THE GOVERNMENT is preparing to intensify its campaign to cut the cost of rescuing Anglo Irish Bank after Spain failed to secure direct European aid for its ailing banks.
Dublin had hoped that any deal to recapitalise the Spanish banks without increasing the country’s debt would be applied retrospectively to the Irish bank rescue.
Questions over the viability of the Spanish bailout drove the country’s borrowing higher yesterday and led to a fresh wave of pressure on Italy.
The euro rose at first but then dropped in value against the US dollar. Italian borrowing costs over 10 years rose by 0.27 percentage points to rise above the critical 6 per cent threshold to 6.04 per cent.
The interest rate on comparable Spanish debt rose 0.31 percentage points to 6.52 per cent.
With borrowing costs at that level, the Spanish government would find it very difficult to remain in regular debt markets for day-to-day funding as it will be required to under its European bailout.
The Spanish deal remains to be finalised, meaning its government may yet secure more favourable terms in relation to the duration and cost of the aid plan.
With direct European aid ruled out, however, Dublin’s attention has turned again to the Anglo Irish Bank promissory note scheme.
“We’re looking for a resolution in the autumn. We need to see progress. I don’t think we can let it slide into 2013,” said a Government source.
This question has proved especially complex.
Another source briefed on Dublin’s talks with the EU-International Monetary Fund-European Central Bank “troika” said a proposal acceptable to Germany which results in an appreciable easing of the debt burden remains elusive. Furthermore, the threat of Greece reneging on its obligations to other euro countries if a new government repudiates its EU-IMF bailout has made Germany wary of any reopening of the Irish bank deal.
Spain will receive emergency loans for its banks from the European Financial Stability Facility temporary fund and the permanent European Stability Mechanism.
The IMF is not lending, as it does not provide funding to rescue banks.
Spanish premier Mariano Rajoy claimed a coup in the negotiation by saying a deal ringfenced for banks had “nothing to do” with the procedures imposed on Ireland, Greece and Portugal.
Both the European Commission and Germany dismissed this line of argument yesterday, saying the deal will be overseen by the commission, the ECB, the European Banking Authority and the IMF.
“Of course there will be conditions,” said European competition commissioner Joaquín Almunia, who is Spain’s member of the commission.
“Whoever gives money never gives it away for free,” he told Spanish radio.
Economics commissioner Olli Rehn told MEPs in Strasbourg that “the policy conditionality will be concentrated on the restructuring of the banking sector”.
German politicians went on the offensive, talking up such conditionality and saying they had insisted any aid would have to pass through the Spanish government.
“The Spanish application comes from the state, the money will go to the state, the state is liable and the state takes on the responsibility for the stipulated conditions,” said Steffen Seibert, spokesman for German chancellor Angela Merkel.
Still, the limited nature of the deal was called into question across the media spectrum. “The Spanish bank rescue is only a facade and not far from a full Spanish rescue,” said the conservative Frankfurter Allgemeine daily.
The paper took issue with the lack of a full EU-IMF programme to guarantee reforms while impinging on national sovereignty.
“Sovereignty is only a justified demand when one is prepared to go down alone,” it said.
Rating agency Standard Poor’s said the plan would have no immediate impact on Spain’s credit standing.
However, it said the “preferred creditor” status of the ESM bailout fund could present a further set of problems for Spain.
“The ESM borrowings, in contrast to those from the EFSF, would subordinate Spain’s senior bondholders,” SP said.
“If the amount borrowed from the ESM were to materially exceed the currently expected €100 billion, the ESM’s self-declared preferred creditor status could, in our view, constrain Spain’s access to the capital markets and therefore reduce the likelihood of bondholders being paid in full.”
Meanwhile, the British treasury announced yesterday that the interest rate on its bilateral loan to Ireland would be cut for a second time.
Ireland will now pay a lower interest rate of 0.18 per cent above the cost of funding,
Treasury sources said the interest rate had been cut “significantly” after it was agreed in principle last July.
