Issue is how much bank debt Europe will take on
ANALYSIS: The deadline for settling the bank debt issue means there is a busy autumn ahead for Ireland’s negotiators
TWO WEEKS ago Taoiseach Enda Kenny secured a deal to do a deal to lessen the load of Ireland’s banking debt. When Minister for Finance Michael Noonan came to town on Monday, he wanted to fix a deadline for a final settlement of the matter.
This he duly received.
The EU/IMF “troika” will present a formal proposal to euro zone ministers in September with the aim of pinning down the agreement by the end of October.
After nine hours of talks with his counterparts on Monday night, and another bout yesterday, Mr Noonan declared himself pleased with the outcome.
For months without end, it appeared the Government was making no progress in the battle for bank debt relief. This suddenly changed in the spring, a development that reflects the view that Ireland’s banking debt is too great to allow it regain access to private bond markets. A new approach would be needed if a second bailout was to be avoided.
However, the Government’s case was strengthened by its application of the bailout programme and the adoption of the fiscal treaty referendum.
Time was senior European figures such as economics commissioner Olli Rehn expressed frustration at the clamour from Dublin for a new bank deal. Now that the argument is won, Mr Rehn is in the vanguard of those seeking a rapid conclusion of the talks.
“We want to retrospectively avail of the new regime and I’m sure, like in all negotiations, we won’t get everything we ask for but we’d hope to make significant progress,” Noonan told reporters.
Although the Government has ploughed some €64 billion into the banking system, it remains to be seen how much of that debt Europe is willing to take on.
One idea is for the ESM permanent fund to take direct equity stakes in the nationalised Allied Irish Banks and the part-nationalised Bank of Ireland in lieu of shares held by the State. This raises questions around the size of the ESM stake, the valuation of the shares in question, and the price at which they change hands.
Also on the table is a revision of the Anglo Irish Bank promissory note scheme, which carries a €17 billion interest bill on top of the Government’s €30 billion injection into the bombed-out lender. This too is a highly convoluted affair, but one that has the benefit of a prolonged technical debate with the troika.
Although the ultimate scale and scope of the debt relief is still to be hammered out in the autumn, the key point is that the Government is at last making headway.
However, that is not to say that there are no pitfalls down the road. There are many.
The first is the fact that EU leaders have made the provision of direct bank aid conditional on a new pan-European banking regulator taking office.
Europe still aims to do this by the end of the year, but official and diplomatic sources say that is not at all realistic. This might not happen until late 2013 or 2014, delaying implementation of the Irish relief pact.
Noonan said, however, the very fact that a binding deal will be done in October – albeit to be executed later – would still send a positive signal to markets.
Furthermore, German finance minister Wolfgang Schäuble insists Spain should retain the ultimate liability for any losses incurred by its banks. This is at odds with the stance of Mr Rehn and the euro group chief Jean-Claude Juncker, who say there will be no sovereign guarantee over direct bank aid from the ESM.
For his part, Noonan said the principle of disconnecting sovereign debt from bank debt was endorsed at the “highest political level in Europe” a fortnight ago. Implicit here is that German chancellor Angela Merkel, who approved the summit communiqué, is more senior than her finance minister. At the same time, Schäuble’s remarks give reasons for niggling doubt.
Court challenges to the ESM in Ireland and Germany present further potential roadblocks. For Irish negotiators, it promises to be a busy autumn.