Posted by Michael Breen (16 November 2011)
The international media’s spotlight has been firmly on Ireland over the last few days. The talk of the town is of an IMF or European-led bailout. This raises several interesting questions. Why now, with the state apparently funded until June 2011? What sort of terms would be offered in the event of a bailout? And, most importantly what would this mean for Ireland’s economic sovereignty?
Many commentators were expecting a bailout later rather than sooner. While it is true that Ireland can stay out of the bond market for now, many of our European partners do not have the same luxury. As markets drive up yields on Irish bonds, other members of the euro zone are being dragged along for the ride. With the contagious effect of our debt crisis spreading to our neighbours, markets are even questioning the long-term viability of EMU. A working paper that is published at DCU’s Centre for International Studies illustrates a similar logic at play in previous episodes of crisis: even countries with a lot of foreign reserves can end up in IMF programs due to the exposure of their creditors to risk and loss.
Suppose Ireland accepts financing from the IMF/EFSF, what next? Assuming that Ireland follows Greece into an IMF program that is backstopped by the EFSF (and it is still an open question as to whether a bailout would be European or IMF-led), I expect that the only conditions the IMF would insist upon would look remarkably similar to the government’s recent proposal to reduce the fiscal deficit. This has already been noted by many commentators. What hasn’t been noted, however, is that the IMF’s position on fiscal adjustment has softened considerably. It’s not beyond the pale to imagine the IMF recommending a (slightly) less stringent fiscal adjustment.
Finally, what of the IMF’s dreaded structural adjustment? In March 2009, the IMF did what critics have demanded for years by discontinuing the use of structural performance criteria – the only binding structural conditions in IMF arrangements. This is a notable change in the direction of policy, as it implies the Fund is getting out of the business of micro-reforms and focusing on macroeconomic policy. In Ireland’s case, the IMF might well draw up a list of non-binding structural benchmarks as they did for Greece, but implementing these conditions would be entirely voluntary. What all this means is that an IMF-led bailout would not be the end of Ireland’s economic sovereignty. Even more importantly, it means that the necessary impetus for political and economic reform must originate from Ireland, bailout or no bailout.
6 thoughts on “The IMF, the bailout and Irish sovereignty”
Do the Irish people not understand that the statement about the state being ‘funded’ simply means the state has borrowed in advance enough money for another few months, money that has to be paid back and money that means yet again Fianna Fáil can avoid taking proper decisions on reform.
Perhaps if the markets refuse to lend any more money it will once and for all make the Irish people face up to the mess they have created.
There is nothing to be proud of in the fact that over three years since Northern Rock (July 2007) all Cowen and Lenihan have done is add dozens of billions to the national debt with zero reform because they prefer to rack up debt than govern properly.
The markets and those outside thecountry can see the mess far more clearly and have no problem knowing what needs to be done.
In typical fashion the Irish prefer denial or victimhood – if the EU/IMF step in it will of course be the perfect excuse for everyone to blame them for what happens.
I cringe when I see the news reports as they show the likes of Dick Roche, who has even less gravitas than Biffo, as the mouth piece and then they show some old farmer collecting his cheese – do people not understand the damage these images do to the perception of whether Ireland can sort out its mess?
Desmond, don’t disagree with a word you have written. The second concern held by the Brians, after retaining power for a short while longer, is their political legacy. While the population at large may not identify this yet- the true story of themismanagement of the crisis since September 2008 will record the ineptitude and arrogance of this regime, small comfort that will be!
“Why now, with the state apparently funded until June 2011? ”
On the basis that you get money when you do not need it, so that you have it when you cannot get it.
It is a pity that this maxim was not followed more systematically by banks and Governments here during the past 15 years. It was for a while, but then “If I have it or can get it, I spend it” took over.
It seems that the ECB, in particular, is now longer prepared to fund most Irish banks as the ECB does not believe that we Irish (government and us) cannot carry the contingent liability of such funding which is meant to be temporary.
Clearly, the EU Commission regard this, coupled with existing government guarantees to other funders of Irish banks, are simply put “a bridge too far”.
The rise in the cost of Irish bonds is a signal to act. In these circumstance, delay is the deadliest form of denial.
Hence the need to act now – rather than use up all existing funds. We have seen the effects of delays with various devaluations during the past 20 years.
European policy makers are not given to muddling through!
re. 3rd paragraph
This “that we Irish (government and us) cannot carry… ” should read
“that we Irish (government and us) can carry ….
Lenihan welded the state and the banks together if the banks are insolvent the state is insolvent. Not too hard to understand.
The state “apparently” funded? Says it all really since the apparently funded state is “apparently” funded because it borrowed money in advance. Then state says it can “apparently” sell off the assets of the Pension Reserve Fund, funny old name that one and when it was set up we were told it was not to be touched until 2025.
Ireland is going to look and feel like Argentina without the weather. Finally, we are going to be forced to dispense with the civil war parties.
In any event these parties no longer have a state to rule over, they have a fiefdom in debt servitude. Now imagine a bright spark out there saying I know the best thing to do elect Eamon Gilmore and the public sector unions to run the country?
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