Time is running out to find viable deal on bank debt

ANALYSIS:The Government's long campaign for a new deal to settle the debts of Anglo Irish Bank and Irish Nationwide Building Society is coming to a head rapidly. Whether it can enlist support from a reluctant European Central Bank will have deep implications for the public finances, the drive to exit the bailout and the stability of the Coalition.

The question centres on a grinding scheme through which Anglo and the INBS are being propped up by taxpayers with onerous IOUs called promissory notes. As it stands, Ireland must pay €3.06 billion per year to meet the €30.6 billion cost of rescuing the two bust lenders. When interest fees are taken into account, the total cost would rise to €47.4 billion by 2031.

This is money Dublin does not have, hence the relentless clamour to ease the burden by spreading repayments over a longer term at a lower interest rate. After months of fruitless talks, Minister for Finance Michael Noonan is coming under mounting pressure to deliver the goods. Less than nine weeks remain before the next repayment falls due on March 31st.

At stake is the credibility of an administration which has asked the Irish people to embrace wave after wave of swingeing cutbacks and tax increases on the basis that it will ultimately secure appreciable bank debt relief. Failure would be politically toxic, yet a solution acceptable to all sides remains elusive.

The engagement intensified a week ago when an Irish proposal to replace the promissory note with a long-term Government bond went before the governing council of the ECB, its ever-cautious decision-making body.

The central bankers withheld their support, delivering a clear setback to Dublin. “There were aspects of it they didn’t care for, with further discussion to follow,” said a close observer. Although Reuters later reported in unambiguous terms that the ECB had struck down the Government plan, this was immediately disputed by the bank and by Dublin.

So where does it stand now? Both sides maintain the question is still in play. “Talks are ongoing. Any conclusions as regards the outcome are premature,” said the ECB spokeswoman. While a similar argument is to be heard from the Government camp, the acknowledgement by Minister for Transport Leo Varadkar that the talks were “very difficult” was stark.

The stakes are enormous.

An appreciable deal could make the difference between the Government smoothly returning to market financing this autumn or another humiliating round of rescue loans from other governments. The danger also remains that an eventual deal delivers only marginal benefit.

The benefit for the State of a long-dated bond – with a maturity between 20 and 40 years – would be that private investors could place their money with Ireland in the knowledge that they stood to be repaid before the Anglo debts fall due.

But it is not as simple as that. Even though Ireland’s successful return to the private market later this year is in the ECB’s own interest, the bank is fearful of anything that could be construed as printing money for the benefit of a member state. The technical term for this is “monetary financing”, a practice expressly forbidden in the EU treaties and something which conjures up nightmares in Frankfurt of nasty litigation in the German courts. Thus the mantra from the ECB remains the same: any new arrangement cannot violate European law.

At one level, the frequency with which this principle is repeated must stoke anxiety that the Irish proposal still fails the basic test. No less than 16 months have passed since Noonan first raised the promissory note question with Jean-Claude Trichet, then chief of the ECB. Attitudes towards Ireland at the top of the bank may have changed since Mario Draghi took charge at the end of 2011 but a long-awaited deal is still not done.

This is exceedingly tricky for the Labour flank of the Coalition, but poisonous too for Fine Gael. If a deal is not struck, the Government would be open to claims that it oversold apparent progress and misplayed its hand.

In Dublin, the argument goes that the situation is not as bad as all that. On the sidelines of the talks, the case is made that the Government anticipated questioning over the monetary financing in its proposal and dealt with it accordingly.

Although fine-tuning is required, the meeting last week is not seen as a disaster. Viewed from the home front, this marked but another phase in the engagement. In one assessment, the Government is still at the stage of making a claim for biggest possible deal. The really hard-bargaining over the nitty-gritty is still to come.

The point is also made that nobody in Frankfurt rules out discussion of new terms for the Anglo rescue any more, as was the case at the outset.

While the dialogue with Dublin stepped up last September, the fact that the promissory note question is only now achieving deep scrutiny at the governing council shows that there is still some distance to go. “Everybody wants a deal,” insists a well-placed member of the Government circle of the attitude in Frankfurt. “It’s just that there are some who would go further than others. It’s been a long time since anyone has said that the promissory note is sacrosanct.”

But there is still a big gulf between goodwill towards Ireland and an actual agreement. The Government argues that Ireland’s abundant support for its crippled banks secured financial stability in the euro zone at a time of acute peril for all countries. Kenny and the Coalition have bet everything on a breakthrough. We will know soon enough whether the all-powerful ECB does the deed.