Unexpected turn for debt deal campaign

Thu, Feb 7, 2013, 00:00

AnalysisAfter months of talks with the ECB, a deal on Ireland's bank debt loomed

Ireland's long campaign for bank debt relief took an unexpected turn last evening as word emerged in Leinster House that the Government was preparing emergency legislation to liquidate Irish Bank Resolution Corporation (IBRC), the State-owned vehicle that controls the former Anglo Irish Bank and Irish Nationwide Building Society.

After many months of fruitless talks with the European Central Bank, an agreement to reduce the debt burden from the two bust lenders appeared finally within grasp.

As a two-day meeting of the ECB governing council kicked off around teatime in Frankfurt, the expectation in the Dáil and Seanad was that Minister for Finance Michael Noonan would introduce the legislation at about 11pm.

Adding to the sense of drama and moment last night was the fact that the Dáil was debating a motion from Independent TD Shane Ross that called on the Government not to pay the next €3.1 billion promissory note instalment.

Although the ECB's support was still not in the bag, frantic moves in Government circles reflected clear indications from Frankfurt that an Irish proposal was finally gaining traction.

This is no small thing. Only a fortnight has passed since the ECB governing council rejected a previous Irish plan, dealing a blow to the Coalition with weeks before €3.1 billion falls due at the end of March.

But things did not necessarily proceed according to plan last night. At about 7.30pm in Dublin - a couple of hours into the ECB meeting - word emerged that the deal would not be done immediately.


At first this triggered the postponement of plans for the emergency liquidation law, in anticipation that the ECB would revisit the matter when its meeting continues this morning. An hour later there were indications from the Government that the Dáil would meet at 10.30pm to consider the legislation, with the Seanad to convene two hours later. The Dáil sitting was then further postponed to 11p.m.

In this fluid situation there was little clarity from Frankfurt. "Talks are ongoing," was all an ECB spokesman said.

Whether agreement is finally reached is critical for the Coalition, which has been on a rollercoaster ride with its European partners for months. While previous apparent breakthroughs have so far come to nought, the pressure to deliver a deal is increasingly acute.

Just as Fine Gael is annoyed at shrill language from the Labour camp, Labour feels more exposed politically as deepening budget cuts and talks on a new Croke Park deal eat into its support. Both camps have an interest in securing a sizeable deal - the sooner and the better.

The liquidation of IBRC would be the first part in a complex chain of manoeuvres that would culminate in the scrapping of the Anglo promissory notes and its replacement with long-term government bonds to be held by the Central Bank of Ireland. These bonds are needed to repay huge emergency loans drawn down from Dame Street by IBRC.

In the plan rejected by the ECB, the Central Bank was to hold the bonds to maturity. In the new plan, the bonds would be held as tradable instruments which the Central Bank could sell on to investors if demand emerged.

Longer maturity

The new bonds would carry a longer average maturity than the 20-year promissory notes and a lower interest rate. The fine grain of the proposal remains unclear, but the core objective would be to significantly reduce the annual €3.1 billion liability the Government must meet under the promissory note arrangement.

In essence, Dublin would pay only the interest on the bonds year-by-year with repayment of the principal put back until they mature. The longer the maturity - there was talk last night the average maturity would be 27 years - the more time there would be for the Government and its successors to put present economic difficulties behind them.

By contrast, the Government is repaying both interest and principal every year under the promissory note arrangement. It is a given that the requirement to shell out €3.1 billion every year does more to hinder recovery than foster it.

But the real benefit of any new arrangement remains to be clarified. The reality is that this will turn on the interest rate attaching to the new bonds. This must approximate with current market rates.

The news on this front is good, for the equivalent of Irish 10-year bonds are trading this week at about 4.12 per cent, less than half the 8.6 per cent rate attaching to the promissory notes. Still, the fact that the bonds will carry a longer average maturity than the promissory notes means Dublin will be paying interest for longer. This is a prime consideration when figuring out the upfront and ultimate benefit of the deal.

The rump of Anglo and INBS would transfer to Nama in the new dispensation. Much remains unclear but a deal seems at last to be in train.