Irish Said to Prefer Bonds Over ESM to Refinance Anglo Irish

Irish authorities now favor using government bonds to refinance the rescue of the former Anglo Irish Bank Corp., easing funding pressure on the state over the next decade, according to two people familiar with the matter.

Under a plan being weighed by officials, Enda Kenny’s government would inject as much as 40 billion euros ($52.4 billion) of notes of as long as 40 years in maturity into the bank, said one of the people, who asked not to be identified because the talks are private. These may be used as collateral for European Central Bank funds, replacing 30 billion euros of so-called promissory notes used for the bank’s 2010 bailout.

The ECB has been in “intense discussions” on “enhancements” to Ireland’s program, ECB Executive Board Member Joerg Asmussen told reporters in Nicosia, Cyprus on Sept. 14. ECB and Irish finance ministry officials declined to comment on the government’s plans.

Using bonds would mark a strategy shift by Irish Finance Minister Michael Noonan who has advocated tapping the European Stability Mechanism to cut the cost of the nation’s banking rescue. The bond plan would sidestep potential political opposition in Europe to using the euro-region’s bailout funds to refinance the bank’s funding, the people said.

“Politically, this could be seen as domestically quite disappointing, given the lack of any headline relief, though it is also a far easier sell in the European context,” said Owen Callan, a Dublin-based fixed-income analyst at Danske Bank A/S, a primary dealer in Irish government debt.

Stop Collapse

The yield on the Irish benchmark October 2020 bond rose 2 basis points to 5.29 percent. It has fallen from 7.13 percent just before European leaders agreed on June 29 to examine the Irish financial sector to improve the sustainability of the nation’s “well-performing adjustment program.”

The Irish state issued Anglo Irish with the promissory notes, or IOUs, two years ago to stave off the bank’s collapse. Now renamed Irish Bank Resolution Corp., the lender takes the notes and exchanges them with the Irish central bank for so-called emergency liquidity assistance, or ELA.

This assistance amounted to 41.7 billion euros at the end of June, equivalent to about a quarter of the economy, with the notes making up the bulk of the collateral. The notes were included in Irish government debt in 2010, helping to triple the state’s borrowings over the last five years.

Bank Funding

Ireland’s government is due to pay IBRC about 3 billion euros a year for at least the next decade to pay off the debt. IBRC in turn uses that money to repay the Irish central bank.

Under the plan being studied, the state would issue a long-term bond to the lender. IBRC could take the bond to the ECB, which could, if it agrees, provide funding to IBRC to replace that supplied by the Irish central bank.

“Firstly, the funding situation for the Irish sovereign would be immediately improved, said Dermot O’Leary, chief economist at Dublin-based Goodbody Stockbrokers. “Secondly, depending on the interest rate on the bonds, the annual interest cost would be reduced.”

The government could redeem the bond as far out as 2052. The main advantage for the state is that it wouldn’t have to raise 3 billion euro a year to pay off the ELA, as currently agreed. It wouldn’t alter the nation’s debt level.

Ireland will continue a campaign for Europe to retrospectively recapitalize other bailed-out banks, Noonan has signalled. In all, Ireland has injected or pledged about 64 billion euros to save its financial system.

Approval Needed

While the ECB would prefer if the promissory notes were replaced by ESM bonds than Irish securities, this would need approval from all member states of the rescue fund and increase the amount of Ireland’s bailout, according to the two people. The state applied for a 67.5 billion euro bailout in 2010.

Germany’s Finance Minister Wolfgang Schaeuble signalled his reservations about raising the size of Ireland’s aid program last month.

“We will have to avoid a headline like ‘Aid Program for Ireland Topped Up’ because then investors in California or Shanghai might not understand that this top-up is a reward for Ireland, but might be tempted to conclude that what was agreed two years ago for Ireland was not enough,” Schaeuble told the Irish Times.

-- With assistance from Rebecca Christie in Brussels and Stephanie Bodoni in Luxembourg. Editors: Dara Doyle, Simone Meier

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