Ireland faces up to bailout reality

After weeks of total denial in front of the cameras, Ireland faced a grim reality when in mid-November its central bank governor Patrick Honahan admitted in a radio interview that the country had been conducting talks behind the scenes to receive “a very substantial loan” as part of a huge bailout package offered to it by the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Union (EU).

By the time this article hits desks, a large chunk of the republic’s banking system, and by extension its economy, will probably be under the ownership of Europe and at the beck and call of Brussels bureaucrats. It is a humiliation of the highest order for a country once known as the Celtic Tiger: in the hours after Honahan spoke on radio anyone checking the Irish government’s web site would have seen on its homepage a list of ‘featured’ web site links topped by keepingyourhome.ie and losingyourjob.ie – which says it all.

Game over

It is clear to everyone but Ireland’s top brass that the game is up. On 18 November, as news broke that the IMF, EU and ECB were meeting with Irish ministers in Dublin to discuss the bailout – and in possibly one of the most naïve comments made as speculation raged about its future – Ireland’s finance minister Brian Lenihan told the republic’s parliament that if the talks produced a “substantial contingency capital fund being made available to back Ireland”, it may still not be drawn down.

Lenihan opened by reassuring depositors that “all deposits continue to be safe and secure” and pointed at the “misinformed, inaccurate and in some instances mischievous comments about the protection of deposits”.

The government said the “technical discussions” had been started “to assess how it may be possible to build on the significant interventions already undertaken by the Irish authorities through the CIFS (the Credit Institutions Financial Support Scheme 2008) and Eligible Liability Guarantee Schemes, the NAMA (National Asset Management Agency) Scheme, the Central Bank of Ireland’s PCAR (Prudential Capital Assessment Review) and the restructuring and the recapitalisation, to secure an enduring and permanent resolution to the problems of our banking system.” This made the proceedings sound more like a beancounting formality than a closed-ranks summit at the highest levels of European government to hammer out a financial deal of suitable magnitude to stop Ireland hurtling towards insolvency – perhaps within days or weeks.

“Were the talks to result in a substantial contingency capital fund being made available to back Ireland and to create confidence in terms of the firepower available, but not drawn down to the banking system, that that would be a very desirable outcome,” Lehihan told parliament. “If the government has been reticent in making public comment, it has been in the interests of protecting the taxpayer. Jumping to conclusions ahead of all of the facts is not to the benefit of the taxpayer – nor is it in our interests in advance of discussions that are now taking place,” he added.

That echoed the line from Ireland’s communications minister Eamon Ryan who on the morning of the 18th said that, while a multibillion-euro loan may be involved to bring stability to the banking sector, the country may not use it.

“That would be something that you might not have to draw down but you’d have there in the back drawer to absolutely lock down certainty that our balance sheets and our banks are fine,” Ryan told RTE Radio.

Meanwhile, the government is pressing on with its ambitions to turn around the country’s economic misfortunes and will soon publish a four-year budget plan for the country, meant to plot its course towards reducing its fiscal deficit to just three percent of GDP by 2014. It is currently 32 percent.

Honahan appears to be the only figure in this drama who is aware of the economic reality of the country. Converse to Ryan and Lenihan’s protestations, he has said he expects a loan made to Ireland would be “drawn down as necessary.” And whereas Ryan said he expected the loan to be around the €6bn (£3.7bn) mark, Honahan had indicated that he saw it running into tens of billions. Other sources have pitched it at as much as €85bn and put the interest on a loan from the IMF at the fund’s standard rate of five percent – two percent less than what it pays to borrow on the open markets now.

UK chancellor George Osborne has made sure people hear him say he is ready to assist Ireland, despite the UK’s own economic woes – not because of any altruistic feelings, of course, but rather because, according to Bloomberg, British banks have the world’s biggest exposure to Ireland. Citing data from the Bank for International Settlements, that exposure totalled more than $222bn at the end of Q1 2010. Bloomberg’s report added that the UK already funded a chunk of cash sent to plug up the Irish units of UK banks that flopped in 2009: citing records in Dublin’s Companies Registration Office it suggested that RBS sent £2.71bn of capital to its Ulster Bank unit until this January, which had “at least” £11.9bn of Irish assets covered by the UK taxpayer-backed Asset Protection Scheme at the end of 2009. Meanwhile, it recalled that Lloyds sent a total of €4.45bn in fresh capital up to this year to Bank of Scotland’s Ireland business.

Strings attached

Of course, the mooted loan comes with caveats and strings attached. French officials have made noises to the effect that they may force Ireland to raise its low 12.5 percent corporation tax rate in return for receiving the bailout package and other commentators in the UK have suggested that Germany may push for that – leaving Ireland without its chief competitive advantage.

In its darkest hour, shadenfraude is too delicious to avoid a cheap jibe about Ireland losing its lucky charms. But if its ministers can be honest about the size and terms of the bailout when it hits, they may yet manage to get the country on track for recovery.