Failure to burn bondholders led to lower rates - Regling

Chief of the ESM bailout fund Klaus Regling has said that the reduction in Ireland's borrowing costs can be attributed at least in part to the decision not to impose losses on senior bank bondholders.

At the same time, Minister for Finance Michael Noonan said he was not "flying on one wing waiting for European assistance" in respect of its stalled campaign to have the ESM shoulder some of Ireland's historic banking losses. This was an issue to be dealt next year, the Minister added.

In Dublin today for talks with Mr Noonan and Central Bank governor Patrick Honohan, Mr Regling said there was no unanimous support in the euro zone for such aid to be granted.

While Mr Regling accepted that European policy in relation to senior bank bondholders had changed from the time the Government and its predecessor were prevented from imposing losses, he said Ireland had drawn some benefit from that.

"In the future, certain things will be dealt with differently from in the past, but maybe one can also have one other consideration at the moment," Mr Regling told reporters at the Department of Finance.

“As you know among the countries that have borrowed from the EFSF, ESM and IMF, Ireland has the lowest interest rates today of these countries that had some problems in the past.

“And that may also have something to do with the way the solution was found without imposing haircuts on senior bondholders and therefore the reward is from markets now to have particular low interest rates for Ireland. So that is also of benefit to the economy and the budget.”

Mr Regling said procedures to allow direct bank recapitalisation were still under development but he repeated his view that activation is not easy. “It requires a unanimous decision and as I have said before. At the moment I don’t see that unanimous view but we will see later this year.”

However, he disputed the argument that Ireland’s smooth bailout exit would make other euro zone countries even more reluctant to grant such aid.

“I don’t think that’s the situation. There’s a lot of good will towards Ireland. The whole euro area is happy that was a smooth exit successfully, that the entire programme went exactly as foreseen and that the adjustment is there.

“There’s just a general reluctance in a number a countries to provide financing retroactively because it’s based on the past. It will be much easier in the future.”

Mr Noonan said at the same event that he had no discussion with Mr Regling on the question of measures to reduce to the cost to the Irish banks of loss-making tracker mortgages.

“Since interest rates went down so significantly in recent times, the advantage of an arrangement on the trackers is not as big as it was when I became minister three years ago,” Mr Noonan said.

In relation to the campaign for retrospective ESM aid, the Minister said the Government was not simply waiting around for European help.

“Our debt is not peaking at 124 per cent of GDP, at the end of 2013 it’s peaking at 120 [per cent]. Now the policy that I’ve agreed with the NTMA that the cash buffers which we’re hold, over the next two three years we’ll bring those down, we’ll taper them down gradually.

“We’ll hold always about 15 or 16 months cover for a deficit. But we don’t have to hold the cash buffers that we’re holding now. The way we’re profiling it that will bring us down to about 113 [per cent].”

While it remained the Government’s policy to return the banks to the private sector, there would be no fire sale.

“When we eventually sell the shares in the banks, that will be used to reduce the debt further,” he said.

“You might have noticed that last week, the NPRF valued our holdings in the bank at between €11 [billion]and €12 billion and as the balance sheets of the banks are repaired and as they trade more in the economy the value of the banks are going up.”

Swedish minister Anders Borg had told him me that it was only last year that Stockholm had sold the last tranche of shares in its holding of bank equity since the rescue of the Swedish banks in the early 1990s. “But he also said that they realised between two and three times what they originally invested over the period.”