Europe Letter: Kenny trip to Brussels comes as Greece reactivates talk of debt relief

Taoiseach Enda Kenny arrives in Brussels today for talks with the head of the European Commission, Jean-Claude Juncker, and his counterpart at the European Council, Donald Tusk.

While today's meetings had been scheduled since December, the timing of the visit could prove uncomfortable for the Fine Gael-led government. The Taoiseach's trip takes place a day after new Greek prime minister Alexis Tsipras visited Brussels, where he held meetings with the heads of the three main EU institutions in a bid to secure a renegotiation of Greek debt.

Officials stressed that today's meetings are an opportunity for the Taoiseach to set out Ireland's priorities to the figures who will lead the EU until 2019. Kenny is understood to have very good personal relations with both Juncker and Tusk – both are members of the European People's Party (EPP) with which Fine Gael, and Kenny in particular, have had long-standing relations.

Policy shift

But the timing could prove tricky for Kenny. The resurgence of the Greek crisis has opened up difficult questions around the Government’s stance on further debt reduction. Since the election of the Syriza-led government 10 days ago, a picture is beginning to emerge of a possible compromise solution. The Greek government is moving away from demands for a debt writedown, and proposing a form of debt swap which would see existing Greek bonds replaced with bonds linked to gross domestic product growth.

While it is still unclear if such a mechanism would result in any reduction in the net present value of Greek debt, any concessions by European lenders could increase pressure on Dublin to seek further concessions from its euro zone lenders. Officials have stressed Dublin has already benefited from debt renegotiations – the promissory note deal is estimated to have saved about €20 billion in borrowing costs, while the reduction in interest rates and extension of loan maturities significantly reduced the debt burden.

Ireland is also refinancing its International Monetary Fund loans with cheaper debt on the market, as the National Treasury Management Agency benefits from low borrowing costs. As Minister for Finance Michael Noonan pointed out last week in Brussels, such a debt restructuring is not open to Greece, which is struggling with much higher bond yields.

But the resurfacing of the Greek crisis has raised questions about the Government's policy regarding retroactive direct recapitalisation for AIB and Bank of Ireland. Having welcomed the EU's commitment in June 2012 to separate banking and sovereign debt, and successfully secured a commitment to consider "retroactive" direct recapitalisation of banks by the European Stability Mechanism a year later, the Government indicated late last year it was effectively abandoning its quest for direct ESM recapitalisation.

The reasons for the shift in policy are logical – as the value of the two pillar banks has increased, it makes less sense to sell a stake to the ESM – but the wisdom of disclosing this intention publicly is questionable. Rather than keeping the ESM direct recapitalisation on the table as a negotiating tool to secure some other form of debt relief, the Government instead appears to be implying the debt relief already awarded is enough.

Fresh arrangements

While Kenny is not expected to make any demands to EU officials today in Brussels, Irish officials are likely to keep a close eye on the Greek bailout negotiations. With the bailout due to expire on February 28th, the new regime in Athens has a few weeks to forge a fresh arrangement with its international creditors before it faces a potential funding shortfall.

EU leaders, including Tsipras, meet for a scheduled summit next Thursday. An emergency Eurogroup meeting may be called for Wednesday, with euro zone finance ministers again due to meet on February 16th . Any move by Ireland to seek further debt renegotiation would most likely take place in the forum of the Eurogroup, with Noonan taking the lead, though the fact that Ireland is safely out of the bailout significantly reduces its bargaining position.

Officials say the proposed debt-swap plan emerging out of Greece would have in fact increased repayment costs for Ireland if it had been adopted during the bailout. For the moment, Ireland is likely to continue on its path of “constructive engagement” with EU partners as outlined by Kenny at Davos last month. Whether this strategy will be enough to counteract calls for further debt relief for Ireland, should a Greek deal be struck, remains to be seen.