When the European Central Bank (ECB) last year approved the exchange of the promissory note - issued by the Government to recapitalise Anglo Irish Bank - for long-term government bonds, it did so unanimously, but without obvious enthusiasm. ECB president, Mario Draghi, said council members had "taken note" of the decision, which they would later review. The ECB, in its annual report, has now concluded the agreement has raised "serious monetary financing concerns". These concerns, it has suggested, "could be somewhat mitigated" by the actions of the Irish Central Bank, as holder of the long-term bonds.
The ECB is pressing the Central Bank to sell the bonds more rapidly than first envisaged, which would reduce the value of last year's debt swap arrangement. Long-term bonds repayable over a 25 to 40 year period at an average 3 per cent interest rate are far less expensive to finance than repayments of the same debt (€25 billion) over eight years at annual rates of over 8 per cent - the terms on which the promissory note was issued. The National Treasury Management Agency (NTMA) estimated the State, instead of having to borrow €3 billion annually, would have to borrow €1 billion annually.
The benefits of the ECB deal have been significant, both in facilitating the State's exit from the EU/IMF bailout programme last December, and in helping to lower Ireland's borrowing costs. The yield - or interest rate - on the benchmark 10 year bond is now below 3 per cent - a percentage point lower than a year ago. Clearly, closer scrutiny by some members of the ECB's governing council of the terms of the debt swap has prompted concern about monetary financing - direct lending by the bank to government - which is prohibited. Central Bank governor Patrick Honohan is best placed to defend what has been already been agreed; to clarify the likely pace of disposal of long term bonds, which the ECB is seeking to establish; and to ensure that any such sales are - as the Central Bank has said - "not disruptive to financial stability".