All eyes on Berlin as bailout exit strategy takes shape

Angela Merkel’s election victory sparked immediate chatter on Merrion Street as to what happens next in her finance ministry. At issue is whether the veteran Wolfgang Schäuble makes way for someone else or stays in the post.

The bargaining to come in the chancellery will be closely followed in Dublin. Some reports point to Schäuble’s survival. Another reading suggests he may be replaced by ECB executive board member Jörg Asmussen, though close observers say that’s probably a bit of a stretch.

Why does any of this matter? Because key questions over Ireland’s exit from the bailout remain to be settled. Even though Merkel was quick to signal that there will be no change in her core policy towards Ireland, her choice of finance minister will be important nonetheless.

Schäuble is as dogged as he is dogmatic. The question now arises as to whether Merkel’s likely partners in the Social Democratic Party demand someone else with a more pragmatic style. Whatever happens, it is a decisive mark of where we are right now that the political manoeuvring in Berlin registers so strongly here.

After all, the Government must soon decide whether it should seek an emergency credit line to hold in reserve as a guard against any sudden loss of market confidence after the bailout. Impending too is another round of European talks on measures to resolve failing banks, something which could present a fresh opportunity for the Irish campaign to ease bank rescue costs.

Remember this? In July, Minister for Finance Michael Noonan said he would like to agree a "back-stop" arrangement with EU partners and the International Monetary Fund for the end of the bailout in December. This would essentially be a 12-month overdraft, the objective being that the facility would never actually be used.

Noonan was clear enough then but things don't look that certain now. Election talk in Germany of a "clean break" from the Irish bailout seems to have triggered second thoughts in Dublin as to whether a credit line ought be sought after all. The sense all along was that the Germans would rather provide an Irish safety net, just in case. No longer.

Soundings
Now that the election is done, the Government is to take soundings in coming weeks as to whether such a programme is a runner at all. Views expressed in Berlin, Brussels and Paris will be crucial. So too will be the feedback from Luxembourg, home of the European Stability Mechanism, the permanent bailout fund from which any credit line would be drawn.

There are many potential benefits, but there are drawbacks too.

Confidence
On the plus side, a credit line could provide an additional layer of confidence as the Government makes its full return to private bond markets.

The overall level of financial risk would be reduced and the National Treasury Management Agency could hold less cash in reserve, easing the State's voluminous debt servicing costs.

But any credit line would come with strings attached. The Government would be obliged to sign up to a package of strict fiscal policy conditions in return for any aid, even if it remains unused.

This may be unwelcome politically, for obvious reasons.

Yet there is still a sense – in Dublin, at least – that a deal could be done in which the conditions are no more onerous than the Government’s existing obligations to international partners.

There is more. A credit line would probably not be granted without the rigmarole of parliamentary approval in some euro zone member states.

This too might prove problematic. Sceptics might well ask why Ireland, which is supposed to be Europe's success story, needs yet more aid. Such questions might be all the more acute in a scenario in which more money will soon be required for Greece.

There is also the squabble over budget targets. The troika wants the Government to stick with the €3.1 billion set out in the original plan. The likelihood now is that the fiscal package will come in below but close to €3 billion, with some additional trappings to reinforce the exit strategy.

There appears to be some confidence in Government circles that the troika can live with all this. The budget will be cast to achieve an all-important primary budget surplus – a surplus before the interest payments on the national debt – and the deficit target laid down by the troika will probably be beaten.

Target
At the same time, it was ESM chief Klaus Regling who has drawn a direct connection between the €3.1 billion target and debate on application for a credit line. "If the agreed target were not reached I'm sure that would not be well received," he said in July. The message was clear enough.

The alternative for the Government, of course, is to go it alone on private markets next year without the benefit of any credit line. The basic idea here would be to demonstrate maximum confidence that the exit plan is on securely on track.

Enda Kenny phoned Merkel on Wednesday to congratulate her on the election result. They then briefly discussed the Irish bailout, the exit plan and agreed to keep in touch. Another big decision looms – and the Berliners will have their say.