Mar 24th 2012
AS SLOGANS go, “restructure the promissory-notes repayment schedule” doesn’t have quite the same tub-thumping ring as “burn the bondholders”. But as Ireland has moved from the anger to the bargaining stage of economic grief, it has realised that coming to a deal over €31 billion ($41 billion) in promissory notes which the government issued to two failing banks is more important than defaulting on their remaining unsecured bondholders.
In 2008 Ireland’s previous government said it would stand behind the debts of the country’s tottering banks. In 2010, as that rash pledge worked itself out, it issued a series of promissory notes (essentially IOUs with set payment dates) to what is now the Irish Bank Resolution Corporation (IBRC), a merger of Irish Nationwide Building Society and the far larger Anglo Irish. Cut off from markets and short of decent collateral that could be pledged directly with the European Central Bank (ECB), the IBRC used the promissory notes to secure access to emergency funding from Ireland’s central bank. The government’s schedule of promised payments will be used to pay back the central bank’s loans.
That schedule is punishing. The government is on the hook for €3.1 billion every year until 2023, with smaller annual outlays due until 2031. This year’s sum, due on March 31st, represents around 2% of GDP. From next year interest payments on the debt are due to be counted against the budget balance. To meet its deficit targets the government will have to make further cuts. Hence rising pressure in Dublin for a deal to restructure the payments.
That requires the nod from Frankfurt. Ireland’s central bank needed permission from the ECB to issue its loans to the IBRC, and any change to the terms of the repayment must also have ECB approval. As The Economist went to press Michael Noonan, the Irish finance minister, was hopeful of securing agreement from the ECB to swap the cash payment due this month for a government bond with a 13-year maturity.
That agreement may not be forthcoming: any restructuring risks exacerbating tensions on the ECB’s governing council between Mario Draghi, the bank’s president, and Jens Weidmann, head of the Bundesbank. But a deal would in any case offer only temporary respite. A more lasting solution might be to replace the promissory notes with longer-term bonds from the European Financial Stability Facility, the euro zone’s temporary bail-out fund. But that would also mean adding to Ireland’s rescue programme, an unappealing prospect for euro-zone member states fresh from patching up Greece.
Lurking behind all this is an Irish referendum, expected in May or June, on the “fiscal compact”, an agreement to enshrine budgetary discipline in the euro zone. Although they publicly forswear a link between the referendum and the promissory notes, ministers know that a deal with the ECB would help them win—and they know that their fellow Europeans know this too. Moreover, say officials, an easier ride on the debt repayment would be the best way to help ensure Ireland returns to the markets next year, as scheduled.
But Ireland’s leverage is nonetheless limited. The fiscal compact does not require unanimous euro-zone adoption to become law, and a “no” vote would make Ireland ineligible for money from the European Stability Mechanism, the single currency’s planned permanent rescue fund.
If Mr Noonan’s plan comes off it will be quite a coup. But it will still be no more than a can-kicking exercise. At some point Ireland will have to move from the bargaining stage to acceptance. The problem is that in between the two lies depression.