Ivan Yates’ lesson for government

The alternative to Eurobonds is leave the Euro. I think the government must steel itself to be less than compliant customers of Germany, Holland and France. That might induce that particular triumverate to alter the policy towards Ireland. The US multinationals here can continue to price everything for themeselves in Dollars or Euros. Either way, we must close the fiscal deficit. That is OOOOCH

We’ve dug deep holes in a circle that cannot be squared

By Ivan Yates
Thursday, June 09, 2011

THE bank holiday break should have given ministers opportunity to consider medium-term viability prospects rather than short term hyperactivity.

Their hectic schedules don’t give them time to think, with up to eighteen daily appointments. They should reflect on the cumulative effect of contradictory hostages to fortune they have given over the past three months. These are Programme for Government commitments; refusal to burn senior bank bondholders; assurance of no sovereign ‘default’ and pledge not to seek a further EU/IMF bailout.

Their repeated assertion that the bailout terms are being adhered to so far is a measure of the work of the FF/Green budget of last November. At a minimum they have to procure €3.6bn in budget deficit reductions in 2012 alone. They have yet to affect any fiscal correction measures themselves. Post-election promises in the Programme for Government are unsustainable. Perilous declarations include:

* Taxation: no increase in top marginal rates of income tax, maintain tax bands and credits.

* Health: free GP care for all, abolition of hospital waiting lists in three years.

* Social Welfare: We will maintain social welfare rates.

* Housing: increase the stock of social housing.

* Overseas Development Aid: we are committed to achieving the 0.7% GNP target by 2015.

These specific headline pledges are accompanied by a plethora of half promises to tackle fuel poverty, introduce a national carers’ strategy, maintain frontline education services, enhance care for the elderly & mental health spending, additional mortgage tax relief… the wish list is endless. Public presumption is that this cabinet will be rigorous in implementing austerity, in adhering to bailout terms. No evidence has transpired that backbenchers have been told of the impossibility of implementing the programme, if we are to meet our creditors’ conditions. TDs’ capacity to suck this up remains untested and unknown.

The starkest breach of pre-election undertakings to date has been the abandonment of renegotiating the bailout. “Burden sharing” was an explicit part of “Labour’s way” (rather than Frankfurt’s way) and a key component of FG’s platform. Even up to the time of the announcement of the revised bank strategy (ie retention of two pillar banks AIB and BoI) there was still some prospect that unguaranteed senior bonds would be singed. It now transpires that all €35bn of recapitalisation for Anglo and Nationwide is to be fully redeemed by the tax payer. Post-banking stress tests, the government have acquiesced that €70bn of bank liabilities will be subsumed into sovereign national debt. The vehemence of cabinet condemnation of Leo Varadkar confirms there is no remaining vestige of independent rational economic thought amongst ministers. The sole discipline for ministerial comment is to be confined to briefing from the Department of Finance — the same failed bureaucrats who still believe in their own credibility. Financial markets treat them with the disdain they deserve. Irish bond yields at 11% compare to Germany at 3%. Kenny, Gilmore and Noonan are simply a new cast of actors reading narratives from the same discredited authors that destroyed Cowen and Lenihan.

This rubbish all emanates under the umbrella of proudly wearing the green jersey. The pretence of stability is the objective. The appearance of acting in the national interest cuts little ice. We were told that Bank of Ireland could and will maintain a non-nationalised future. Tell that to the believing suckers who reinvested in share options at 55 cent, only to now see their value reduced to 14 cent. The minimum state stake is set to be 75% in the only remaining private sector indigenous financial institution. The umbilical cord between the state and banks is a two-way street as they hold €22bn of government bonds.

The Government has staked its entire reputation on not having recourse to a second bailout. Analysis of the facts and all likely scenarios suggest this is a serious error of judgement. The €67.5bn bailout will give us enough cash up to the end of 2012 to run the country and keep the banks afloat. 2013 will be the critical year. On the basis that there is no default or debt restructuring and that the Government jettisons political promises, we can calculate fiscal requirements. Estimates of government credit for 2013 and 2014 vary between €11•4bn and €18bn. FG and Labour believe markets will provide this finance. Domestic and international developments suggest such prospects are receding.

The initial Greek bailout of €110bn requires a second round of €60bn funding. This proves the first dollop didn’t solve the problem of removing dependency on lenders of last resort. Since our bailout of last December, Irish bond yields have deteriorated by a further 2%. The Portuguese and Greek bailouts have only served to turn their electorate against incumbent governments. Domestically, it now appears that there will be no growth in Irish GDP this year. Latest statistics on consumer spending, redundancies, emigration and tax receipts indicate continued declines for the non-export sectors. Eternal excessive optimism remains the hallmark of Irish official establishment planning. The most likely scenario? Ireland’s exchequer will totter along until 2013. The European Stability Mechanism will be put in place, with an additional second bailout of at least €20bn being required.

By that stage, private bond holders will be forced to roll over their credit facilities, as is now proposed in Greece. It’s not bond burning, just breaching redemption agreements. Private investors can smell the coffee. New rules in the eurozone mean that the ESM will have preferential secured creditor status, over other investors. This superior collateral requirement of German and Dutch paymasters will scare the markets away from sovereign bonds in peripheral states.

The ultimate endgame beyond 2013 relates to the future of the euro currency itself. Jean-Claude Trichet mused last week about the need for a new super EU finance minister to supervise national budgets, public spending and taxation policies. This federal future implies eurozone economic and fiscal integration. At that point, a two-tier euro may be preferable to peripheral states. A fudge of a common eurozone bond to replace sovereign bonds is a likely intermediary step. This could take market pressures off fundraisers, like the NTMA. In all scenarios, the one certainty is that an Irish government in Dublin will not be master of our debt destiny. The sooner Enda, Eamon and Michael explain this reality, the better for themselves. In three short months, they have dug deep holes in a circle that cannot be squared. If honesty is Kenny’s only policy, some circumspection wouldn’t go astray.

* For several years, I have been afflicted with a back problem. I cannot sit for any length of time without increasing pain. The cause, according to MRI scans in 2003 and 2007, was degenerative disc disease — wear and tear from aging. These problems deteriorated in recent weeks. I cannot walk properly. It seems this is due to stenosis. I’m due to undergo surgery next week. Hence, I will be absent from this column in coming weeks.