The Irish government is working on a plan to recoup some of the money it plowed into failing lenders from the euro area’s backstop fund, Finance Minister Michael Noonan said.
Euro-zone finance ministers last month agreed on the outlines of a plan for the 500 billion-euro ($652 billion) European Stability Mechanism to recapitalize lenders directly. Retroactive application of this tool, as would be the case if Ireland applies, will be decided on a case-by-case basis.
“I would like to have the main ask designed on the Irish side in the autumn and my conversations with the principals” of the so-called troika that oversees euro-zone bailouts “well under way,” Noonan said on RTE television. The troika comprises the European Commission, the European Central Bank and the International Monetary Fund.
Noonan has already helped to persuade the ECB not to block a swap of so-called promissory notes used to rescue the now defunct Anglo Irish Bank Corp. with 25 billion euros of long-term government bonds held on the national central bank’s balance sheet.
The second part of Noonan’s strategy involves accessing the ESM to refund as much as 30 billion euros the state spent on saving other banks. Winning retroactive recapitalization would reduce Ireland’s debt to gross domestic product, due to peak at 123.3 percent this year, and add momentum as Noonan heads back into bond markets.
“Any debt relief that the minister can secure through the ESM banking recapitalization tool would be welcome,” Juliet Tennent, an economist at Dublin-based Goodbody Stockbrokers, wrote in a note today. “However, we continue to believe that such a deal is unlikely.”
The yield on 10-year Irish bonds was unchanged at 4.1 percent today. While it’s up from a low of 3.42 percent in May, it was above 9 percent when Ireland requested a 67.5 billion-euro international bailout in November 2010.
“If we go there naively and put out our hand and say give us the money we won’t succeed,” Noonan said. “So what I have just started to do now is to construct a piece of financial engineering, something analogous to what we did with the promissory note, so that what we will be looking for will uniquely apply to Ireland, that it would use the ESM in the full latitude of its provisions.”
‘No New Developments’
Once the Irish plan is ready, Noonan said he’ll seek the support of ECB President Mario Draghi, IMF Managing Director Christine Lagarde and Olli Rehn, the European Union’s economic and monetary affairs commissioner.
“My argument would be that we need this piece to ensure that the debt is reduced, so that we never get dragged back again into a bailout,” Noonan said.
Rehn said in Frankfurt today that there are “no new developments” on Ireland’s intention to tap the ESM. “We have just recently decided on the extension of loan maturities that supports Ireland’s exit from the program, and we work on that basis now,” he said.
Under rules adopted by euro-area finance chiefs in Luxembourg on June 20, direct recapitalization of banks by the ESM would be capped at 60 billion euros. The tool would become available once the ECB assumes “effective” supervision of the currency bloc’s banks.
Late next year is now the time line for the transition to the new banking supervision regime, in part because of German approval procedures, according to two European officials who spoke on condition of anonymity. The new schedule contrasts with an initial goal of moving to the system in March, later pushed back to July.
Accessing the ESM would “get money where we could reduce the debt and ensure then that the signal is out into the markets that the Irish have done the job, they are positioned now with a debt that isn’t far off the European average,” Noonan said.