Irish debt-relief decision in October


Euro zone finance ministers resolved early this morning to take a final decision in October to provide an unspecified amount of bank debt relief to Ireland.

The unanimous move to set the deadline, at a nine-hour meeting in Brussels, marks a step forward in the Government’s long campaign to reduce the burden of the State's €60 billion-plus banking debt.

Although the mechanism to be deployed and the amount of relief in play remain unclear, the European Commission will develop concrete proposals to be submitted to the ministers in September.

“That’s very positive. It’s positive for Ireland, its chances of succeeding in its reform programme and thus it’s positive for the whole of Europe,” Mr Rehn told reporters around 3am in Brussels.

“As journalists you know that it’s the deadlines that run the world so it’s important that we have a very clear timeline it was by unanimity – by consensus – agreed that the timeline for looking into solutions for debt sustainability of Ireland is now in the course of September with a view of decisions in October.”

The move by the euro group came as Minister for Finance Michael Noonan pressed for a speedy deal to revise the bank rescue and linked the question to an International Monetary Fund review of Ireland’s bailout later this year.

This is a crucial procedure under the IMF’s own internal rules as it does not lend to countries judged to have an uncertain funding profile over a 12-month horizon.

Any deal to improve Ireland’s debt sustainability in a significant way would increase certainty over the Government’s finances by improving the prospects for a definitive return to debt markets as the bailout ends next year.

EU leaders decided last month to reopen the Irish bank bailout. They also resolved make direct bank aid available to euro zone countries, but only after the introduction of a new pan-European bank regulator.

European officials acknowledge this system will not be in place by October, raising questions as to whether the initial debt relief arrangement might be limited to a revision of the €47 billion Anglo Irish Bank promissory note scheme.

The Commissioner left open the possibility of direct bank recapitalisations eventually but he would not say whether the likely agreement would cover all the banking debt or be limited to the promissory notes.

“It is better not to go in very concrete detail at this stage because we have technical negotiations going on for the moment,” Mr Rehn said.

“Let these negotiations between the Irish authorities and the European partners move forward. I’m confident that we will find a solution that, as the statement today says will help to improve [the] debt sustainability of Ireland and thus make Ireland a success story again.”

Asked about the necessity to put the supervisory mechanism in place before direct bank recapitalisations, the commissioner said all participants in the talks knew the issues and challenges faced by Ireland.

“Let’s not jump the gun and let’s now focus on the concrete technical negotiations,” he said.

“As regards direct bank recapitalisations, that is possible once there is a truly effective single supervisory mechanism in the union.”

Jean-Claude Juncker of Luxembourg, who was elected for a new term as president of the euro zone ministers, brushed off questions as to level in financial terms of the amount of debt relief under discussion.

Neither would he say how the ministers would give effect to any deal in October before the adoption of the new bank regulatory system.

Such questions will be examined technically during the summer, Mr Juncker said.

Mr Noonan had said as he arrived in Brussels for the talks that he hoped to achieve progress in respect of a timeframe for the bank debt review.

Asked if he was angling for an agreement before the December budget, the Minister said that would suit the Government’s domestic agenda.

“It would also suit the IMF timeframe of having to adjudicate on whether we’re funded for 12 months ahead or not and they’ll need to do that some time in the autumn,” he said.

The Government and the EU authorities are very keen to avoid any negative conclusion by the IMF in respect of Ireland’s funding profile as that could precipitate talks on a second bailout.

Meanwhile, riskier banking assets rose as European shares were squeezed higher today on speculation that Germany's constitutional court would give its blessing to Europe's new bailout fund, which could pave the way for the fund to be used more flexibly.

In extremely choppy and light trade the FTSEurofirst was up 12.14 points, or 1.2 per cent at 1,042.23, by mid-morning although volumes were just 27 per cent of their 90-day average, reflecting the broader uncertainty preventing investors from pumping fresh cash into such a tumultuous market.

After a bullish start to the second half of 2012 when the FTSEurofirst gained more than 5 per cent over three trading days fuelled by expectations of central bank intervention to help boost flagging global growth, the rally has petered out around 1,050.

Grabbing investors' attention today was a meeting of Germany's top court to address whether Europe's new bailout fund, the ESM, and budget rules are compatible with national law.

The German parliament approved the ESM in June, but the court hearing is expected to take some time, keeping Europe on tenterhooks.

Banks, which would be the major beneficiary if the fund were to be approved, rallied along with other risk assets as investors bought in on the beaten down lenders.

The sector trades on a price to book value of just 0.6 times, according to Thomson Reuters data, but the London-based analyst is cautious on the banking sector in the longer term citing clarity issues in the face of regulation uncertainty, lending constraints and balance sheet strength, which is weighing on their outlook.

A euro zone finance ministers' decision to grant Spain an extra year to reach its deficit reduction targets and set the parameters of an aid package for Madrid's ailing banks was broadly as expected, and also helped set a more bullish tone.

Additional reporting Reuters

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