Efforts in train to aid Ireland and Portugal to return to market

Thu, Feb 28, 2013, 00:00

Euro zone governments are discussing ways to help Ireland and Portugal return to the capital markets swiftly and some among them have voiced a preference for delaying the repayment of bailout loans by the two states, sources familiar with discussions said yesterday.

The sources quoted from a 15-page discussion paper from the European Commission and the European Stability Mechanism that was debated last week by deputy finance ministers from the euro zone.

Finance ministers from the so-called Eurogroup may discuss the matter at their next meeting in Brussels on Monday. “They are favouring an extension of maturities of the EFSF and EFSM loans in order to avoid bottlenecks in paying back ,” one of the sources with knowledge of the document said.

Finance ministers decided in principle in January to extend the maturities, subject to technical and political examination.

European sources have since expressed some concern that the fanfare surrounding the frontloading of benefits of the Government’s deal on promissory notes could hinder efforts to persuade fellow euro-zone administrations to support longer maturities on other loans.

Preferred option

Under the preferred option, Ireland and Portugal would be allowed to backload their loan repayments but remain within the timeframe of their existing overall schedule.

That would imply no substantial change to the aid agreements, and therefore would not require Bundestag approval, one of the sources said.

Another source said Germany was blocking a deal over concerns it would need to get approval from the Bundestag’s budget committee or plenary.

Second option

The second-best option would allow both recipient countries to delay paying back the loans beyond that schedule, by 2½ years, five years or more than five years, though that would be even more likely to require Bundestag approval.

Were Ireland’s EFSM/EFSF loans to be extended in 2015 and 2016, the amount of Irish debt maturing in those years would fall to €5.6 billion from €10.6 billion and to €12.1 billion from €16.3 billion respectively.

Third option

A third option may be to provide both countries with a precautionary credit line through the ESM, a condition for tapping the European Central Bank’s Outright Monetary Transactions programme.

A timely full return to financial markets would be a success for the euro zone, seeking to showcase that bailouts have worked in a crisis that has sent unemployment rocketing and led to an election standoff in Italy. Ireland’s bailout is due to expire this year, while Portugal’s programme is scheduled to end in 2014. Both countries have, however, asked euro-zone finance ministers to help them stay off the programmes once they expire.

The Government also hopes Europe’s new ESM rescue fund will take stakes in the domestic banking sector off its hands next year once it is permitted to do so. – (Reuters)