Ireland hails historic debt deal with ECB

DUBLIN — Ireland clinched a long-awaited deal yesterday to ease the burden of its bank debts, sending its borrowing costs falling to pre-crisis levels and bolstering its chances of ending its reliance on EU-IMF loans this year.

After nearly 18 months of negotiation, Prime Minister Enda Kenny won European Central Bank (ECB) approval to stretch out the cost of bailing out Anglo Irish Bank, slicing billions off the country’s borrowing needs and cutting its budget deficit.

“Today’s outcome is an historic step on the road to economic recovery,” Kenny told a packed Parliament in Dublin. “It secures the future financial position of the state.”

The assent of the ECB is a major coup for Kenny, who was forced to call an emergency session of Parliament Wednesday night to liquidate Anglo Irish, a lender whose casino-style attitude to risk helped precipitate the country’s financial implosion.

Kenny’s announcement came hours after lawmakers voted to dissolve a government-owned “bad bank,” the Irish Bank Resolution Corp — the focal point for Ireland’s divisive 2010 agreement negotiated with the ECB to repay foreign bank bondholders in full.

“It certainly is unusual in the history of the crisis that we are actually being surprised in a positive way by the scale of the response,” said Austin Hughes, chief economist at KBC Bank. “Normally we have seen underachievement and overpromising. “The early indications are that this will make a material difference for the outlook on the Irish economy.”

The agreement stretches the cost of bailing out Anglo Irish over 40 years rather than 10 and cuts Ireland’s borrowing needs by 20 billion euros over the next decade.

It also gives the government another one billion euros to work with in forthcoming budgets.

Technical talks between the ECB and Irish officials had been bogged down by ECB concerns that any deal given to Dublin to ease the 48 billion euros cost of the Anglo promissory notes could set a precedent for other countries, such as Spain, which are also dealing with large bank debts.

But with European leaders keen to offer a success story from the region’s debt crisis to encourage both voters and potential investors, Dublin went back to the drawing- board.

The new deal was designed so that the ECB did not have to vote on it, enabling ECB President Mario Draghi to say simply that the Governing Council had merely “taken note” of Dublin’s plan.

The yield on Irish benchmark 2020 bonds fell as low as 3.955 percent, the lowest seen in an equivalent Irish benchmark bond since early 2007, before the subprime crisis started, according to Reuters data.

The government said it had cut its forecast for next year’s budget deficit as a proportion of GDP to 4.5 percent from 5.1 percent previously and to 2.4 percent from 2.9 percent previously for 2015, below a target of three percent.

“It is positive for funding, and therefore increases Ireland’s chances of leaving its (EU-IMF) loan programme and relying more heavily on the capital markets for funding toward the end of this year,” said Fergus McCormick, head of sovereign ratings at DBRS ratings agency.

“However, the swap itself will not affect our A (low) rating or negative trend on Ireland, because swapping the promissory notes for a bond does not reduce the stock of public debt.”

Under the terms of the deal, Anglo’s promissory notes, with an average maturity of between seven and eight years, will be exchanged for government bonds with an average maturity of over 34 years. The first principal repayment will be made in 2038 and the last in 2053.

The finance spokesman for the opposition Sinn Fein party said the agreement would burden future generations. “This week my youngest son began to crawl. He wasn’t even born at the time the promissory note was issued, yet he’ll be 40 years of age and this state will be paying back the toxic debts of Anglo Irish Bank,” Pearse Doherty told Parliament.

impact of strong euro

The ECB will monitor the economic impact of a strengthening euro, Draghi said yesterday, feeding expectations the climbing currency could open the door to an interest rate cut. After the ECB left its main interest rate at 0.75 percent yesterday, Draghi said the exchange rate was near to its long-term average but went further than many analysts had expected.

“The appreciation is, in a sense, a sign of return of confidence in the euro,” Draghi told a news conference in Frankfurt

“The exchange rate is not a policy target, but it is important for growth and price stability and we certainly want to see whether the appreciation is sustained and will alter our risk assessment as far as price stability is concerned.‘

Draghi’s comments surprised markets and helped drive down Europe’s single currency from US$1.355 to a two-week low of US$1.34.

Herald with Reuters, AP