. The three states are insisting that governments remain on the hook for loss-making legacy assets even after any bank rescues by the ESM fund.
This demand, laid down by the countries’ finance ministers, is in apparent defiance of the decision by EU leaders in June to break the link between sovereign and bank debt.
After talks near Helsinki, the ministers said the ESM should assume only a limited burden if it makes direct bank recapitalisations.
The intervention comes as the Government faces persistent difficulty in its pursuit of a deal in Europe to ease the burden of the banking debt.
There is increasing concern in Dublin about German-led backsliding on the promise of a radical new deal to settle the banking crisis in Ireland and Spain. One of the Government’s core objectives is for the ESM to take direct equity stakes in the surviving banks: AIB, Bank of Ireland and Permanent TSB.
“It leaves the situation extremely uncertain from an Irish point of view,” said John Fitzgerald of the Economic and Social Research Institute. “Depending on how it is interpreted, it may or may not allow the Irish government to sell its interests in the surviving Irish banks to the ESM.”
EU leaders agreed in principle three months ago to allow direct bank recapitalisations by the ESM, the basic idea being for the European fund to replace governments as the final backstop on banking losses.
However, German minister Wolfgang Schäuble, Finland’s Jutta Urpilainen and Dutch minister Jan Kees de Jager said they want to curtail the ESM’s exposure to bad debts. “The ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities,” they said.