Ireland Said to Ready Bank-Debt Proposal for ECB Review

Irish Central Bank Governor Patrick Honohan
Patrick Honohan, governor of the Irish Central Bank. Photographer: Aidan Crawley/Bloomberg

Irish Central Bank Governor Patrick Honohan will probably ask the European Central Bank Governing Council today for permission to effectively delay a cash payment on its banking debt, as the country tries to ease the burden of saving its financial system, said two people with direct knowledge of the matter.

The state is due to make a 3.1 billion-euro ($4.1 billion) payment to the former Anglo Irish Bank Corp., which is then supposed to use the funds to reduce its emergency borrowings from the country’s central bank. Instead, the lender may use the funds to buy a new Irish government bond, meaning no net cash outflow from the state. The bond can be used to tap funding from the ECB, the people said.

Irish Finance Minister Michael Noonan confirmed to lawmakers late yesterday the state was considering using a bond for the March payment, without giving more detail. The concession may facilitate a longer-term effort to cut the cost of Ireland’s banking rescue, which helped tip the nation into an international bailout in 2010. The Irish government is seeking European help to restructure about 30 billion euros of so-called promissory notes used to rescue the former Anglo Irish.

“It makes sense for European officials to facilitate a restructuring, thus improving the chances of a return to the market for Ireland,” said Juliet Tennent and Dermot O’Leary, economists at Goodbody Stockbrokers in Dublin, in a note.

Neil Whoriskey, a spokesman for the Irish Central Bank, and Wiktor Krzyzanowski, a spokesman for the ECB, declined to comment.

Ongoing Discussions

“We are now negotiating with the EU authorities, and principally with the ECB, on the basis that the 3.06 billion-euro cash installment due from the minister to IBRC on March 31 under the terms of the IBRC promissory note could be settled by the delivery of a long term Irish Government Bond,” Noonan said in an e-mailed copy of a speech in parliament yesterday. The discussions are ongoing, he said.

At present, the government needs to repay the central bank 30 billion euros of money created to fund the former Anglo Irish, now renamed the Irish Bank Resolution Corp.

The state needs to do so in a way that leaves the net impact on the money supply at zero. Otherwise Ireland’s central bank could be accused of printing money, a policy opposed by the ECB.

At the moment, the government pays 3.1 billion euros each year to the bank. Broadly, IBRC uses that money to pay off its central bank borrowing. To neutralize the impact on the money supply, the central bank would then cancel those funds.

By going ahead with the cash payment, Ireland is sticking to its commitment to IBRC, avoiding a default even though the bank may use the funds to buy a sovereign bond.

Ireland’s October 2020 bonds, regarded as the benchmark, yielded 6.9 percent today, down from 9.1 percent at the start of December. The yield on the equivalent Greek security is 18 percent and on the Portuguese note it’s 12 percent.

Noonan has indicated he may ultimately seek to use the euro-area bailout fund to refinance the cost of bailing out IBRC.

“The postponement of the payment would give Ireland some breathing space to conclude a comprehensive settlement on the banking debt,” said Michael McGrath, finance spokesman for Ireland’s largest opposition party, Fianna Fail, in a statement. “The government’s objective should be to secure a reduction in the actual burden of bank-related debt.”

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