In assessing the effectiveness of the EU/IMF emergency lending package to Ireland, it’s important to distinguish the financial market impact from the political impact.Â In terms of market impact, the package is surely a success.Â All talk of restructuring, for sovereign debt let alone senior debt in banks, is off the table.Â Through IMF and bilateral involvement, the call on EU lending has been kept in the low range: note the heavy use of the EU-budget backed stability mechanism relative to the use of the financial stability fund — the EFSF’s powder has been kept dry in case it’s needed elsewhere.Â Furthermore, the lender of last resort checklist is looking good: if not quite lending freely at high rates against good collateral, all the EU money comes in at a large headline amount, with a fairly high rate (above IMF and Greece program), and the collateral coming from conditions to which the Irish government had already agreed.Â This money will get paid back.
In terms of domestic politics — and therefore with broader implications for the EU as political project — the package is much more problematic.
In particular, reflecting the strange nature of the European Union itself, critical choices are implied by the collective decision process, but are dumped back to the national political systems to explicitly make.Â Foremost among these is related to how Ireland got its bluff called on its mixed messages to markets and the EU.Â On the one hand, the message was that the country was in a tight spot, but mostly because of its banks.Â The other was that, yes, our debt dynamics looks bad, but remember we are sitting on 2 big piles of cash, one from pre-funding next year’s deficit and the other from pre-funding our public sector pensions.
Hence the response from the EU — if you’re so focused on saving your banks, why not first use those big piles of cash to do it?Â By the way, this is the logical response of an outside investor: if you’re being offered the Brooklyn Bridge for sale, why not ask that the putative seller put some of his own money into the deal?Â Or put more bleakly, as Mervyn King might have said, Irish banks are European in life but national in life-support.
But that’s where the domestic political problems multiply.Â Most of the Irish contribution to the package comes from the National Pension Reserve Fund (NPRF), which was sold at inception as pre-funding public sector pensions from 2025 onwards.Â In truth, the NPRF had already become a banking sector intervention vehicle since 2008, and the scale of Ireland’s problems implied a call on most of its assets.Â But the loan deal makes that explicit: any more upfront money to undercapitalized or legacy Irish banks comes from local cash, then the other money becomes available.
Since these investments are being directed into a sector that will be downsized as part of the program, there’s not much prospect of a return.Â You don’t pour 10 billion into a shrinking sector — without any major debt restructuring — and expect to get your money back.Â GM, it ain’t.Â In fact, the new money for banks seals that there will be no bank bond restructuring, because you’d have to wipe out the equity before hitting the bondholders.Â The equity is that new money from the state.
The implications flow from there.Â Lost amid the 2 year talk of austerity is the extent to which the Irish government has gone to protect the final salary pension plans of incumbent public sector workers.Â The government likes to quote the “average” pay cut for the public sector of 15 percent.Â The reality is more complicated.Â About half of this pay cut is a cut in base salary, and half is a “pension levy” — a percentage contribution towards that final salary pension.Â The trick is that by designing part of the pay cut as a levy, the base salary is left intact.Â And the pension depends on the base salary.
By the way, the impact of the actual cut in base salaries on salary-linked pensions is postponed for incumbent workers and pensioners under the “Croke Park Agreement” — something with which overseas analysts of Ireland would be advised to get familar. Â Add in to this that senior civil servants exempted themselves from the cut in base pay by arguing that they had lost their bonus payments in a separate cut — “bonuses” that they all got — and you begin to see the focus on pension preservation in the nitty-gritty of Ireland’s fiscal policy.
But: the outside partners, as our government gratingly calls them, didn’t set things out this bluntly.Â One can speculate that they saw the twin obsessions of saving Irish-owned banks and Irish public sector pensions, and that there was enough money to do one, but not both.Â So the pension money goes to the banks, and it’s left to a future Irish government to sort it out with Ireland’s 2nd most effective lobby group (the public sector unions, after the banks) how this gets paid for.Â The current government, its time horizon limited by an inevitable 2011 election loss, was happy enough to oblige.Â The current opposition, and likely future government, wasn’t at the table.Â That’s another EU democracy deficit.