21 Nov 2010

Ireland succumbs to bail-out

Capitulation: After days of doubletalk, denial and spin, the Irish government has finally succumbed to what appears to be forced medicine. Ireland’s Sunday lunches were interrupted by the news that no sovereign finance minister wants to have to deliver to his people: the nation can not afford its likely expenditure, a foreign rescue required.

Outside a protester tried to stop the sports minister attending the Cabinet to sign off what Irish TV was calling the most important decision ever made by an Irish government.

“Democracy Now by-elections NOW,” he chanted as he blocked the ministerial car, before being carted off shouting “stop harassing me”. Another protester daubed “traitors” on a placard.

Their mood would not have been helped by the fact that the first official confirmation that the Irish Cabinet had voted in favour of a bailout came from the German finance minister Wolfgang Schaeuble.

“Ireland has applied and now it is being worked on with high priority,” he said in a television interview on German broadcaster ZDF, even before the Irish Cabinet meeting had broken up. The German finance ministry had to deny suggestions that it was the source of briefing last week that talked up Ireland’s application for a rescue.

Ireland’s overlords in Germany, such that they exist, are undoubtedly at the Eurotower in Frankfurt, not in Berlin. Confirmation of how much of an European Central Bank (ECB) operation this was came today when I heard that Patrick Honohan, Ireland’s central Bank Governor, and point man on the ECB, had phoned Irish broadcasters on Thursday to be asked to be interviewed, after the Irish Government was dragging its feet.

As I wrote on Friday the slow motion exit of corporate deposits from Ireland’s banks, over €23billion this year, increased the pressure on the government. Ireland’s banks were becoming addicted to the medical drip of European Central Bank funding.

So what we have here is a move beyond recapitalisation to full-on restructuring of the Irish banking system. So expect, mergers, closures, and cheap sell-offs to foreign banks. On tax policy, my sense is that this is not an old-school 1980s IMF Structural Adjustment Policy. It seems many of the €10bn in cuts and €5bn over 4 years were already planned to be self-imposed by a willing government.

Importantly the Irish government is adamant that the 12.5 per cent corporation tax rate is “off the agenda”, and thanked George Osborne, for his comments to me, that it was Ireland’s decision. Sarkozy and Merkel followed suit with a hands-off approach to that tax, and that provided the political space for Brian Lenihan to make his application for the European Financial Stability Fund (and/or Mechanism) in a telephone conference of Euro finance minister’s this afternoon.

There’ll be no numbers tonight, because there is a lot to iron out.

But this is utterly momentous. I was there in Brussels at 3am when weary finance ministers created these mechanisms against a backdrop of utter financial panic. They told us then that the mere presence of these weapons would obviate the need for their use. Today we find, and Ireland does too, that they were wrong.