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Wednesday, 06 November 2013 12:25

Does Ireland need a safety net when we exit the bailout on 15th December

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lagarde_kennylagarde_kennyA question that is prominent on the minds of Irish people now is ‘does Ireland need a safety net when we exit the bailout on 15th December’. 

There is a difference of opinion on this question.  David McWilliams says that while Ireland is moving in the right direction and growth of 2 per cent next year will finally contain our escalating debt and it should come down gradually over the following few years. However, if for any reason the growth forecast does not come to pass the national debt could quickly become unsustainable and we will need all the help we can get.

Europe is unstable at the moment.  Italy, Greece and Spain are examples and they could cause problems for the Euro.  However, David and Martin Lousteau, a former economic Minister from Argentina also commented in November 2011 when they told the Irish Examiner that Ireland would default on its debt and would have left the Euro by now.

The only expert who took a different view was investment banker Vikas Nath.  He accurately forecasted that there would not be an Irish default and that if the euro survived Ireland would be part of it.  “An Argentine or a Russian might have walked away from his obligations, but it is unlikely that someone from Ireland will. You are honourable people,” he said in 2011

The general consensus is that if Ireland takes a safety net, it will come with strings.  Strings that the Irish government don’t want because it could lead to another horrendous budget in 2015 which could include a demand for a bigger deficit reduction, which would result in a larger adjustment and therefore more pain for the taxpayer.

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The Government have taken the gamble that if they impose severe budgets and austerity in the early part of their term in government and if it pays off, that they can ease off a little in the latter part of their term in office.  This is good strategy on their part because it could help them in their re-election.

The good news is that it seems to be paying off.  However, the previous government left us is a deplorable situation with massive borrowings that should not have happened.

At the moment, we are on a knife edge and the government have to finely balance the situation.

An Irish Times report today, quoting unnamed sources in Brussels, said that officials believe that if Ireland deploys a one-year line of credit that it will meet the same problem of market confidence when it expires in a year’s time.

The report also said that Ireland’s bond yield of 3.5% are currently favourable for a full market return at the moment.  Michael Noonan, Minister for Finance, said yesterday that a decision on the bailout exit strategy was “finely balanced”.  Whereas Brendan Howlin, Public Expenditure Minister, gave a clear suggestion that the government will apply for a precautionary line.  He told the Financial Times “We are actively discussing a backstop.  If you ask most international financiers they would say it is advisable to wear a belt as well as braces.”

Bloomberg, in its edition this morning, said that Ireland should accept a precautionary line of credit. It said that the Country could negotiate on its corporate tax policies in return for a safety net rather than signing up for more cutbacks or tax hikes.

Washington

Minister Noonan returned from Washington last Wednesday following two days of talks with the IMF about the end of the bailout and the overdraft facility.

While in Washington, Mr Noonan also had a 35 minute meeting with US Treasury Secretary Jacob Lew about his Budget decision to crack down on tax avoidance by 'stateless' companies.  Mr Lew is one of the most powerful figures in the US government.

It is crucial to keep the US government onside in relation to our corporation tax system because there are 1,000 multi-national companies in Ireland employing 285,000 people directly and indirectly.

The Wall Street Journal reported that Ireland is considering not getting a line of credit.

Germany

Meanwhile today, the EU has threatened a probe of Germany's trade surplus, adding to criticism from the US and the International Monetary Fund that the German reliance on exports is hindering Europe's economic recovery.

The probe may follow the European Commission forecast yesterday that Germany's current account surplus will reach 7pc of output this year and 6.6pc in 2014. That is an increase from a May estimate of 6.3pc and 6.1pc respectively.  What this means is that German surpluses are a drain on European and global growth. Germany accounts for almost a third of the euro-area economy and views itself as a model for the 17-member bloc.  Last week Germany said the critique was "not justified" and that exports were a sign of strength.

Mr Rehn asked Germany to do more to boost consumption and foster higher wages. He recommended tax cuts, reductions in social contributions and infrastructure spending.

As reported in Bloomberg yesterday after the latest round of talks, Hermann Groehe, the general secretary of Ms Merkel's Christian Democratic Union, "Our conviction together is that the export strength and the competitiveness of the German economy as well as strong domestic demand – both are important for our country. We urgently encourage others to work on their competitiveness just as much,"

 

Read 22045 times Last modified on Wednesday, 06 November 2013 12:49
Robert Tallent

Bob is a Management Consultant, Mentor and Trainer. He is also an Entrepreneur from 1983 to the present day. Between 1983 and 1995 he ran four businesses with a turnover in excess of £1m. As well as having an Honours Degree in Business Studies, he is also an Industrial Engineer and managed a large department in a multinational with large budgets and responsibilities.

He studied to become a Management Consultant, Mentor and Trainer and setup The Synergy Group in 1995.

He has a huge range of business and management experience in practically every industry.

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