Despite a lot of hype in recent weeks that the Irish government were going to arrive at a deal with the ECB that would reduce the burden imposed by promissory note payments to the IBRC, I had remained fairly skeptical that any announcement this week would represent significant progress.
In my last post on this issue, last Saturday, I had noted that any deal that was done was just in relation to the March 31 payment and did not affect future payments. I had written:
Is it likely that the ECB will agree at a later date to a more comprehensive restructuring of the promissory notes allowing for a systematic payment deferral? I would guess not. While you could argue that a deal on the current payment shows some flexibility on the part of the ECB, an alternative viewpoint is that six months of “discussions” failed to get anything other than a fairly meaningless one-off deferral.
My pessimism turned out to be too optimistic. In fact, it appears that the Irish government made essentially no progress with the ECB even regarding the current payment.
The arrangement arrived at today (ministerial announcement here) is so complex that it will bamboozle everyone and this confusion will provide plenty of cover for those who wish to claim that it represents useful progress. However, effectively what is happening is that the Irish government are providing the IBRC with a long-term bond, the IBRC are exchanging that bond with Bank of Ireland for one year in return for €3.1 billion in cash and this cash will be used to repay the IBRC’s Emergency Liquidity Assistance (ELA) loans.
What has been achieved? In essence, the government has delayed paying out the cash for this year’s €3.1 billion but the IBRC (and hence the state) now has to repay Bank of Ireland this amount next year. This is effectively a one-year deferral of this payment, which is far worse than the long-term deferral of the payment that I had already described on Saturday as “fairly meaningless”. Because the ECB have fully achieved their goal — getting a full €3.1 billion ELA repayment — calling this “a deal” with the ECB is hardly appropriate. Rather, it represents an arrangement with a privately-owned Irish bank that maintains the appearance of some sort of deal having been agreed with the ECB.
What further puzzles me about this transaction is that Governor Patrick Honohan described the plan to the Oireachtas Finance committee on Tuesday as follows:
The arrangement regarding this first tranche is very much in the direction in which I want us to go. It is a major step forward qualitatively in the approach.
I guess one could say it is “the direction we want to go” in the sense that this arrangement represents a deferral of the cash payment, however short-term. But the actual arrangement used to implement this deferral — borrowing the cash on a short-term basis from a privately-owned bank — is not at all a sustainable way to refinance a debt that amounts to almost 20 percent of GDP. So I fail to see how this is a major step forward, qualitative or otherwise (I had been puzzling about qualitative major steps ….)
Where does this leave us? In the same position as I reckoned we were last Saturday. No deal of any substance has been done with the ECB nor is one forthcoming. An arrangement to borrow long-term funds from EFSF or ESM to pay off IBRC’s debts and retire the promissory notes may happen. But it would require political approval across Europe, will not happen before Ireland passes the Fiscal Compact and would effectively amount to a second EU-IMF bailout with all the terms and conditions that this implies.