21/1/11

The Irish Times - Friday, January 21, 2011

Ireland must focus on Greek debt despite political meltdown

German chancellor Angela Merkel is pushing for a system similar to a common consolidated corporate tax base to which Irish leaders might recoil in horror.

ANALYSIS: Potential restructuring of our EU partner’s debt would establish an important precedent, writes ARTHUR BEESLEY , European Correspondent, in Brussels

THE BATTLE to resolve the crisis in the euro zone is approaching its endgame. EU governments have turned their attention to the restructuring of Greek debt, a hotly contested notion that raises the prospect of sovereign default in the euro zone. It is high stakes stuff, with important implications for Ireland.

As such, the debate merits serious attention across the political spectrum in Dublin. Political activity for the next seven weeks will centre on the election, but neither the Government nor the Opposition can afford to lie low on this front.

The debate on Greek debt takes place amid an intensive negotiation of key reforms to the European Financial Stability Facility (EFSF) rescue fund, including lower interest rates. Any inattention here would hamper Ireland’s argument for a rate cut, which is already difficult. But the Irish dimension does not end there, far from it.

If European leaders open the door for Greek debt restructuring, that would create a clear precedent that Ireland might well follow. Given the force of worries that mountainous bank debts will prove too heavy to bear, Irish restructuring cannot be beyond the bounds of possibility.

Officials in Brussels and Frankfurt say they don’t see it that way. However, restructuring in general remains one of the great unresolved questions in the debt debacle. What to do about euro countries whose debts may be too great to be repaid?

Restructuring Greek debt was once considered unthinkable; now it is on the table. Though moves in this direction are denied, denial at this point is something of a rite of passage for every new manoeuvre. When EU leaders ditched the no-bailout clause it was denied. It was that way too when they saved Greece, set up a wider rescue net, averted a Spanish meltdown and rescued Ireland.

In question right now is whether the EFSF might provide credits to Greece to buy back its own bonds in secondary markets, at a discount to their nominal value. The technical elements remain to be resolved and any political agreement to go down that road may be far away. The underlying fear is that mere discussion of such questions fuels turmoil on the markets.

At its root, however, the debate flows from concern Greece may be unable to return to the private investments as its EU-IMF programme nears conclusion. That very danger presents an obvious risk of the debt crisis blowing up all over again, as it first did late in 2009 after Athens came clean over its finances.

Although a well-placed source said European finance ministers did not discuss deploying such provisions for Ireland at meetings last Monday and Tuesday, that is not really the point.

If Greek debt was restructured and Ireland could not gain access to markets, a similar turn might be in store.

Reducing repayable debt might have attractions, but it would have consequences too in terms of Ireland’s future borrowing costs and on other matters besides.

This is a debate, therefore, which merits particularly close attention in Dublin.

All the more so in a scenario in which Germany and France, the EU’s dominant powers, have linked drastic new initiatives to tackle the debt crisis with the drive for deeper economic governance in Europe.

Doubly significant here for Ireland is their desire to draw business taxation measures into the mix. French president Nicolas Sarkozy is again agitating against Ireland’s 12.5 per cent corporation tax rate and German chancellor Angela Merkel is pushing for something akin to a common consolidated corporate tax base (CCCTB).

Irish leaders might recoil in horror, but their bargaining power is feeble. It remains open to question whether Sarkozy seeks to link lower bailout interest rates to higher corporation tax or whether Merkel tries something similar in relation to a CCCTB. A further possibility, in some accounts, is that deeper fiscal retrenchment is earmarked as the price of a lower interest rate.

The problem here for Brian Cowen’s administration is that its credibility with European partners has long been lost. Dáil ructions yesterday served to undermine its position further. With the all-important Finance Bill still to be published – let alone enacted – it did not go unnoticed in Brussels that the Coalition’s survival beyond lunchtime was in question for hours. It now seems the Bill will pass.

But the chaos was hardly reassuring for the EFSF, which is to tap the market for Irish funds next week.

Still, setting the election date brings clarity as to when a new government is likely to take office. From the perspective of European talks, the timing is tricky enough. Polling day is March 11th. EU leaders are working to make final decisions on EFSF reforms and a new permanent bailout fund at a summit only 13 days later.

There will be time – just about – to install a new taoiseach. By then, however, the really tough talking may well be done.