..and what it says about the banks.
Today saw the release of the Labour/Fine Gael programme for government that was passed by both parties and which will therefore form the policy basis for the new government which is due to be announced on Wednesday.
I was interested to see how the new government was going to deal with the hospital pass parting gift from Brian Lenihan when he refused to recapitalise the banks in the dying days of his government, saying he ‘didn’t have a mandate to spend the money.’
Now, Lenihan’s reasons aside, there are a few interesting things to take from the Irish Times report linked to above:
Speaking last night, Mr Lenihan said the decision was taken with the approval of the EU, the IMF and the European Central Bank (ECB).
However, the IMF said the bailout conditions should be adhered to. It said last night that Ireland had the resources to recapitalise its banks and it was important that the delay was temporary.
A spokesman for economics commissioner Olli Rehn said the EU expected the delay to be “temporary”, and for the recapitalisation to proceed as agreed.
So, both the EU and the IMF say that the delay in recapitalising the banks must only be a temporary - the impression seeming to be that it was just a delay until the new government took over and then allowed the recapitalisation to go through.
So, now we can turn to the Programme for Government and find the piece in it when they say “We will immediately recapitalise the banks with the €10bn they are due under the EU/IMF deal.”
Well, we can’t find it, because it isn’t there.
Instead the new government partners say:
• We will attach the utmost priority to avoiding further down-grades to our sovereign credit rating by setting further capital spend by the State on bank re-capitalisation at a level that is consistent with national debt sustainability.
• In this regard, we will defer further recapitalisation of the banks until the solvency stress tests are complete and known to the new Government. Earlier recapitalisation in advance of publication of the stress tests will not contribute to market stability and confidence.
First, where do the partners put “further capital spend by the State on bank re-capitalisation at a level that is consistent with national debt sustainability“? The general government debt of Ireland is already at 94% of GDP. Putting a finger on what is sustainable is always hard, but looking at anemic growth with debt servicing costs at (average) 4.3% and rising, it would appear that Ireland’s debt is already unsustainable.
That is perhaps a worry for the future though.
In the more immediate term, that the government does not intend to recapitalise the banks before they fail the stress test ( as they surely will without the new capital) is going to cause much more difficulty for the new partners. It flies in the face of what the EU/IMF said on the 10th of Feb when Lenihan put off the recapitalisation, and is certainly going to cause friction between Ireland and its European ‘partners’.
Will be interesting to see who blinks first in the coming weeks..