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Public noises don’t bode well for the right deal for Ireland

by Aaron McCormack on March 14, 2011

It is possible that the people of Ireland and their political leadership will continue to meekly accept the “extend and pretend” approach on debt that is being enforced by France and Germany.

So far, not so good.  Unless something very different is happening beneath the surface it does not look like the new Irish government is getting to grips with the most important sovereign negotiations since the creation of the State.

The only path forward for Ireland is to get a brand new deal on both the interest date and the amount of debt that Ireland holds with the European institutions.  A substantial reduction in interest rates (at least 2.5% less than the current 5.9% average) and about a 50% reduction in the principle owed seems to be the only mathematically viable result that does not end up in chronic austerity and a likely default somewhere down the line.

What we are getting is classic “extend and pretend”.  A muddle of small amounts of progress with the hope (a vain hope) that somewhere down the road a miracle may occur.  A putting off of the fundamental problem – a habit that is endemic not only in governments but also in business.

The experts cannot see an outcome some years hence where Ireland survives on a combination of a couple of points of interest rate cuts and brutal local austerity.  That outcome will sacrifice the country and result in default in any case.  The French and Germans and their banks suffer no consequences for their poor choices.  In fact they will make good money on their lending.

Folks, governments and their permanent counterparts in the civil service often make terrible choices. 

On the 31st January this year the Irish government paid €750m in maturing Anglo Irish Bank bonds to investors.  It was unsecured senior debt that WAS NOT COVERED BY THE STATE GUARANTEE.  But the Irish Government and their civil servants thought that they should honor these bonds at 100% of their full value.  At the same time the government announced a budget with social service cuts of over €800m.  There was no national outcry about this and the best attack on this was launched some three weeks later by Vincent Browne
It has to be believed that the Irish government was told in no uncertain terms by Europe that these bonds needed to be paid in full despite the fact that there was no financial or moral obligation to do so.  They capitulated.  Whether the new government would do the same remains to be seen.  Why the media and the people in Ireland didn’t make a huge fuss about it at the time remains a mystery.

If this sort of thing can happen, it is possible that the people of Ireland and the political leadership will continue to accept the “extend and pretend” approach on debt that is being enforced by France and Germany.  There is no doubt that Ireland will get something from this first round of engagement, but it will be too little and will likely require concessions on our part.  A 1% cut in the blended EU/IMF interest rates will be worth less than €500m per annum.  If that is what we get, people need to wake up, and be woken up, to the future that the country is condemned to.

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