ECB to scrutinise Irish debt levels

The European Central Bank has indicated it will closely monitor the Central Bank of Ireland's holdings of government debt in the wake of the deal to restructure the debts of Anglo Irish Bank.

The pledge from ECB chief Mario Draghi to keep the arrangement under surveillance comes amid anxiety in Germany's Bundesbank that the pact comes dangerously close to the illegal printing of money for the Government, a practice known as monetary financing.

Although the Coalition has made light of claims that the deal is under threat, Mr Draghi's remarks led Fianna Fáil to warn that the financial benefits might be watered down.

Government bonds were issued to the Central Bank of Ireland to replace Anglo promissory notes on the understanding that the national Central Bank would sell the bonds to market investors as soon as possible.

"Crucial in the future will be the disposal policy by the Central Bank of Ireland of these bonds," Mr Draghi told MEPs.

ECB judgment

Saying the core transaction was with the Irish Central Bank, Mr Draghi said the ECB governing council would pass judgment when conducting its annual review of "monetary financing situations" in the euro zone.

His remarks came as former ECB executive board member Jürgen Stark added his voice to German criticism of the deal.

However, Tánaiste Eamon Gilmore said in Brussels there was nothing surprising from Mr Draghi, adding that he had outlined the ECB's position.

"As you know, the governing board of the ECB unanimously noted the actions that have been taken by the Irish Government to deal with the promissory note: that was the liquidation of the IBRC and the replacement with the promissory note with long-term Irish bonds," Mr Gilmore said.

The Department of Finance also saw no reason for disquiet.

"The Government fully understands the need for the ECB to ensure it is operating within its mandate but none of the issues raised in the last number of days are a cause for additional concern," a spokesman said.

FF criticism

However, Fianna Fáil finance spokesman Michael McGrath said the Central Bank might be forced to sell the bonds more quickly than foreseen.

"This would greatly diminish the benefits of the initial deal in that it could result in an increased cost of borrowing for the State and the interest payments would end up going to a third party rather than our own Central Bank," he said.