EU ECONOMICS commissioner Olli Rehn has said the Government should have no need to seek emergency financial aid from the EU and the International Monetary Fund (IMF) as it battles to regain market confidence in its economic plan.
However, he wants Minister for Finance Brian Lenihan to quickly set out specific budget and reform measures to achieve billions of euro in savings in the next four years.
As the Government faces into a difficult budget for 2011 with borrowing costs at record levels, the commissioner said the immediate adoption of measures for 2012, 2013 and 2014 would provide clarity to the markets.
Responding last night to a series of written questions from The Irish Times,he said the Anglo Irish Bank rescue will be reflected in a high budget deficit this year. "This will be a one-off effect and the deficit for next year will be much lower," he said.
“Resolving Anglo Irish Bank is undoubtedly a very costly operation. It will have a significant impact on the Irish public finances. On the other hand, it is very important to resolve the problem of Anglo and so calm markets.”
Mr Rehn expressed confidence in the power of the Government to tackle effectively this problem and said the cost to taxpayers of inaction over the banks would have been “very much higher”.
Amid mounting concern in Brussels at the negative market reaction to the Anglo debacle, his remarks come a day before the Government discloses a new estimate for the cost of rescuing the bank.
In his most detailed public comments on Ireland since taking charge of his portfolio last February, Mr Rehn insisted the State has strong economic fundamentals and added that painful austerity measures will eventually pay off.
The commissioner’s remarks came as the interest rate on Irish 10-year bonds reached 6.78 per cent, the highest since 1997, before easing back slightly.
Asked if certain analysts were correct to say Ireland should seek immediate help from the EU/IMF rescue scheme, Mr Rehn said bold and decisive measures already taken were rightly praised for being ahead of the market.
“I have no doubt that the Government will continue to take the necessary steps to steer the Irish economy successfully through this very difficult period. In this way, the need for external financial assistance – although available if required – should not arise.”
Taoiseach Brian Cowen also yesterday dismissed the need for external help. “The National Treasury Management Agency have confirmed that we are funded right up to the middle of next year and I think it’s important to emphasise that point,” said Mr Cowen.
Mr Rehn said confidence in the Government’s economic strategy would be “significantly strengthened” by a clear commitment to “specific consolidation measures” for the medium term.
The Government’s agreements with the European authorities foresee €3 billion in cutbacks for 2011 and 2012. While the looming budget will set out only precise measures for 2011, Mr Rehn wants Mr Lenihan to go much further than that.
“I know that the authorities have already quantified the consolidation packages they plan to implement in the following years,” he said.
“However, let me repeat that identifying and adopting already now the measures that will over the next years make sure that debt remains on a sustainable path would provide additional clarity, also to markets.”
Mr Rehn would not say whether he wanted the Government to extract more than €3 billion from the 2011 budget. Neither would he say whether Anglo’s first-tier and second-class bondholders should be asked to take a discount on their liabilities.
Despite signs of recovery earlier this year after “quite exceptional” turmoil in 2008 and 2009, Mr Rehn described the economic contraction in the second quarter of this year as “disappointing” and a reminder that work remains to be done.
Ireland is in the middle of an adjustment period and such adjustments take time, he said.
“I fully understand that Irish taxpayers are unhappy, when they are asked to bear the budgetary costs of the financial crisis. They are not alone, as taxpayers in many other countries have found themselves in the same situation, in previous crises as well as following the events since 2007.
“On the other hand, the fact is that governments often have no choice but to provide financial support to banks that are in difficulty. If they stand by and allow these banks to fail in a disorderly way, the stability of the entire financial system would be in jeopardy with devastating macroeconomic consequences.”
Mr Rehn said the Irish construction and credit boom was unsustainable but added that the State outperforms many other EU member states in some regards.
“The Irish labour market is well-known for its flexibility, which will help in the adjustment. Being in the centre of the global economy and having a flexible and well-educated labour force are strong preconditions for growth.”