Friday, November 15, 2013

15/11/2013: Exiting the Bailout Alone: 'Goods', 'Bads' and Risks

So Ireland is exiting the bailout without a precautionary line of credit. The news is big. And the news is small.

Small on positives, albeit tangible:
  1. Markets got more certainty that any pricing will be a signal - absent a back stop, pricing signalled by the bonds markets is more likely to be the true pricing of debt. Caveat: NTMA's EUR 20 billion+ credit pile-up is likely to still muddle the waters. At last for a while, we are pre-funded.
  2. The markets were told by the Government that, like the FF/GP Coalition before them, the current shower can make statements. Whether they can live up to them (see 'bad' points below) is another game.
  3. We avoided the unknown to us 'conditionalities' that attached to the pre-cautionary line of credit - be it Precautionary Conditioned Credit Line (PCCL) or the more strict Enhanced Conditions Credit Line (ECCL) (see points below as to the cost of this avoidance).
  4. IMF will be gone from the Government Buildings (although it still will be monitoring our performance from the sidelines with bi-annual reviews and the EU 'partners' will still be visiting the Merrion Street).
Small and potentially large negatives, many not yet tangible:
  1. Reforms reversals pressures are bound to set in: with elections coming up, trade unions and other lobbyists (yes, that's right - the all are lobbyists) will be pressuring the Government to cut back on 'austerity'. In other words, we are going to see the return of the 'Galway Races' in a slightly less in-your-face form. Taxpayers be warned - fiscal discipline can start drifting even more toward tax extraction away from spending cuts.
  2. Reforms fatigue is likely to follow: Irish Government to-date has failed to deal forcefully with the issues of domestic reforms. Interest groups and powerful vested interests they represent are lining up on the starting line to make sure they will continue extract protection from the State in exercising their market power. Consumers be warned - semi-states and protected professions will continue ripping us off.
  3. Risks to the fiscal, financial sector and macroeconomic conditions are not going away. Just spot the decline in our goods exports: January-September cumulative exports are down from EUR70.12 billion to EUR65.41 billion year on year. The timing for our exit is fine, but the risks are still there.
  4. Creeping up of the longer-term borrowing rates can take place, both in-line with expectations for the future rates policy by the ECB and in pricing in any risks to the macro and fiscal sides.
  5. Stepping outside the tent with Troika reduces the pressure that the IMF can apply on our 'partners' in supporting any retrospective banks debt deal.
  6. IMF leaving the oversight system (the latter won't go away per 2-6 packs legislation we have signed up to) means we are seeing the back of our only 'protector' in the Troika. Good luck expecting the EU and ECB taking the side of the Irish economy on fiscal and structural reforms policies.
  7. Having exited without PCCL or ECCL, we do not qualify for the OMT - the famed and fabled 'silver bullet' from the ECB that was supposed to act as the fail-proof measure for risk management and crisis blowout prevention.
What can we - consumers and taxpayers - expect (these are uncertainty-laden assessments, based on current track record of the Government and internal coalition politics, so they are subject to possible change):
  1. Higher costs of semi-states' services to ordinary punters as the protected sectors remain protected and are used increasingly to shore up public finances;
  2. Higher costs of financial services as banks ramp up their power vis-a-vis the Government;
  3. Higher taxes and charges as reforms policy drifts lifelessly from spending cuts to revenue raising;
  4. Higher cost of debt roll-overs in the longer run as markets price in fully the level of debt we carry;
  5. Lower competitiveness in the long run and more reliance on the old favourites (property, Government spending and consumption) to drive growth.
May we have good luck avoiding the above 'bads' and risks and enjoying the above 'goods'...

Update: The best headline of the affair award goes to Bloomberg: http://www.bloomberg.com/news/2013-11-15/irish-go-commando-as-noonan-draws-line-under-crisis-euro-credit.html
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