A leap of faith by Ireland, the exit from the IMF/EU bailout


Finance Minister Michael Noonan.
Finance Minister Michael Noonan.

Ireland is to make a clean exit from the IMF/EU bailout when we leave the program on December 15.  There will be no precautionary credit line negotiated with the European Central Bank or the IMF, no backstop, no insurance policy in case we get into financial trouble again in the months and years ahead. 

We're going it alone. It's a brave move and we can only hope that it's the right one. 
The decision not to seek a credit line came in a dramatic announcement by Taoiseach (Prime Minister) Enda Kenny in the Dail last week.  There is no doubt that the decision was based on political concerns more than on economic policy.

There were strong economic reasons why a credit line -- even if we never use it -- might have been a good idea.  Our ability to fund ourselves going forward after we exit the bailout program depends on growth in the Irish economy in the next few years and the absence of any nasty surprises, especially from the banks. Neither of these things is certain. 

Because we are an export-led economy, growth here is dependent on a sustained recovery in Europe and beyond, and that is far from guaranteed. We need a strong recovery in the global economy to increase demand for our exports.  If the European economy and the world economy limp along with little or no growth then we will be in trouble. 

The banks are also a real concern.  Our banks are still basket cases, and there is a European wide stress test for banks coming next year which could expose just how weak they are.  And because it's an EU stress test we won't be able to fudge the outcome.

There is a huge unresolved problem in our banks due to the number of domestic mortgages in crisis, and the number of people deep in negative equity after the property crash. 

The potential losses involved have never been crystallized on the books of the banks.  They have billions in property loans on their books which have not been written down to their current value.

So we have two major problems.  If the European economy fails to grow then our exports won't increase and the growth we need in the Irish economy to enable us to fully fund ourselves again, including making our debt repayments, won't happen.

If the banks are forced to admit the real level of losses they face on domestic mortgages and write down the loans accordingly, then they are likely to need another big capital injection to meet EU solvency standards.

At present they are ignoring the reality, hoping that if they delay long enough the property market will recover sufficiently to solve the problem for them.

So we face an extremely uncertain future in the next couple of years.  Things could pan out the way we want.  But they might not.

Even the government admitted last week that it had been "a finely balanced decision" not to seek a credit line.  I remember hearing Minister for Finance Michael Noonan just a couple of months back saying that it might be prudent to seek a backstop of around €10 billion.  So why did he change his mind?

Several reasons have been put forward.  We have built up a cash pile of around €20 billion in borrowings in the treasury piggybank here, enough borrowing to get us through 2014 and part of 2015. 

So when we go back to the markets in the next few months we could cope even if they decided they wanted us to pay penal rates and we decided not to borrow.  We can get through any short term difficulty.

Perhaps more important, the general economic picture in Europe at the moment is relatively benign in comparison with the chaos we saw over the past few years when several countries were on the verge of financial collapse.  So it's a good time to be leaving the bailout and going back into the markets to borrow under our own steam.  

In addition, we have shown an ability to cut spending and increase taxes to reduce the budget deficit, although we still have a way to go to get down to the three percent of GDP deficit that is our target and is the agreed maximum among the EU countries.