By all accounts, the incumbent Fianna Fáil government led by prime minister Brian Cowen is unlikely to remain in power when the Republic of Ireland goes to vote early next year. The colossal failure of the Irish banking system, taking down with it the once robust economy, will ensure that Fianna Fáil does not get a fresh mandate.
The likely change of guard in Dublin will be closely watched across the world and more so in other European capitals. How the next government takes forward the 85-billion-euro rescue package, put in place by the EU-IMF combine, will determine the fate of the former Celtic tiger.
When the EU-IMF rescue package was announced in the last week of November, the response from Ireland was mixed. While many felt relief that the government’s finances would be depoliticised to a great extent until the country manages to stand back on its feet, there were also concerns voiced over the loss of sovereignty.
The deal
The building blocks to the EU-IMF package are fairly simple. ¤10 billion will be released immediately to recapitalise the broken banking system in the island, with a ¤25-billion contingency. This is to bring the banks up to the core tier 1 capital ratio of 12 per cent. The balance ¤50 billion will be used to meet the budgetary requirements to bring down the budget deficit to 3 per cent of GDP (between now and 2015).
The source of this funding is thus: ¤17.5 billion will be contributed by Ireland itself, taking ¤12.5 billion from its National Pension Reserve Fund and the balance ¤5 billion from its domestic cash reserves. Three parts of ¤22.5 billion each will come from European Financial Stability Mechanism, IMF and European Financial Stability Fund respectively.
What is Ireland offering?
The 5.83 per cent interest that Ireland will be paying for this rescue package is only the tip of the iceberg. While it is being debated if the loans have come with an expensive price tag, there are sections of the country that are also discussing another related but pertinent issue” the loss of the nation’s sovereignty to manage its own financial affairs. The Irish government will start paying back these loans over a seven-year period after a moratorium of three years. Some believe this is a far better deal than what Greece got earlier this year. Incidentally, the tenure of the rescue package to Greece has been modified to match what Ireland got.
Ireland must report to its saviours on a weekly basis what money it is taking in and how it is spending it. Similarly, Irish banks will have to share details of their business on a weekly basis. The numbers and salaries of public servants must be disclosed every three months. Banks must report a running account of its debts over the next three years. The banks must also give a monthly report on deposits and their sources. While all this is done, the government has also committed to “right size” its banks. That means sale or liquidation of banks or transfer of bad loans from banks into a government cesspool called National Asset Management Agency, which will issue bonds for taking in the bad loans.
Structural changes have also been agreed upon. Reduction in minimum wages, cut in pension and public spending, an estimated job loss of 30,000 over the next four years, pushing the retirement age, increase in tax rates, cuts in the unemployment dole, etc.
As this paper goes to print, Finance Minister Brian Lenihan is taking a ¤6-billion cut budget proposal to the Dail, or Ireland’s lower house of parliament.
The real deal clincher
Sources in Ireland’s political, diplomatic and banking circles are not so much worried about the perceived loss of sovereignty as much as how it proposes to put its growth numbers in place. The EU-IMF package gives Ireland a three-year moratorium on the loan, but interests will have to be paid from day one. Ireland will be well on its way to full recovery if it manages to earn (and grow) beyond what it pays its benefactors. Even though the interest rate on the loan is 5.83 per cent, the final figure ought to be a shade lower when the payment kicks in, say experts.
There are a few reasons to set aside undue concerns. Even before money has changed hands, Ireland is already posting comforting numbers. GDP is inching northwards, unemployment is dipping, exports are improving and overall costs (rent and labour) are also falling.
Political climate
Waiting in line to form the next government are the Fine Gael and the Labour or what many believe would be a coalition between these two parties. The Fine Gael is a ‘right of centre’ party with general principles very similar to the current government. Despite the political postures the Labour might adopt, it is more likely to toe the line when the real call to be part of the government comes. “Historically, there have been far greater compromises in Irish political history. Hence there is little reason to worry about how the new government will take the EU-IMF deal forward,” said a political analyst in Dublin.
The EU-IMF deal has frozen numbers for 2011 only. By the time the next government settles down, it will be half way into the next year. It may either maintain a status quo on the deal or back out on some of the conditions, in which case it ought to have its own plan to regain its lost sovereignty. For the moment, there is no third choice on the table.
