The somewhat Delphic acknowledgment by the European Central Bank’s Mario Draghi yesterday of the promissory note deal with the Government marks an important landmark in the country’s rocky road to recovery. For taxpayers it represents the prospect of a real, welcome easing of financial pressures as the Government gains more fiscal room for manoeuvre. For the Government, the prospect of an orderly return to the bond markets this year at sustainable rates, and, no doubt, a political dividend from having brokered a deal that leans to the upper end of expectations. For the economy, the prospect of an earlier return to growth.
It’s no “silver bullet”, but the transformation of promissory notes into long-term bonds should cut Irelands borrowing needs by some €20 billion over a decade. A combination of interest-only payments at 3 per cent and a redemption maturity of up to 40 years for some bonds will make the bailout of Anglo from its €25 billion hole if not painless, at least significantly more sustainable. And the dreaded debt default has been avoided.
But, to put the deal in context, it’s worth recalling that at the end of 2012 the State’s non-promissory note debt stood at €160 billion. We are far from being out of the tunnel, not least, as Taoiseach Enda Kenny reminded TDs yesterday, because of the continuing, “large and unsustainable” gap between government revenues and spending. As a percentage of gross domestic product, the deficit is expected to narrow, but only to a collossal 7.5 per cent in 2013. The pain will continue. That can be reduced to 4.5 per cent in 2014, but only if Ireland sticks to its austerity programme.
Many will have been puzzled by the lengthy, circuitous process by which the deal was negotiated, notably its punctuation by loud, ill-advised political declarations and warnings of “catastrophe” at home, and by the sudden, unexpected liquidation of the IBRC. In the end, however, despite the “noises off”, Minister for Finance Michael Noonan and his officials have carried off a complex negotiation in a difficult environment with adroitness, and deserve the credit which Mr Kenny lavished yesterday.
Their task was made more complicated by the legislative bind in which the ECB found itself, particularly the legal prohibition on the bank providing direct monetary financing to member states. To do so would certainly have prompted legal action, probably in the German courts. The problem was circumvented through the liquidation of the IBRC and the transformation of the notes into bonds which the Irish Central Bank promises to sell off as soon as the market permits. That the ECB was willing to go through such hoops at all, however, is a measure that should also be acknowledged of the solidarity, often taken for granted, of our European partners .