Ireland has been priced out of international bond markets. A rate of 7 percent is a signal that investors will not risk their capital on Irish government bonds. The final interest rate at the close of trading today was 8 percent. This is a signal that the game is up. No amount of cutting public expenditure will solve the problem. The Irish state must tap into European Financial Stability Facility (EFSF) to raise funds and pay off debts associated with the bank bailout. This is almost inevitable. So, what is this fund and what conditions will be attached to using it?
Firstly, it is important to keep in mind the context of the Economic and Monetary Union. Ireland shares its currency with 16 other European countries. It cannot adjust its exchange rate and cannot devalue its currency. In the absence of this monetary policy Ireland can only use labour market and fiscal policy to tackles its economic problems. The Eurozone has one monetary policy actor (the nexus of power of which is oriented around the ECB) and 16 national fiscal authorities (governments) acting independently from one another. Ireland never internalised this fiscal constraint. It cut direct taxes and became dependent upon the housing boom to fund public spending. A boom that was facilitated by low ECB interest rates and cheap money for Irish banks. The net foreign liabilities of Irish banks was 10 percent of GDP in 2003. In 2007 it had grown to 60 percent.
Most observers outside the Euro recognise that it will be increasingly difficult for regional economies of the Eurozone to escape their economic woes, stimulate growth or tackle their deficit in the absence of a devaluation or massive stimulus. Neither of these options are possible for a country with little or no capacity for macro-economic management. It would require European wide coordination. But, Europe is less concerned with this than it is with saving the Euro. The EFSF is a political construct designed to ensure the Euro does not fail. It, like the EMU, is dependent upon the political interest of German and French governments.
To a certain extent the immediate question facing Irish policymakers is a) leave the Eurozone or b) use the Financial Stability Facility. The latter will be chosen. So, what is it this and why is it considered a bailout from Europe with an IMF implementation plan?
The EFSF is not a sovereign investment bank but a financial company using instruments “to issue bonds on the market to raise funds” for Eurozone countries who are facing financial difficulty. It is hard to determine what the interest rate of a ‘loan’ or ‘bailout’ from the EFSF will be. One can assume it will be lower or approx 6 percent. When it was initially established, Greece received funding at an interest rate of approx 5 percent. Bonds issued are guaranteed by the €440bn commitment by member states. Most of which comes from Germany and France (€210bn). Another €250bn will come from the IMF.
The EFSF works closely with the German Debt Management agency (DMO) and the European Investment bank. The chief executive officer is Klaus Regling who co-authored a report on Irelands banking crisis. The DMO will raise the funds and the EFSF will issue them. In effect, the agency will issue bonds to national governments that are guaranteed by other national governments in the Eurozone, the main contributor being Germany (€120bn). In theory, therefore, the Irish government would be borrowing from a Euro-agency, and if it defaults on its payments, investors would have their cash secured by other Eurozone governments, and the IMF via the EFSF. The internal make up of this amount needs to be made explicit when the process begins. Support for Greece is €110bn and none of this funding, as far as I am aware, comes from the IMF.
So, should we think of the EFSF as a bailout from the EU-IMF or a Euro-funding mechanism for national governments who cannot raise the money in private-finance markets? It should be the latter but it is not. The European Commission is adopting a conservative approach to the agency and it is anything but a mechanism of solidaristic economic coordination. Private investors are striking against Ireland because they would prefer to buy bonds issued from Europe than Ireland. It provides them with greater insurance on their losses via the €770bn member state guarantee. Capital is snubbing Ireland because it is waiting for the insurance provided by the EFSF-German guarantee fund. The EU assumes that national governments will use it when they have been ‘independently’ assessed by finance markets as insolvent. This is another reason why we need European-public rating agencies. Private markets can strategically force Ireland into the EFSF by refusing to lend money at affordable rates. Portugal and Spain will be next.
In this regard, I have a different argument to Morgan Kelly about why bond yields are increasing. He is right that our deficit and fiscal woes are caused by an unaffordable bank bailout but underestimates the strategic rationale and thinking of profit-actors in bond markets. Ireland is being priced out of the bond markets not because it is perceived to be incapable of austerity, reducing its deficit or insolvent but because speculators and investors want the security of a EU-IMF guarantee fund. Our borrowing costs are huge because of the bank bailout but the interest being charged (making it impossible to borrow) is a strategy of finance-capital.
If the Irish government tap into the fund (and it will have no choice if bond rates continue at 7+ percent) it will have to go the European Commission, with the IMF participating, and negotiate a programme of adjustment. It will subsequently sign a memorandum of understanding with the IMF and European Commission. This will come with strict policy conditions and signed off by all 16 finance ministers in the Euro. Oli Rehn is here to begin this process of interaction between the Commission and the government. The four year €15bn austerity plan is likely to have been an political-economic rule of thumb agreed between the Irish government and the EU Commission for financial support.
So, in practice, the adjustment strategy being adopted by the government is probably not that different to what we can expect when the EFSF is activated. But, one thing for sure, if the EU-IMF demand anything, it will be more not less, particularly in the area of taxation and labour market reform. This is the reality of not having an independent monetary policy; all adjustment falls upon labour, those dependent upon social protection and taxation. It is going to be an extremely turbulent 6 months and one can only speculate as to what type of political resistance the EU-IMF will induce. The EU commission is being painfully short-termist and in real danger of fermenting a serious anti-European backlash. A coordinated political-economic response, grounded in the policies of Social Europe, is a distant shadow.