By Business Editor David Murphy @davidmurphyRTE

Kenny and Merkel agree on special case status

An intriguing characteristic of this crisis has been the fact that the impossible can miraculously become possible.

Germany had been opposed to giving Ireland a deal on bank debt. Then last weekend after some speed diplomacy between Chancellor Angela Merkel and Taoiseach Enda Kenny, Ireland was designated as a “special” case. And on Friday, in an interview with our Europe Editor Tony Connelly, a key member of Germany’s Christian Democrats has raised the possibility of an agreement on bank debt with strings attached.

So what could the conditions of a deal be? In reality it could be quite similar to the targets Ireland will have to meet in any case. The biggest worry for the EU, and particularly Germany, is Ireland’s deficit. So perhaps the strings attached could be scheduled to reduce the gap between spending and the amount of tax collected.

That is something Ireland has committed to do already. It is an important part of the Government’s campaign to convince the bond market to lend to the State in future. However, if Angela Merkel is to convince other German politicians that agreeing to an Irish deal is a good idea, she many want it to appear that she has extracted a concession.

The reaction of Tánaiste Eamon Gilmore was not too surprising when he ruled out anything that could be seen as a second bailout. The coalition has put a lot of political capital into an exit from the EU-IMF programme at the end of next year. So Ministers will baulk at the notion that Ireland will have to wait to get its sovereignty back.

But the reality is more complicated. The Fiscal Treaty (remember that) commits Ireland to a deficit of 0.5% of our Gross Domestic Product. Put simply, that means Ireland will have to continue to trim its spending in the absence of significant economic growth.

During its conference call this week, the IMF’s mission chief to Ireland Craig Beaumont cut the fund’s forecast for economic growth for Ireland by almost half a per cent for next year. That will make it harder for Finance Minister Michael Noonan to meet the required targets.

Next year the General Government Debt will reach a staggering €197 billion. Many observers believe Ireland cannot repay that regardless of how many gold stars it gets from the Troika.

Mr Beaumont said a deal on bank debt could cut the debt mountain by up to 15%. That could be manageable. And if Ireland has to agree to some concessions, it is probably worth it.