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News : Irish Economy Last Updated: Jan 28, 2013 - 8:12 AM

Irish-EU Debt Talks: Ministerial spin machine swerves into ditch
By Michael Hennigan, Finfacts founder and editor
Jan 28, 2013 - 7:54 AM

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From left to right: Dilma Rousseff, Brazilian president; José Manuel Barroso, European Commission president and Herman Van Rompuy, European Council president, meeting at the EU-Latin America summit, Jan 26, 2013, Santiago, Chile.

Irish-EU Debt Talks: In recent days, the ministerial spin machine has swerved into a ditch and besides a report that the European Central Bank's governing council at a 2-day meeting on Wednesday and Thursday, had poured cold water on an Irish proposal to restructure the €28bn in bank related promissory notes outstanding to the Irish Central Bank in respect of the public support of Anglo Irish Bank and Irish Nationwide Building Society, there have also been signals that the past confidence about fully exiting the EU-ECB-IMF bailout, has also abated.

Reuters reported at the weekend, that the ECB has rejected Ireland's preferred solution to a dispute over the cost of servicing money borrowed to rescue the failed banks, EU sources familiar with the talks said on Saturday.

The Government wants to avoid having to pay €3.1bn a year until 2023 to redeem the promissory notes and Michael Noonan, finance minister, had proposed converting the note into long-term government bonds that would be taken up by the Irish Central Bank with the intention of keeping the bonds in its portfolio for a long period.

The news agency said sources said the ECB's governing council discussed the Noonan plan for the first time at a meeting on Wednesday and Thursday and agreed that it amounted to "monetary financing" of the Irish government, banned under article 123 of the EU treaty.

"The ball is now back in the Irish court," one source involved in the deliberations said.

The Government has one important card to play: propose an extension of the current bailout program.

The EU authorities would not wish to see this development as the 'good pupil' grooming of Ireland has been geared to having a positive story of bailout and exit for other struggling countries.

Last month we wrote: "Monday witnessed another installment of the Irish-EU bank debt version of Salome's 'Dance of the Seven Veils.' Recent stirrings of optimism that at least part of the €64bn* in State support for banks after the economic crash would be mutualised, were dashed again when France joined Germany in the European Parliament, in rejecting an extension of last week's terms of the latest Greek bailout, to Ireland and Portugal. The enduring addiction to spin at Irish policy level comes at a cost. Pleading the 'béal bocht' while being happy to promote to international audiences, a misleading narrative of recovery, underpinned by rising exports and competitivness, has consequences."  

*Ireland’s bank debt: A €64bn gift from Europe for cargo cultists looks unlikely (breakdown of bank-related debt here)

Some European policymakers surely believe that Ireland has exited from the road of perdition. Debt will peak at about 120% of GDP (gross domestic product) -- similar to Italy's current level. The claim is that exports are booming but the reality is that most of the gain is related to the tax strategies of US multinationals - - it's however, hard to walk back from this persistent spin.

Claimed improvements in competitiveness partly relate to fake output data.

US economists Carmen Reinhart and Kenneth Rogoff say that the good news from their historical study of eight centuries of international financial crises is that up to the current one, they have all ended. In their celebrated book, This Time Is Different: Eight Centuries of Financial Folly, they said from over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances, one of their main finding was that the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90% of GDP. Above 90%, median growth rates fall by one percent, and average growth falls considerably more. "We find that the threshold for public debt is similar in advanced and emerging economies."

While GDP is the national accounts metric in the European Union, it is not a good measure for Ireland as it includes the inflated profits of the dominant foreign-owned sector.

While GDP grew by 1.4% in 2011, GNP (which mainly excludes multinational sector profits) fell by 2.5% and domestic demand dipped 3.7%.

Nominal GDP was 20% higher than GNP in 2011, up from a gap of 14% in 2009. Not only are exports significantly exaggerated, international comparisons of Irish labour productivity growth and unit labour costs are distorted by the multinational sector.

Ireland: GDP or GNP? Which is the better measure of economic performance?

At the end of 2011 General Government Debt stood at €169bn or 108% of GDP and 131% of GNP.

In Chile at an EU-Latin America summi at the week-end, attended by Angela Merkel, German chancellor, Tánaiste Eamon Gilmore gave a warning that failure to strike a deal with the ECB on the promissory note would have a “potentially catastrophic effect on Ireland.” In Dublin, Leo Varadkar said the Coalition has to change some of its proposals to avoid punitively high repayments on the promissory notes.

The next €3.1bn payment is due in March.

Angela Merkel likely viewed Gilmore's warning as puzzling as the 'good pupil' seemed to be heading for the sunlit uplands until last week.

Now, an IMF backstop maybe needed or participation in the ECB's new OMT bond-buying on return to the markets, never mind a cut in the debt burden.

“It’s not an issue of being in the markets, it’s an issue of at what price,” Noonan told Bloomberg News in Davos last week. “We don’t want to go back into the market and fall back out of it again.”

Michael Noonan sang to a different tune in London in Dec 2011 when he said he was targeting “full re-entry” to the bond market by mid-2013.

“My key message to you is that we want to move out of the European Union-International Monetary Fund program and return to the markets at the earliest opportunity,” Noonan said. “I intend that Ireland will give Europe its first success story as the recessionary cycle moves back in the right direction.”

“I would stress that there is no question whatsoever about our sovereign signature,” he said.

“Our recovery is export-led, and on the back of increases in export levels of 6.3% in 2010 and an estimated 4.6% increase in 2011, exports are at record levels. The pharmaceuticals, software, financial services, business services and food sectors all performing especially well.”

The policy makers back in Europe will likely put Gilmore’s sudden desperation down to jet lag.

What next? Mario Draghi, ECB president, to be dismissed as a clerk!

Gilmore had to learn that Jean-Claude Trichet, ECB president in 2011, was more than a “mere civil servant” as he said when he foolishly promoted the slogan: "Labour's way or Frankfurt's way."

Irish Times, Jan 02, 2013:

Mr Gilmore believes the recession will have ended by 2014 and that the political and economic landscape will alter radically.

“We believe that we are now at a stage where we can start looking forward. We have been mired in economic recession. As we move into 2013, we will be able to look beyond that crisis.

“My parting words to the parliamentary party was when we come back in 2013 we will need to be talking and thinking about what post-recession Ireland will look like. I see enormous potential. The EU presidency absolutely parallels what we are doing, concentrating on jobs and growth and trade,” he said.

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