Irish Economy
Reality Check: Merkel did not agree to refund Ireland €64bn bank rescue cost
By Michael Hennigan, Finfacts founder and editor
Oct 21, 2013 - 7:08 AM

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Reality Check: Ireland has a large debt burden but it's better to deal with the facts than recycling myths as Ivan Yates, former Irish government minister, who recently returned to media work in Ireland following a year in the UK going through a bankruptcy process, did last week in the Irish Independent when he wrote on Angela Merkel, German chancellor: "She signed up to an EU deal on June 28 last year, which could permit the European Stability Mechanism to provide capital to any of the 130 large distressed banks in the Eurozone, including retrospective payments."

Last June, Finfacts noted that Ireland is second to Greece in the rankings of the burden of sovereign debt but when household debt is included, we are the biggest debtor of the western world as a ratio of economic output.

As for the year before, there was no EU deal and the relevant paragraph of the communiqué [pdf] of the June 29, 2012 European summit, reads:

We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally."

There was no commitment about retrospective payments and nor was there a suggestion of an agreement that the European Stability Mechanism (ESM) rescue fund, would in future recapitalize banks. A possibility is not a commitment or agreement.

Enda Kenny, taoiseach/ prime minister, claimed the EU statement was a seismic shift in EU policy.

“What was deemed to be unachievable has now become a reality and that principle has been established and decided and agreed upon by the council, by the heads of government,” he said in a comment to the media in Brussels.

“This is a massive breakthrough for Ireland and it changes the game in terms of our bank debt,” Eamon Gilmore tánaiste / deputy prime minister, told RTÉ radio. “This deal will allow the country to recover much faster,” he said.

Michael Noonan, finance minister, said: “This [deal] takes this further in terms of policy and the intention now is to separate certain bank debt completely from the sovereign balance sheet.”

The Irish ministers, with good experience in spin, appeared to have believed that by claiming that an actual deal had been done, would bring pressure on Germany.

Wonder if anyone of them could name a leader who promised a refund?

Ivan Yates claims that there was an agreement to use the €500 ESM fund to refund all governments the costs of rescuing all banks during the crisis, which would have soon depleted the funds.

We added more dryly last year:

The public bank support has amounted to €64bn - - equivalent to 41% of GDP (gross domestic product) and while gifts from Europe came every year since joining the European Economic Community in 1973 (as much as 5.7% of GDP in 1991-93 at the genesis of the Celtic Tiger period), like the cargo cultists of Melanesia in the South Pacific after the Second World War when manna in the form of cargo from military planes ended, we are also likely to be disappointed.

In the period 1973-2010, net cash receipts from Europe, unadjusted for inflation, amounted to €42bn [Table 11; pdf]."

Yates also said in the Irish Independent piece: "German banks created our credit bubble when we entered full membership of the euro in January 2002. Irish taxpayers fully compensated them for their bad lending decisions."

Last month economists at the Central Bank showed that this claim is absolutely false.

In  a paper the economists say [pdf]:

Germany was the source of approximately €11bn or 25% of total foreign funding at end-2002. Thereafter, absolute German funding fell quite quickly to below €5bn, or 5%, by end-2006 and to below 1bn or 11% by end-2007. Pfandbrief banks headquartered in Ireland accounted for nearly 80% of this funding.

The statistical reporting population of banks is defined by the nationality concept, i.e., country of headquarters. The introduction of the covered bond (Pfandbrief) market in Ireland prompted a number of European banks to amend their corporate structures. Consequently, a number of banks active in the Pfandbrief market were considered as Irish headquartered banks for statistical reporting purposes, and formed part of the Irish data between 2002 and 2011. These Pfandbrief banks were not active in the Irish retail credit market."

Their operations were located at Dublin's offshore financial services centre.

The agreement earlier this year on restructuring of Anglo Irish Bank promissory notes, that had been used to bailout mainly depositors in the nationalised bank, was consistent with the goal of improving Irish debt sustainability.

Yates concluded his piece:

To achieve economic recovery, Government needs to drop self-congratulatory rhetoric and deploy our best civil servants to secure a game-changing strategy towards a Europe of equals."

Yes to dealing with the facts and no to allowing tax strategies present a better national economic performance scenario than the reality while at the same time trying to persuade European leaders we really need their help. There is also another reality as Ivan Yates likely discovered when he was trying to rescue his failing business, a debtor nation seeking concessions from others, is not an equal.

It's a safe bet that many of the key European leaders do not appreciate that GDP (gross domestic product) understates Ireland's debt burden compared with GNP (gross national product).

After all, Mario Draghi, ECB president, earlier this year praised Ireland for its double digit improvement in unit labour costs -- thanks to paper/ virtual rises in Ireland's output and exports, led by companies such as Microsoft and Google.

Who's to blame for this costly confusion?

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