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Ireland’s bank debt: A €64bn gift from Europe for cargo cultists looks unlikely

Ireland’s bank debt: "The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally," were two sentences in the communiqué [pdf] of the June 29, 2012European summit, that gave Irish political leaders, by default prone to over-spinning expectations, at least some credible reason for hope at last. Taoiseach Enda Kenny said the agreement represented a "seismic shift" in European policy and should open the way to "re-engineer the debt burden" on Irish taxpayers. The public bank support has amounted to €64bn - - equivalent to 41% of GDP (gross domestic product) and while gifts from Europe came every year since joining the European Economic Community in 1973 (as much as 5.7% of GDP in 1991-93 at the genesis of the Celtic Tiger period), like the cargo cultists of Melanesia in the South Pacific after the Second World War when manna in the form of cargo from military planes ended, we are also likely to be disappointed.
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In the period 1973-2010, net cash receipts from Europe, unadjusted for inflation, amounted to €42bn [Table 11; pdf].

Economists at Goodbody Stockbrokers, Dermot O'Leary and Juliet Tennent have produced a policy brief on the current debt negotiations between Ireland and both the European Union authorities:

Ireland achieved a breakthrough at the June 29 euro leaders' summit by getting a specific mention in the communiqué. However, details on what sort of deal Ireland may get are vague and there is room for disappointment in relation to the timing of any deal given the wider European issues.

Expectations high post June 29 summit… - The June 29 euro area summit has opened up the possibility of a restructuring of Ireland’s legacy bank debt burden. Technical discussions are on-going at the present time with a deadline of October set for initial agreement.

…but don’t expect a €64bn gift – The bond market has reacted positively in anticipation of a game changing deal, but suggestions that Ireland will receive a €64bn gift from Europe are wide of the mark. We believe that a deal in October will contain commitments in relation to restructuring promissory notes in IBRC and verbal agreement on future direct recapitalisation of the Irish banks. This would represent a step in the right direction, but the market may be disappointed by an absence of improvement in Ireland’s gross debt position.

ECB must be part of the solution - The agreement provides an opportunity to correct the mistakes of the past, namely repaying senior bondholders in IBRC in full. The ECB must accept that it will be supporting Ireland’s banking system for longer than it desires. For debt sustainability this must include a much slower pay down of ELA and may also involve a wider restructuring of the banking system by way of transfer of loss making tracker mortgages. However, this must be done in a way that does not lead to further questions about capital adequacy of the Irish banks.


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