28 October 2012

Karl Whelan: After Mrs Merkel’s Irish jig, are Ireland’s problems solved?

If the deadlock over a bank debt deal lingers on and the Irish economy continues to flounder, financial markets may start to change their minds about Ireland's long-term prospects, comments Whelan in his Forbes blog.

By Sunday evening, Irish Prime Minister Enda Kenny had managed to get Mrs Merkel to agree to a terse 90-word statement. One might argue that a reiteration of the commitment to “examine the situation” wasn’t much stronger than the June summit statement, but German government spokesperson Steffen Seibert has said that this statement “is naturally a strengthening of what [euro group leaders] agreed in June".  This was followed by French president François Hollande also asserting that Ireland was a “special case”.

However, you don’t have to look too closely to see serious longer-term problems. First, there are genuine questions about long-term debt sustainability... Second, it is not at all clear that a deal on Ireland’s bank debt will be achieved that restores the debt to sustainable levels... Finally, even if it becomes clearer to all that a deal on Ireland’s bank debt is necessary to avoid a full-scale sovereign default, there are serious tensions among the various EU bodies involved as to how such a deal should be done. Despite high expectations, large-scale debt write-offs or generously-priced purchases of the state-owned Irish banks are unlikely to occur.

In terms of the options that could happen, a key fact is that the state-owned Irish banks owe enormous amounts of money to the ECB. There are various ways in which the ECB could help Ireland out, including a lengthening of the term associated with these debts and providing funding for “bad banks” to work out distressed assets over time.

The ECB, however, would prefer the funding to come from the ESM, which would require political approval from Europe’s finance ministers. Most of these ministers are not keen to go home to their countries and inform voters they have approved huge amounts of funding to refinance dead Irish banks. The result has been a failure to make progress on the June commitment to re-examine the Irish bank debt.

Full article

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