Fiscal Treaty Outcome?

Published: June 1, 2012
Categories: News Article, Sligo Champion Articles, Euro/Finance

Sligo Champion Article

One of the slightly strange things about writing an article for the Sligo Champion is that you write it roughly one week before you - the reader - will read it. This means it can be a bit tricky when I'm writing about current events.

That's exactly how I feel today, Thursday May 31st. I am writing this in my 10th floor office in Brussels but in less than an hour I will go to the airport, catch a flight to Dublin, and then travel to Sligo in time to vote in the Fiscal Treaty Referendum. I should make it just before 10. so I will be one of the last few stragglers to cast my ballot.

By the time you read this we will know the outcome of the referendum and indeed we will have very likely moved on. One of the things I find in politics is that you are always moving on to the next thing. No matter how crucially important something is, when it's done, it's done.

It's a strange and somewhat unnatural way to operate which leaves little time for reflection, learning from your mistakes, or using the experience and knowledge gained, because it's a constant mantra of "what's next on the agenda?"

I wonder is everybody on the same treadmill of reacting to events, of not having enough time to plan or is it worse in politics? I also wonder how much of it is driven by the media, the need to have another story, another headline, and then of course we need to ask ourselves the question: how much do we drive the media? Do we need the constant stimulation, the uncovering of new angles, new perspectives?

Are we ourselves the catalyst for this constant change? I really don't know, but I do know that when you read this it is likely that some other story will be dominating the headlines.

So, how will it go? Yes or no? No or yes? How many "auld pencils" as Bertie called them will waver over "yes" but make the mark on "no"? How many uncertain no's" will think again in the semi-isolation behind the screen in the polling booth and tick the "yes"? How many definite "yes's" and determined no's", how many reluctant "yes's" and hesitant "no's"? How many "to hell with the lot of ye" no's and how many "damned if I do and damned if I don't "yes’s"?

And in the end who knows, things change, things move on and those of us who still have to vote can only hope we are doing the best thing, or maybe the better thing, or maybe we are merely hoping to do the least possible damage.

And speaking of damage, as we in Ireland carefully consider our voting intentions, the euro continues to slowly unravel.  One of the new words coined in recent weeks is GREXIT, which is short for "Greek Exit" and just yesterday, I came across another one, SPANIC, short for "Spanish Panic".  Such terminology doesn't exactly inspire hope, but they say every cloud has a silver lining and maybe the menacing storm clouds blocking out the Spanish sun might be part of a silver lining for Ireland.

Spanish banks are in trouble.  Losses at Bankia are in the range of €20 billion plus and for now at least, the Spanish Prime Minister has said his government will attempt to bail the country's troubled banks.  My advice to him is to be very, very careful.  Ireland has already gone down that path and it nearly broke us.  When bank debt was foisted onto the shoulders of citizens, the markets lost confidence in us and our borrowing rates were just too high.  It wasn’t that nobody would lend us money, it was that the interest rate demanded was simply too much, so we were bounced into a bailout.

If Spain were to inject €20 billion into one of its banks (and who knows what black holes lurk in other banks), then they run the very same risk that we did. The markets may well demand an exorbitant interest rate and the dreaded word bailout would be writ large. Then we would really see a SPANIC.

So, where is the silver lining I mentioned earlier? Believe it or not, it might well be shimmering at the verges of this SPANIC. If the Spanish recapitalise their banks, they run the risk of a bailout. Should this happen, the emergency EU bailout fund that we have heard so much about in recent weeks - the European Stability Mechanism (we even had a brief court case about it!) - might not be big enough to bail out Spain, and with Italy not far behind in terms of economic dire straits, the potential sequence of negative events could be truly catastrophic for the single currency.

So what are the alternatives? As always in the Euro crisis, today's solutions were deemed unthinkable twelve or even six months ago, and foremost among these is the possibility that the ESM might recapitalise the banks. This would take the burden off the Spanish government's shoulders and would signal a seachange in European policy.

And here, finally, is our possible silver lining: If this was to happen and the ESM either directly or indirectly recapitalised Spanish banks, Ireland could then look for a retrospective recapitalisation, of Anglo Irish for example. This would have the effect of lifting that debt of approximately €35 billion off our shoulders.

Even if this were to happen it’s not a "get out of jail" card. The debt would still have to be repaid but the interest rate could be 5 to 6% less than what we currently pay. Furthermore our sovereign debt burden would be considerably lessened thus ensuring a much quicker return to the markets and an exit from the bailout programme. Will this happen? Well we will know soon enough and all I can say for now is that it’s a little more likely today than it was a month ago. By the time you read this, that might be the current headline.