Irish Debt

Dublin has pressed ahead with a plan to defer a €3.06bn cash payment due on its banking debt in a move it hopes will ease its return to international bond markets in late 2013.

Michael Noonan, Ireland’s finance minister, said on Thursday the government would settle the payment, due on March 31, using a long-term government bond rather than with its cash reserves. “This [financing] approach reinforces the commitment of our European partners in assisting the state in its path to recovery,” he said.

“I, and the Irish government, would like to thank all parties to these discussions for their constructive approach and positive engagement.”

For months, Dublin has been trying to persuade the EU to allow it to restructure debts related to its rescue of Anglo Irish Bank, the lender at the centre of Ireland’s financial crisis, and a second failed lender, the Irish Nationwide Building Society. On Thursday, Dublin said it had secured the agreement of the European Central Bank for its latest arrangement.

However, the ECB gave the announcement a lukewarm greeting. “The ECB takes note of today’s announcement of the minister of finance of Ireland regarding the government’s intentions on the payment of the promissory notes due on Friday the 30th of March 2012,” it said in a statement, stopping far short of endorsing the move.

The issue has moved centre stage as Ireland prepares to hold a referendum on the EU’s fiscal treaty on May 31. Some ministers have warned of an angry public reaction if the onerous repayment terms on its banking debt are not improved.

Under the arrangement, Dublin will give a long-term government bond to the IBRC to cover the €3.06bn payment it is due to make under the terms of promissory notes worth €31bn it issued at the height of its banking crisis.

The IBRC can then use the bond to reduce the €40.6bn in emergency liquidity assistance it has received from Ireland’s central bank.

But although Dublin said it had secured the ECB’s agreement, Thursday’s move will be seen with scepticism in Frankfurt because of the increased longer term costs to Ireland and fears that its government was acting for reasons of short-term expediency.

The ECB will also worry that by sidestepping the payment due, Ireland has risked its credibility with investors, possibly delaying its return to capital markets. The “nuclear option” for the ECB would be to block Ireland’s use of emergency liquidity assistance, but it seems unlikely to go that far.