Ireland debt: spelling out the spending cuts ahead

Dublin awoke today wondering who was in charge of Ireland.

As I said yesterday, it was telling that the German finance minister gave the first official confirmation of an official request from Ireland for assistance.

Most ominously was the short statement put out last night by the Frankfurt-based European Central Bank, which promised that the Irish assistance would be offered “under strong policy conditionality”.

And then in France it emerged that the 160 page four-year budget plan has already been circulated in draft form to Europe’s finance ministers and the IMF, before being shown to Ireland.

Some details are emerging. A 10 per cent cut in social welfare payments, a €1 cut to the minimum wage, 28,000 public sector job cuts have all been concretely reported here in Dublin.

If the plan follows that of Greece, I would imagine that Ireland’s 21 per cent VAT rate is also in peril, which will be music to the ears of supermarkets across the border.

All of this effort is aimed at cutting €10bn of further spending and raising an extra €5bn of taxes by 2014, to close Ireland’s gaping deficit.

Intriguingly though, this is not a standard issue IMF hatchet job. Not yet. It seems that it is the Irish government has pre-emptively engaged in fiscal self-flagellation. As it stands, the IMF/EU is not about supersizing these cuts. But it will be monitoring, at least quarterly the progress of these policies.

In return, Ireland will not have to access sovereign debt markets for three years, and access loans at a reasonable interest rate, of around 5 per cent, if Greece is anything to go by. City economists estimate that this will take €50-60bn of external funding.

But this will be by no means a typical IMF program. The main target is Ireland’s bloated banking sector. The word “restructuring” has replaced “recapitalisation”.

As I said yesterday this means, mergers, foreign sell-offs, and probably the effective nationalisation of AIB, Ireland’s second largest lender. Some banks will disappear. Many, many banking jobs will be lost here. It will require €15-30bn of external funding.

The ECB EU and IMF are here to apply radical surgery to the Irish banking sector. And my sense is that it won’t be unpopular.