Government faces challenging EU talks to win bank debt relief

THE GOVERNMENT is facing tough talks to secure bank debt relief in Europe, amid doubt over the timing of any agreement and uncertainty over its scope.

In spite of a pledge by euro zone finance ministers to push for a deal next month, negotiators have yet to settle on a single proposal to ease the weight of the multibillion-euro debt.

The European Central Bank remains very sceptical about any recasting of the €47 billion Anglo Irish Bank promissory note scheme, a key Government objective.

A separate proposal for the European Stability Mechanism permanent bailout fund to make direct capital infusions into Bank of Ireland, Allied Irish Banks and Permanent TSB is still in an early phase of development. The examination of these issues is said to have raised serious technical questions for which there is no obvious or straightforward solution. Minister for Finance Michael Noonan will intensify the campaign for a deal at talks next week in Paris, Berlin, Rome and Nicosia, but many hurdles remain.

Mr Noonan will conduct bilateral talks with his French, German and Italian counterparts before talks next Friday in Cyprus with all ministers.

These engagements come in the wake of a big new ECB plan to buy up the sovereign debt of weakened countries in potentially unlimited amounts.

While the initiative met a storm of criticism in Germany, a spokesman for chancellor Angela Merkel insisted the reaction was overblown.

In July, EU economics commissioner Olli Rehn said euro zone ministers unanimously endorsed the October deadline for the deal on Ireland’s debt.

However, Central Bank governor Patrick Honohan raised questions yesterday over that timeframe. “There are discussions going on, they are continuing and I expect they will have some results . . . I’m not putting a timetable on it,” he said in Dublin.

Mr Honohan said moves to tackle banking debt were focused on Spain, with a “read-across” later to Ireland. “So there is going to be a sequencing issue on a timetable before you see all that finalised.”

But the Government remains determined to strike a deal next month. “The upcoming euro group meetings in autumn are very important as we seek to meet the timeline of October set by commissioner Rehn,” said a Department of Finance statement.

Although Mr Honohan was confident that “something will be done” to restructure the promissory note scheme, it is understood the ECB remains very wary of the Government’s proposals.

One mooted solution is to replace the Anglo notes, a form of IOU, with government bonds. Such bonds would have a higher credit standing in the eyes of the ECB, enabling the former Anglo to draw a cheaper form of central bank funding than at present.

This has raised legal concerns in the ECB, which wants to avoid breaking laws that prohibit the provision of direct financing to governments.

Further complications surround the proposals for ESM bank recapitalisations, which are subject to the introduction of a powerful new euro zone bank supervisor.

While the European Commission will initiate legislation next week to establish a supervisor to oversee as many as 6,000 banks, Germany says the new regime should cover only the largest, systemically important banks.

Mr Honohan said the ECB bond programme would win over its critics by being disciplined. He ruled out the ECB buying any Irish bonds in the short term, but said the initiative would still provide an “important backstop” to the State.

“As the Irish Government is coming back into the bond markets, Ireland’s paper would also be eligible for purchase under this programme, so that again provides a sort of underpinning. It tells the markets: ‘Don’t worry, the ECB is there’.”

The interest rate on nine-year Irish bonds dropped yesterday to 5.6 per cent, the lowest for two years.

Mr Honohan said the losses of any failed banks should be imposed on both junior and senior bondholders.

Passing bank losses on to the Irish public through the State guarantee, and the refusal of the troika to allow the Government to impose losses on unguaranteed senior bondholders in 2010, have been “rightly subject to extensive criticism”, he said.