ECB unease puts pressure on Govt to offload bonds

Concern among some ECB governing council members about deal’s legality

Ireland is facing pressure to offload the long-term government bonds it issued as part of last year's promissory note deal and at a faster pace than the timetable originally outlined, amid continuing concerns from the European Central Bank about the deal.

The ECB is reviewing the controversial promissory note deal as it prepares to publish its annual report for 2013.

Senior sources have told The Irish Times that there is significant concern among some ECB governing council members about the legality of the arrangement, which saw the Irish Central Bank swap the promissory notes used to recapitalise Anglo Irish Bank with long-term government bonds.

The ECB is considering whether the conversion of €25 billion of promissory notes into sovereign debt equated to monetary financing, something that is forbidden by article 123 of the EU Treaty.


A crucial aspect of the promissory note deal agreed last year after months of negotiations was the length of time the Central Bank would hold the long-term bonds that replaced the promissory notes.

Pace of liquidation
"The transaction has taken place, so there is little the ECB can do to change that, but there is still concern about monetary financing," said one senior ECB source, adding: "There is a belief that the deal means that the situation [in Ireland] is much better than it would have been. But it is still controversial. The pace of liquidation is one issue."

The Central Bank has committed to selling a minimum of €0.5 billion of the bonds by the end of 2014, which it is expected to offload in small tranches, but Dublin is under pressure to sell a larger percentage given the current strong appetite for Irish government debt.

Sources familiar with the thinking of the ECB on this issue said the pace at which the government sells off the bonds is a key concern. “Even the doves on this issue have concerns and want to leave this behind us [...] the faster the sales take place the better.”

The Central Bank of Ireland agreed last year to sell the bonds “but only where such a sale is not disruptive to financial stability”.

The weighted average life of the long-term government bonds is 34 to 35 years, compared to seven or eight years for the promissory notes.

The ECB’s annual report to be published on April 7th is expected to include a reference to the promissory note deal that will indicate residual concerns exist about the arrangement.

Two weeks ago the country resumed regular market access by raising €1 billion in an auction of 10-year bonds, the first regular bond auction since exiting the bailout in December.

Last week it followed suit with an issuance of €500 million in short-term debt.

So-called peripheral euro zone countries such as Greece, Portugal and Ireland have seen something of a revival in markets in recent months as the euro zone crisis has subsided. Ireland’s 10-year bond yields hit a record low of 3.1 per cent ahead of the first regular auction of long-term debt two weeks ago.

The complex refiguring of the promissory notes used to recapitalise Anglo Irish Bank was announced in February 2013 after months of negotiations.

ECB chief Mario Draghi said at the time that while the ECB had taken note of the transaction it would be reviewing the arrangement as part of its monitoring of monetary financing in euro zone countries.

German Bundesbank chief Jens Weidmann said that the bank "has to make sure that its actions are in conformity with its rules and statutes".

Suzanne Lynch

Suzanne Lynch

Suzanne Lynch, a former Irish Times journalist, was Washington correspondent and, before that, Europe correspondent