State got €12bn for not burning bondholders, says EU official

IRISH BAILOUT:THE TOP EU Commission official on the Irish bailout has said critics of the decision not to impose losses on senior bank bondholders should recognise the benefit the State derives from the interest cut on Ireland's rescue loans.

István Székely also said the extent of economic uncertainty in Europe was such that the degree of precision possible in any forecast about Ireland was very low.

While likening the recovery effort to flying in fog, he said the bailout plan was working but added that the Government must continue to build its credibility.

Mr Székely, who is chief of the commission’s mission to Dublin, said the interest cut last July would be worth €12 billion to Ireland.

By contrast, the maximum that might have been gained by “burning” bondholders in Anglo Irish Bank was some €3 billion.

He told a public forum in Brussels that this represented a “fair deal”, even though there was no agreement per se to link the two issues.

“There was no such deal really involved, but to me that seems pretty substantial burden-sharing,” he said at the Bruegel think-tank.

“I think no one can argue about the fact that putting a zero margin on Irish debt is a massive transfer from the European taxpayer because the price of risk – that kind of risk – is clearly not zero even if the market gets back to kind of normal.”

Dublin’s effort to tackle senior bank bonds was backed by the IMF but resisted by the European Central Bank. The ECB prevailed.

Mr Székely was one of the main negotiators of Ireland’s rescue plan.

The discussion involved only debt not covered by the State guarantee and which was not secured against any other bank assets, he said.

“When the discussion turned really serious, this was all down to senior unsecured unguaranteed debt in Anglo, which was €3.5 billion, roughly speaking,” Mr Székely said.

“So if you burned that, the best you can get out is less than €3 billion. Now the value of the interest in the margin cut is €12 billion. To me that seems a fair deal.”

Responding to questions from Prof Philip Lane of Trinity College Dublin, Mr Székely acknowledged that the scale of fiscal adjustment set out in the bailout may be “suboptimal in a textbook-like situation”, but precision was not possible in the current environment.

“In a way, what we are hoping here is to try to fly through this fog by a fairly simple rule in a kind of robust path – that may not be optimal and I agree with you that there may be several questions asked about this – but hoping that you build up credibility to an extent that your room for manoeuvre in policymaking is increasing,” he said.

“That’s precisely what you need in Ireland to be able to adjust to the situation without running into credibility problems each and every little inch you move.”