Bloomberg News

Ireland Likely to Win Break on Debt

March 27, 2012

Patrick Honohan, governor of the Irish Central Bank. Photographer: Aidan Crawley/Bloomberg

Patrick Honohan, governor of the Irish Central Bank. Photographer: Aidan Crawley/Bloomberg

Irish Central Bank Governor Patrick Honohan said the state will probably be able to sidestep a March cash payment on its bank debt, boosting the government as it seeks to win voter backing for Europe’s fiscal treaty.

On March 31, the state is due to make a 3.1 billion-euro ($4.1 billion) cash payment to the former Anglo Irish Bank Corp., which is supposed to use the funds to reduce its emergency central bank borrowings. Instead, the lender may use the funds to buy a new Irish government bond, meaning no net cash outflow from the state, Honohan told lawmakers in Dublin, as talks with European authorities continue.

“While some technicalities still need to be resolved, it now seems likely that this effort will be successful,” Honohan said today.

Prime Minister Enda Kenny is seeking European help to restructure and cut the long-term cost of about 30 billion euros of so-called promissory notes used to bail out Anglo Irish in 2010. A concession on the debt may boost support for the fiscal compact. Ireland’s voters will decide on the treaty on May 31, Deputy Prime Minister Eamon Gilmore told lawmakers today.

An accord on the debt “certainly won’t hurt,” said Austin Hughes, an economist at KBC Bank Ireland in Dublin. “It’s modest positive for the yes side. A payout at the end of the Month would have had a significant impact on the no vote.”

Honohan said avoiding a net March cash payment is “half a step” to a wider solution to cutting the cost of the Irish banking bailout, which may take “several months” to reach.

Risk

Ireland has committed a total of 34.7 billion euro toward rescuing the bank, which has been merged and renamed Irish Bank Resolution Corp., as of the end of 2010. The state made the first 3.1 billion euros cash payment last year.

“The sequence of annual cash payment by the government of 3.06 billion euros envisaged for the coming years in the promissory notes has become a source of risk to financial stability,” Honohan said. “A way of funding this cash payment over a much longer period would clearly help reduce this risk.”

To avoid injecting cash immediately into the lender two years ago, the Irish state gave it promissory notes. The bank uses the notes as collateral to access emergency funding from the country’s central bank.

By going ahead with the cash payment, Ireland is sticking to its commitment to IBRC, avoiding a default even though the bank may use the funds to buy a sovereign bond.

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said he sees “good reasons” for easing Ireland’s debt burden after one of the costliest banking bailouts in history.

Ireland’s October 2020 bonds, regarded as the benchmark, yielded 6.83 percent today, down from 9.1 percent at the start of December.

Ireland, which sought an international bailout in 2010, is seeking a full return to international credit markets by the middle of next year.

The country’s debt agency, the National Treasury Management Agency, today said it had agreed to explore investment opportunities in Ireland, with CIC International, a subsidiary of China’s sovereign wealth fund. The accord showed Ireland is nation “is heading in the right direction,” Prime Minister Enda Kenny said in Beijing today.

To contact the reporters on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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