Ireland's long campaign to cut the cost of the bailout
January 2011:The Fianna Fáil-Green coalition pursues a cut in the interest rate on loans under the EU-IMF deal in November 2010. The question is raised with finance ministers, opening prolonged talks in which Ireland’s corporate tax regime comes under sustained assault from France and Germany.
As Fine Gael and Labour campaign in the general election to impose losses on senior bank bondholders, EU economics commissioner Olli Rehn says euro zone finance ministers will not allow that. The issue is not on the table, Rehn says.
At his first EU summit, Taoiseach Enda Kenny is offered an interest rate cut but declines as this is presented as a quid pro quo for a concession on corporate tax. This is the night of Kenny’s “Gallic spat” with then French president Nicolas Sarkozy. German chancellor Angela Merkel is also sceptical about the Irish request.
Also this month, the new Government agrees to a €24 billion recapitalisation
of the main Irish banks without attempting to force senior bondholders to share the burden.
Minister for Finance Michael Noonan says the Government has a plan to impose “substantial” losses on senior bondholders in Anglo Irish Bank. He says he has won support for the move from the IMF and will proceed if the ECB comes on board.
In the face of market pressure on Spain and Italy, EU leaders finally agree to lower the interest rate on Irish rescue loans and by more than expected. The annual cost of Ireland’s bailout drops by some €800 million as Kenny declares the conflict with Sarkozy to be finished: “It’s over, c’est fini.”
Then ECB president Jean-Claude Trichet rules out imposing losses on senior investors in Anglo. Admitting there is little prospect of the ECB allowing him to do that, Noonan says this is no longer his “primary” concern.
He then seeks to open talks to recast the Anglo promissory note scheme. However, Noonan says the initial response from Trichet is “pretty non-committal”.
As EU leaders develop a plan to impose losses on the holders of Greek sovereign bonds, Dublin is adamant it will not go down that road.
EU leaders agree to create a new international treaty to toughen economic surveillance in the euro zone. Britain vetoes the deal so the leaders proceed with an international treaty operating outside the framework of EU law.
European Commission mission chief to Ireland István Székely says critics of the decision not to impose losses on senior bank bondholders should recognise the benefit the State derives from the interest rate cut. The maximum gain from burning bank bondholders would have been €3 billion but the total benefit from the rate cut would be €12 billion.
Noonan steps up the campaign to cut the cost of the €64 billion bank bailout to Rehn and Mario Draghi, new chief of the ECB.
The Government drive to recast Anglo notes hits a roadblock when Rehn delves into his Latin phrasebook to say “pacta sunt servanda” to Dublin in relation to the defunct bank – respect your commitments and obligations.
But days later, the ECB reluctantly allows Noonan to defer a €3.06 billion cash payment to the former Anglo. However, the promissory note scheme remains in place.
Amid concern about the fragility of Spain, the European Commission throws its weight behind the growing clamour for the European Stability Mechanism (ESM) fund to be given powers to provide direct aid to stricken banks. As the Irish referendum on the fiscal treaty is passed by 60.3 per cent to 39.7 per cent, Kenny says the vote is a message from the people of Ireland to Europe that they want the bank debt question settled.
In the expectation that Spain will soon seek a full-blown bailout, EU leaders agree to give the ESM powers to directly recapitalise banks. After a fraught negotiation, Ireland secures a pledge that similar cases will be treated equally. EU leaders also agree to review the Irish bank rescue.
Rehn says finance ministers are aiming for a deal for Ireland in October but euro zone officials urge caution, saying political considerations in Germany and the Netherlands are a major concern.
Although there is still no deal to recast the Anglo notes, Noonan reports progress in talks with the ECB. He suffers a big setback when his counterparts in Germany, Finland and the Netherlands say the ESM will not take on “legacy” debt. National bodies must remain on the hook for most banking debts, they insist. However, the Government still claims support from France, Spain and Italy.
Merkel backs her finance minister in relation to ESM aid, prompting a political furore in Dublin. After emergency talks with Kenny, she agrees that the Irish banking situation is “special”. The issue is sent back to finance ministers.