Bloomberg News

ECB Said to Be Ready for New Honohan Pitch on Anglo

February 06, 2013

European Central Bank officials may consider as soon as today which concessions they are prepared to grant Ireland to lower the cost of the nation’s bank bailout, according to two people with knowledge of the matter.

Irish Central Bank Governor Patrick Honohan will meet his European counterparts for the first time since they rebuffed an initial bid to cut the burden of Anglo Irish Bank Corp.’s rescue two weeks ago. He will likely pitch a new proposal during an unofficial dinner preceding the ECB’s Governing Council meeting tomorrow, according to the people, who asked not to be identified because the matter is private.

While Honohan’s plan will continue to include the replacement of the so-called promissory note the government issued in 2010 with a long-term bond, he’ll drop a proposed guarantee that the Irish central bank would hold the security for at least 15 years, the people said. A decision may be made as soon as tomorrow, one of the people said.

Irish officials are trying to find agreement with the ECB over an issue that has dogged the country’s attempts to work its way out of a bailout agreed in 2010. In Dublin, labor unions are preparing to hold the biggest demonstration in two years on Feb. 9 as they press for a deal.

‘Monetary Financing’

“We are optimistic that an arrangement, agreeable by all parties, can be found in the context of the current discussions,” Brian Hayes, a junior minister in Ireland’s finance ministry, said late yesterday in parliament, without giving details of the blueprint.

Paul Bolger, a spokesman for the Irish Finance Ministry, and Nicola Faulkner, a spokeswoman for the Irish central bank, declined to comment on the plan. A spokeswoman for the ECB in Frankfurt said that talks on the matter are ongoing and any conclusions on the outcome are premature.

“There are a few preconditions on which any rescheduling of the notes has to be based -- it has to meet the test of no monetary financing, which is a bedrock of ECB policy,” said Philip Lane, an economics professor at Trinity College Dublin. “There are many ways to come up with something.”

Irish newspapers are reporting that the Labour Party, the junior member of the ruling coalition, is raising the specter of a government collapse if a deal to relieve bank debt flounders. Prime Minister Enda Kenny said yesterday he expects an accord to be reached with the ECB by the end of next month.

Bank Support

The collapse of a real estate bubble in 2008 forced the state to inject or pledge 63 billion euros ($85.5 billion) into the banking system. That included about 30 billion euros of so- called promissory notes used to rescue Anglo Irish in 2010.

With the ECB’s imprimatur, the Irish central bank holds the notes in exchange for emergency funding for Anglo, which must be refinanced every second week. The state is currently due to pay the central bank 3.1 billion euros a year for at least the next decade to pay down the bailout of Anglo, now renamed Irish Bank Resolution Corp.

“As a non-standard funding instrument, the IBRC promissory notes are inadequate, require biweekly approval for collateral purposes for IBRC from the ECB,” said Hayes. “All parties to the current discussions could gain from an agreed approach to this issue. And it is in this context that the Irish Government has been working extremely hard to secure an agreement.”

Sidestep Payment

The government wants to replace the promissory note with a long-term bond, allowing it to sidestep the annual payment. Honohan proposed to ECB colleagues last month that the Irish central bank would hold such a bond for 15 years, people with knowledge of the matter said at the time. That would give the state the guaranteed medium-term financing it has sought for Anglo’s plan in the past.

The ECB rejected the proposal and now Ireland is preparing to drop the 15-year plan. Honohan may propose instead that the Irish central bank will remain mindful of safeguarding financial stability before it sells the bond, one person said yesterday.

“The ECB don’t want the Irish central bank to be tied to a specified holding period so this could be sufficient fudge for a deal on the notes,” said Conall Mac Coille, chief economist at Dublin-based securities firm Davy. “I expect they’ll end up holding the notes for at least four to five years.”

The government and Honohan need to find a way to restructure the notes in a way that leaves the net impact on the money supply at zero. Otherwise Ireland’s central bank could be accused of printing money, a policy opposed by the ECB.

A central bank commitment to hold Irish government bonds for 15 years “in this case would be for fiscal policy reasons, which makes it monetary financing, which is a no-no,” said Lorcan Roche Kelly, chief Europe strategist at Trend Macrolytics LLC.

To contact the reporter 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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