Germany hardens resistance to deal on banking debt

Fri, Apr 6, 2012, 01:00

THE GOVERNMENT’S drive to restructure some of its banking debt faces a major roadblock as Germany hardens its resistance to the use of the euro zone bailout fund for that purpose.

The German finance ministry is understood to be arguing in talks on the plan that an arrangement involving euro zone bailout funds is not politically feasible for the authorities in Berlin.

Seven months after Minister for Finance Michael Noonan embarked on a campaign to ease the burden of the €31 billion Anglo Irish Bank promissory note scheme, the unyielding German stance presents a serious hurdle.

With the EU-IMF troika due in Dublin in a fortnight for the latest review of the bailout programme, there is some expectation in Irish and European circles that a long-awaited “technical paper” on the initiative might be completed during the mission.

At issue is the use of bonds issued by the European Financial Stability Facility temporary fund or the European Stability Mechanism permanent fund to replace the €31 billion Anglo Irish Bank promissory note scheme.

These IOU notes carry a high interest rate, meaning the total cost to the State would be over €47 billion by the time the final repayment is made in 2031.

Instead of these IOU notes, Mr Noonan wants to use EFSF or ESM bonds with a much longer term, perhaps for as long as 30 or 40 years. Such bonds would be in addition to the EFSF aid Ireland is getting under the EU-IMF bailout pact agreed in November 2010.

Although European Central Bank officials in Frankfurt see potential for a workable deal with such an arrangement, the attitude in Berlin is that any proposal to use the bailout funds will not work. This stance is rooted in the conviction that German MPs are in no mood to approve the granting of additional aid to Ireland via the EFSF.

The fund cannot be deployed without the unanimous endorsement of euro zone countries. Furthermore, all German disbursements must be specifically approved by the Bundestag.

German negotiators are understood to have made the argument that it would difficult to persuade MPs to support additional EFSF aid to Ireland when they are repeatedly told the Irish bailout is a euro zone success story.

Although the economic rationale of the proposal is well understood, the provision of further rescue aid to Ireland from the funds is deemed not possible from a political perspective.

At the same time, there is a willingness to explore any alternative ways of reducing the debt burden.