Financing ban is big roadblock to any deal

ANALYSIS:ECB chief's stance dents hopes of any move soon on Irish promissory notes

ECB chief Mario Draghi was not quite in jovial form after the bank’s final rate-setting meeting of the year.

In spite of residual Irish hopes of a deal next year to reframe the Anglo Irish Bank promissory note scheme, he did not yield an inch yesterday and rehearsed familiar arguments about the necessity to avoid the illegal printing of money for any member state. Although that in itself is not new, it is worth noting that the lack of any deal before the budget follows intensive engagements between Dublin and Frankfurt during the autumn.

In September, ECB executive board member Jörg Asmussen said both parties were under “heavy time pressure”. Amid signs then that the talks were stepping up, Minister for Finance Michael Noonan said it would “suit” him to have a deal in place by budget day.

It was not to be, and Draghi’s mention of the treaty ban on monetary financing suggests that remains a big roadblock.

While he emphasised that there was plenty of “goodwill” in the talks, goodwill on its own is not going to ease the €47 billion debt burden. Draghi played down the divisions in Europe over new powers for the ECB to supervise commercial banks in the euro zone. While talks between finance ministers ran aground on Monday in the face of German backsliding, Draghi expressed the hope that the deed will be done finally at next week’s summit in Brussels.

This initiative is a precondition for the ESM to rescue banks directly, something the Government is also pursuing. “This is going to be an important council,” Draghi said of next week’s summit. “I am sure the determination of the June summit will be confirmed in the oncoming summit.”

The June gathering, of course, was the moment when EU leaders resolved to break the connection between bank and sovereign debt.

Despite Irish hopes for an autumn deal in which the ESM would rescue AIB and the Bank of Ireland, the heat came off rapidly. Top priority now is agreement on the new ECB powers – with questions over the scope of any ESM bank recapitalisations held over until next year. On this question Draghi did not reveal his own hand in relation to the pressing question of legacy debts. While Germany and its allies will not hear of the fund taking responsibility for historic losses, Draghi simply called for clarity. “When the position was taken that the new ESM could not be used to fill holes created by legacy assets, which had gone sour, I think one has to define exactly what these legacy assets are. So far it’s just a name.”

For Ireland, it follows from all of this that settlement day is still very far away.

From the perspective of the euro zone at large, the authorities continue to take the benefit of an all-too-rare period of relative calm in financial markets.

However, Draghi’s warning that the economic recovery in the euro zone will not begin until late next year was stark enough. Still, the sense remains that the confidence engendered by the ECB’s decision in September to intervene in sovereign bond markets – in return for policy conditionality – is holding.

This scheme, known as the outright monetary transactions (OMT) initiative, has yet to be triggered. “After OMT the improvement on financial markets has been significant,” Draghi said. The bank remains on standby should Spain, the presumed target of the scheme, seek an aid programme. In spite of hints from ECB vice-president Vitor Constáncio that an application is awaited from Madrid, Draghi reiterated that it remains up to the Spanish government to decide. He said the same in relation to any possible use of the scheme by Italy. With former prime minister Silvio Berlusconi speaking publicly of a return in next year’s election, Draghi said he was not going to comment on events in his own country.

Asked about the prospect of “official sector involvement” via a roll over of Greek debt held by central banks, Mr Draghi said: “You say that too much has been asked from the private sector but my impression is actually the opposite – a lot has been asked from the public sector. This whole programme is being financed . . . by the public sector with public sector money.”