THE GOVERNMENT has taken a modest first step towards renegotiating the terms of the promissory notes payments, the €31 billion that it has issued to the Irish Bank Resolution Corporation (IBRC) to cover the cost of rescuing Anglo Irish Bank and Irish Nationwide.
The notes – which are Government IOUs on that banking debt – involve substantial annual payments to the European Central Bank (ECB) over the next ten years. For months the Government has tried to negotiate changes to that arrangement, via some alternative financial instrument that would allow a longer repayment time on the outstanding loans, at a lower interest rate. So far the Government has secured a deferral of the €3.06 billion cash sum that was due in 2012, equivalent to some 2 per cent of GDP.
Debt deferral is not debt restructuring, but the Government hopes that it is a positive move in that direction. However, it involves no net saving to the exchequer, as the €3.06 billion payment will be financed by a long-term government bond that is repayable in 2025. Payment has been postponed for 13 years, not cancelled. Nevertheless, the Government has bought extra time in which to continue its talks with the troika about securing better terms on the cost of the bank bailout. Second, the temporary cash-saving stratagem improves, somewhat, Ireland’s general debt sustainability, and therefore should facilitate an easier return to the bond markets in 2013.
That said, an obvious concern for the Government must be the formal tone and blunt content of the short ECB statement that accompanied this agreement. The ECB again reminded the Government of the “unprecedented support” the central bank has already provided the Irish banking sector. And the European bank stated its firm expectation that Ireland’s future promissory note payments would be made “according to the schedule to which the Government has committed itself”. Certainly, Irish banks have been major beneficiaries of ECB lending. Proportionally, they have borrowed far more from the ECB than their banking peers in other countries. In February, outstanding Irish loans from the ECB stood at some €132 billion. Hence, the grounds for the central bank’s wariness.
The limited success the Government has so far achieved in negotiations to achieve a better deal on the repayment of bank debt and the uncompromising stance that the ECB has adopted on this issue, underlines the need for a fresh approach. Yesterday’s decision by euro zone finance ministers to raise their financial firewall, by increasing the lending capacity to at least €800 billion of its two rescue funds is long overdue. That advance, allied to an EU and IMF policy paper, under preparation, which will explore an alternative and less onerous form of payment to the promissory note, is also encouraging.
Both developments allow more scope for discussion and for reaching an agreement on the restructuring of bank debt, and so they give grounds for some optimism about achieving a more lasting solution to what has become an intractable financial problem.