EUROPEAN DIARY:THE GOVERNMENT'S campaign to cut the cost of the Anglo Irish Bank promissory notes hit a roadblock last week when EU commissioner Olli Rehn bluntly ruled out any postponement of a €3.1 billion payment due on March 31st. Rehn's unambiguous comment appeared to bring the matter to an abrupt halt, but all was not as it seemed.
In the Dáil last night, Minister for Finance Michael Noonan revealed that the Government was in talks with the European Central Bank about settling the payment with a long-term bond.
This is quite a turn of events, for Dublin had been perceived in European circles to be unfairly raising expectations of a delay when many European officials believed there was no realistic prospect of that.
Rehn did not imply any room for manoeuvre when he said “pacta sunt servanda” in relation to the €3.1 billion payment.
However, it remains to be seen whether the ECB governing council accepts the proposal.
With Bundesbank chief Jens Weidman and German executive board member Jörg Asmussen in the vanguard of the naysayers in relation to the Anglo campaign, their position will be crucial.
Even as Noonan spoke last night, it was considered that today’s governing council meeting was too close to call.
Any postponement would increase the prospects of success. The Government has more or less won over the European Commission and the International Monetary Fund, but a solution acceptable to all sides remains elusive. Still, Ireland’s supporters believe an opportunity may open up in the coming months for the Government to press for a definitive deal. For that to happen, however, other things need to happen first.
This is matter of sequencing. Noonan has been urging his euro zone interlocutors to grant a reprieve since September with little real progress apparent until last night. The period since September, however, was dominated by the unpredictable Greek saga and related dramas.
With Greece temporarily settled and Italy and Spain out of the danger zone for now, political attention is on a resolution of the dispute on the size of the anti- crisis firewall. This is now set to come to a head at meeting of euro zone finance ministers in Copenhagen tomorrow week.
The great majority of the protagonists in the debt debacle still want Germany to expand the €500 billion European Stability Facility permanent fund, by combining it with unspent resources from the EFSF temporary fund or by some other means. Hope notwithstanding, high-level sources in Brussels warn that German agreement is by no means assured and that an easing of market tensions in recent weeks may encourage further delays in Berlin.
That is no small risk. Another German rebuff would make it very difficult for the IMF to persuade its global backers to increase the fund’s resources. Any failure on that would make the situation only more volatile.
If the ESM and IMF are enlarged, however, then space may open up for Noonan to press for a definitive conclusion of the “prom notes” debate over the summer. In the backdrop is concern to settle the question before any renewed debate over the Portuguese rescue or any new flare-up in Greece.
But opinions still diverge over the substance of the Government’s demand.
Noonan’s supporters see merit in a concession, not least because the Irish bailout is seen as the one with the best chance of success. The argument goes that any reduction of the upfront Anglo burden would make it easier for Ireland to regain market confidence, thereby lessening the risk of failure.
Against that is the concern that any deal would necessitate increased external aid for Ireland, and might be dressed up as a kind of second bailout. This is politically difficult in places like Germany, and carries potential to increase Ireland’s reliance on ECB support at a time when the bank is trying to reduce its exposure. The basic idea is that Dublin would replace the promissory notes, which have a 20-year repayment horizon and an annual interest rate in excess of 8 per cent, with cheaper, longer-term debt from Europe, perhaps for as long as 40 years.
For statistical reasons, Dublin would prefer any new deal to fall within the ESM’s ambit when the fund becomes operational in July. While any EFSF involvement might add to Ireland’s debt ratio in official statistics, that may not be the case in an ESM scenario.
Although any deal might lessen Ireland’s immediate dependence on emergency central bank liquidity, the corollary is that a lesser form of support would still be required and would have to remain in place for the duration of the scheme.
The ECB remains to be convinced, however, and tension between Mr Weidman and ECB chief Mario Draghi over other crisis-fighting measures adds yet another layer of complexity.
However, Noonan’s remarks last night suggest he is finally making headway.
