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It is expected that there will be a precautionary credit line made available, in addition to the option of accessing OMT (outright monetary transactions), in order to appease any bond market volatility in the short term. The sticking point, as one would expect, appears to be the accompanying conditionality, which Ireland wants as little of as possible.
Precautionary credit line
Ultimately, the idea of the precautionary credit line is to help Ireland to exit the bailout programme without causing volatility in borrowing costs. Clearly there is confusion and uncertainty surrounding the nuances of this potential arrangement – does it amount to another bailout for Ireland? It would seem that ECB president Mario Draghi and Eurogroup president Jeroen Dijselbloem are at pains to avoid this mantel. The clever synonym ‘successor programme’ is being used instead, presumably designed to bolster confidence in the state.
The extent of the credit line is still unknown. The minister for finance Michael Noonan has suggested that €10 billion may be required from the troika partners, while the taoiseach – prime minister of Ireland – Enda Kenny has stated that no figure has yet been discussed, and that the €10 billion is in reference to the potential deficit next year. Ireland is tasked with meeting a deficit target of 3% of GDP by 2015. The troika have the belief that in order to do achieve this, Ireland will need to initiate further budget cuts and tax hikes to the tune of €3.1 billion in next month's budget.
There was apparently some consternation surrounding this issue the last time the troika representatives were in town, with the International Monetary Fund particularly alarmed by the fact that Ireland had once again slipped back into recession for the first time since 2009. The organisation may be leading the outfit towards the conclusion that most have known for a while – that drastic austerity is not conducive to economic growth.
Ireland’s deputy prime minister Eamon Gilmore is also beginning to kick up a fuss in the face of these proposed measures, stating that Ireland is ‘not an economic experiment’. Whether this renewed vigour to protect the taxpayer is as a result of his falling personal satisfaction ratings remains to be seen.
Ireland’s recovery is fragile and while unemployment levels are slipping back – falling to 13.4% last month, aided in part by rising emigration levels – there is a growing feeling of austerity fatigue. Ireland may well be turning a corner, particularly in light of its services output, but there is a risk is that any let-up in fiscal discipline could impact borrowing costs by leading investors to question the country’s commitment to programme reforms. One would hope that the credit line will help to address any elevation in bond yields, but there is a fear that it will not be made available without accompanying budget cuts.