European Central Bank policy makers rejected an Irish government plan designed to fund the rescue of the former Anglo Irish Bank Corp. for at least 15 years, according to three people with knowledge of the discussions.
Under the proposal, the Irish central bank would have signed a contract guaranteeing to hold for at least a decade and a half a long-term bond issued to replace about 30 billion euros ($40.4 billion) of so-called promissory notes used to rescue the lender in 2010, according to the people, who declined to be identified because the talks are private.
The Irish government is trying to refinance the rescue of Anglo Irish to ease funding pressure on the state over the next decade. Policy makers prefer the government to take another loan from the European Stability Mechanism or raise the money in financial markets, two of the people said.
Deliberations among ECB policy makers last week were unofficial, according to the people. Irish central bank governor Patrick Honohan retracted the proposal when it was met by opposition, one of the people said. Honohan announced he’d present a new plan in one of the next ECB council meetings, according to another person.
With the imprimatur of the ECB, the Irish central bank currently holds the promissory notes in exchange for funding Anglo through emergency lending.
Enda Kenny’s government had weighed injecting as much as 40 billion euros of bonds with a maturity of as long as 40 years into the bank to be used as collateral for ECB funds, Bloomberg News reported in September. The government would have exchanged those notes for a long-term bond, which the central bank would hold until at least 2028, the people said.
By scrapping the promissory notes, Ireland would no longer have to pay 3.1 billion euros a year to Anglo. Under the current contract, Anglo must use this annual instalment to pay down the central bank loan.
Discussions about funding the lender are ongoing, Paul Bolger, a finance ministry spokesman, said by phone yesterday, adding that Kenny said on Jan. 13 he was confident an accord would be reached by the end of March. An ECB spokesman declined to comment on the 15-year proposal, saying talks are ongoing and drawing conclusions about an outcome are premature.
Reuters reported on Jan. 26 that the ECB had rejected a plan to replace promissory notes with long-term bonds because it is tantamount to monetary financing. The ECB is prohibited from financing governments.
“While we still expect a deal to be announced before the next payment date, 31 March, there are clearly problems in agreeing a deal that does not breach the ECB Treaty,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers in Dublin.
Emergency-liquidity assistance to the lender amounted to 41.7 billion euros at the end of June, equivalent to about a quarter of the economy, with the promissory 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.
Anglo Irish was merged with INBS and renamed Irish Bank Resolution Corp. in 2011, and ordered to wind down by the end of the decade.