The government has announced that Ireland is set to exit the EU/IMF bailout without a precautionary credit line. This is a big decision for Ireland. It is a momentous one for the government. Much of what happens from here may well be judged by this point.
There are many pro’s and con’s to this decision. It represents a big gamble and the first real risk that we have seen taken in some time. In a few years we will either say it was brave or foolhardy depending on the outcome.
The government has found it increasingly difficult to sell the message of the bailout exit. The public has not been convinced. The EU has played hardball as regards the terms of any credit line and the government knows that if they were to accept such conditions then they would be told that the bailout exit was nothing more than a charade.
Since the government took office every decision, good or bad, has been shared with the officials, with the previous government or with the troika. This represents the first big piece of strategy that they can claim full and complete ownership of. That’s what makes it so important for the government.
On the upside, if Ireland continues on its current path and interest rates remain where they are the government will be hailed as freeing us from the yoke of over zealous eurocrats interfering in our policies. If the markets remain stable for the remainder of the government term then it can be claimed that the government has restored international confidence in Ireland and it will be hard for anyone to disagree. From here on in the government can claim to be in complete control and will get any credit that comes from any advance in the economy.
However, there are very real risks here. The Irish economy is still incredibly fragile. The Irish people have been pushed to a limit with austerity and are increasingly demanding a relaxing of this. The exit of the troika will only add fuel to such demands. The markets are every bit as tough a tasks master as the Troika. They will be watching Ireland very closely as it exits the bailout, watching for anything that might signify a change in policy or an inclination to take risks again and halt the spend thrift plans.
Interest rates for Irish bonds have fallen since Ireland entered the bailout. This is a bit like competition in the market. Once the markets know that Ireland can go elsewhere for its funds there is less risk and no point charging increasing high rates. Those in favour of a precautionary credit line argue that if Ireland has such a back stop then it will keep the markets calm. There is a fear that Irish rates are artificially low because of the existence of the bailout and that without this they would be going up.
The government has decided to show its absolute confidence in the Irish economy. This is brave and will raise eyebrows. The question is whether over time, the markets will buy it or whether they will start to let rates creep up. The rates will become a barometer of government performance much like they were for the last government before they ended up accepting the bailout. Even if we don’t need to borrow for a while the actions of ratings agencies and the rates quoted will affect opinion on the government.
If the rates remain stable then the government may just see a turnaround in its fortunes as it can claim sole credit for its new strategy and for the exit. If however, rates start to go up then its a totally different story. The government will be judged as having been reckless by refusing a precautionary credit line and if, god forbid, we do have to return to the EU for a second bailout it will be with serious egg on our face and perhaps a worse situation than before. IF that transpired, it would certainly be the end of this government.
So, in a nutshell, it is make or break. Alea iacta est.