Referendum relief will be short-term
Due to further weakness in the domestic economy, the government's relief at a referendum "Yes" vote will be strictly short-tern, writes Dan White
Print13 June 2012
In the end the result in the referendum wasn’t even close with the government securing a “Yes” vote of over 60%. Unlike in previous referenda, where most of the “Don’t knows” turned out to be closet “Nos”, this time around a majority of the “Don’t knows” either voted “Yes” or didn’t bother to vote at all.
While the government claims that, by passing the Fiscal Stability we will be able to access funds from the European Stability Mechanism (ESM, AKA the new EU bailout fund) in the event of us requiring a second bailout, the risk is that this could turn out to be a self-fulfilling prophecy.
The Spanish crisis
The rapidly worsening Spanish crisis, in reality a banking crisis, once again highlights the flaws in the bailout agreement this country was forced to accept under duress in November 2010. At the last count the Irish taxpayer has pumped €63bn into the Irish-owned banks. It was the rapidly-rising cost of bailing out the banks which effectively ejected this country from the international bond markets in the autumn of 2010 as investors concluded, probably rightly, that the mounting burden of bank debt meant that Ireland’s total debt burden was unsustainable.
Spain seems to have learned from Ireland’s mistakes. At the time of writing the Spanish government was refusing to accept a bailout along the lines dictated to Ireland, Greece and Portugal, insisting instead that the ESM inject the money directly into the Spanish banks. By doing so it would keep the cost of bailing out the Spanish banks off the balance sheet of the sovereign and, hopefully, preserve its access to the bond markets.
If that was the plan it seems to have failed for now with Spanish bond yields climbing to 6.8% earlier this month and the country’s treasury minister admitting that, at those levels, Spain couldn’t afford to raise new debt.
Europe’s paymaster
An even bigger problem with the approach being adopted by Spain is that Germany, Europe’s paymaster, remains adamantly opposed to anything that smacks of the mutualisation of eurozone debt and is insisting that the Spanish sovereign assumes responsibility for any European funds that are pumped into the Spanish banks.
Germany’s reluctance to allow the ESM to pump money directly into the Spanish banks without a guarantee from the Spanish sovereign is understandable. Although we are still dealing with no more than guesstimates it is already clear that any Spanish bailout will be larger than those of Ireland, Greece and Portugal combined.
Brussels-based think tank, the Centre for European Policy Studies, has estimated that the Spanish banks are sitting on property-based loan losses of €270bn. Last month Bankia, Spain’s third-largest bank, effectively went bust. Within weeks the cost of bailing out Bankia, which had originally been estimated at “only” €4.5bn, had soared to €23.5bn. What’s the Spanish for Anglo?
Meanwhile the shares of Santander and BBVA, Spain’s two strongest banks, are down by more than 40% over the past year.
Greece set for exit
As if Spain wasn’t enough to be getting on with, Greece seems to be heading for the eurozone exit. Regardless of the results of the 17 June general election, the second Greek general election inside six weeks, it is abundantly clear that the consensus supporting the austerity demanded by the EU/ECB/IMF troika in Greece has broken down.
No matter who emerges victorious on 17 June it is now virtually certain that Greece will soon become the first country to leave the single currency. Given that Greece lied in order to qualify for eurozone membership in 2001 and has dragged its feet ever since there will be many, not least in Germany, who will say good riddance when the country reverts to the drachma.
Be careful what you ask for!
A Greek exit from the eurozone, no matter how thoroughly justified, fundamentally changes the nature of the single currency. Ever since the euro was first established at the beginning of 1999 we have been assured that no country could ever leave. Euro membership was for keeps. However, if it turns out countries can leave after all, the nature of the eurozone changes fundamentally.
It will no longer be a true currency union but a glorified fixed exchange rate system along the lines of the ERM which preceded the euro. With Greece, and probably Cyprus also, gone from the single currency, the markets would move quickly to pick off the other weaker eurozone members. Spain, Italy, Portugal and Ireland would all find themselves in the firing line.
The bleak outlook for the eurozone comes at the same time as evidence of a further weakening of the domestic economy emerges. After a couple of months during which they seemed to have bottomed out, retail sales are falling once again with a 1.8% drop in the value of retail sales being recorded in April.
This in turn has fed through into the May exchequer returns which showed VAT revenue running 0.9% behind the budget day target. Given that the government is relying on the 2% increase in the standard VAT rate to raise an extra EUR*670m of revenue this year, the May figures must be causing considerable concern in Merrion Street. If VAT revenues continue to come in below target the government could be looking at an even tougher budget than already planned in November.
Further evidence of the weakness of the domestic economy was provided by the latest Quarterly National Household Survey figures, which showed that employment fell to its lowest level since 2003 in the first quarter of 2011.
This combination of external and internal factors means that the outlook for the Irish economy remains extremely bleak. While the referendum “Yes” vote, by ensuring access to the ESM, removes one potential source of uncertainty, any relief for the government will be strictly short-term.
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