Thursday, February 07 12:06:23
The European Central Bank moved towards agreeing a deal today to ease Ireland's debt burden after the Government rushed through emergency legislation to liquidate the former Anglo Irish Bank last night.
Taoiseach Enda Kenny has staked his administration's reputation on cutting the cost of bailing out Anglo Irish, now known as Irish Bank Resolution Corp, or IBRC, and the ECB's governing council in Frankfurt was considering a fresh proposal after rejecting a previous plan last month.
A deal had appeared imminent yesterday afternoon but officials decided further work was needed, one source close to the negotiations told Reuters. The ECB Council was discussing an Irish deal at its regular, twice-monthly meeting today.
In essence, the government has given up on hopes of passing on to the Irish central bank the responsibility for debts the state ran up to rescue Anglo Irish; it now hopes to be allowed to pay off that debt over a longer period, easing its finances.
"This closes a sad and tragic chapter in our economic history," Kenny told a special session of the Dail that stretched until 3 a.m as TDs rushed through the winding up of the failed bank.
Anglo Irish was brought down by a real estate crash after a bubble inflated by cheap credit. Fearful of knock-on effects, the Irish state stepped in, landing itself with a huge debts that forced it into austerity budgets as the economy shrank and obliged it to accept a conditional bailout from the EU and IMF.
Technical negotiations between the ECB and Irish officials have dragged on for 18 months, with the central bank conscious that any deal given to Ireland to ease the crunch in debt repayments would set a precedent for other countries, such as Spain, which are also dealing with large bank debts.
However, European leaders also need a success story to emerge from the region's debt crisis. A rescheduling of the promissory notes given by Ireland to IBRC could help Ireland emerge on schedule this year from its EU-IMF bailout programme. Ireland would issue longer-terms bonds in place of the notes.
Under the Government's new plan, first reported by Reuters on Wednesday, IBRC's liquidation was necessary so that the Irish government no longer had to make a politically toxic 3.1 billion euros of annual payments on the promissory notes stretching out until 2023. The next such payment is due next month.
The government had originally hoped to unveil the liquidation of the former Anglo Irish in conjunction with a deal from the ECB, but the Reuters report obliged ministers to immediately legislate for the bank's demise.
Finance Minister Michael Noonan told parliament the government could not deny the report and therefore risked destabilising the bank's position.
"I would have preferred to be introducing this bill in tandem with a finalised agreement with the European Central Bank," Noonan said. "But we had to move."
Under the plan put to the ECB, the 28 billion euros in promissory notes will be replaced with long-term government bonds, meaning that Ireland can make more gradual repayments, a source familiar with the discussions told Reuters.
The ECB had rejected a preferred solution two weeks ago when Dublin wanted the Irish central bank to hold a long-term bond for a minimum of 15 years, a proposal Frankfurt deemed to be "monetary financing", prohibited by EU law intended to prevent governments in the euro zone destabilising the currency.
The 15-year clause is now being dropped, a second source said. If the ECB signs off on the plan, most of IBRC's balance sheet will pass to Ireland's central bank after the scandal-hit bank is liquidated, another source said.
Rescheduling the payments will mean Ireland's debt agency, which began to pave the way towards its emergence from bailout strictures last year by re-entering long-term debt markets, will have to raise less cash in each of the next 10 years.
Avoiding the hefty interest charge that kicks in with this year's payment on the notes would also reduce the budget deficit, still among the highest in Europe, by more than one percentage point, according to Finance Department estimates.
While some interest charge will still likely be paid, the deficit that currently stands at just below 8 percent of annual output will be cut to some degree and may lead to public demands for the government to ease up on its austerity programme.
"The critical aspect is whether there's some scope for a little less austerity and managing that will be a significant issue," said KCB Ireland economist Austin Hughes, referring to a further 3.1 billion euros of tax hikes and spending cuts Dublin has pledged to implement later this year.
"My sense would be that our partners would want this to be regarded as a windfall gain that should be ferreted away but politically there will be pressure for a somewhat less austere budget in December," he said of other euro zone states.
Irish bond yields were broadly unchanged. And with a deal on Anglo Irish already priced in by many investors, traders said there would not be a big jump if the ECB gives the thumbs up. It would, however, support yields as Dublin returns to the market again in the coming weeks.
By Padraic Halpin and Carmel Crimmins