Promissory notes solution could be reached by mid May

Wednesday 04 April 2012 11.20
Minister of Finance Michael Noonan has already lobbied the French finance minister Michel Baroin on the issue
Minister of Finance Michael Noonan has already lobbied the French finance minister Michel Baroin on the issue

A long term solution to the Anglo promissory notes could be reached as early as mid May, just two weeks before the referendum on the fiscal compact, RTE News has learned.

Well placed diplomatic sources have told RTE that the EU's current bailout fund, the European Financial Stability Facility (EFSF), is the preferred option to replace the promissory notes on more favourable terms.

"The broad idea is to use the EFSF to replace the promissory notes, to try to use it to further strengthen the Irish banking sector so that Irish banks can regain market funding under better conditions," one senior EU source told RTE News.

"There is a common understanding that this is the only and best solution to the issue," a second well-placed EU source said.

The idea is that the EFSF issue a long maturity bond, or bonds, worth €28 billion, with low interest rates, which would replace the state's obligation to pay €3.1 billion annually over 10 years.

The bond would be presented as a "complement" or "extension" to Ireland's existing bailout, agreed in November 2010.

However, the support would not be regarded as a "second bailout", nor would it have any impact on Ireland's debt or deficit levels, sources said.

Nor would there be any new conditionality attached to the extension, officials said.

The sequencing of a move to solve the promissory note is described as "delicate," and could be knocked off course.

But given the removal of tensions relating to the second Greek bailout, officials believe that the idea of involving the EFSF could feasibly be put before a meeting of Eurozone finance ministers as early as May 14.

However, another senior EU source cautioned against rushing the solution: "If you want to do this before the referendum, May 14 is the timeline. But it's more important to get a good solution and to get those involved in the solution to accept it. We want to make sure this delivers benefits to everyone."

The EFSF would essentially provide a long term bond, either directly to the IBRC or to the Irish state, in order to wipe clean the annual promissory notes payments.

The bond would then have to be paid back, but over a longer period, and with lower interest rates, according to one diplomat.

An EFSF source said the Luxembourg fund was "not working on such a structure".

However, it is understood the EFSF will only become involved after euro zone finance ministers have issued a formal request. Another source confirmed there had already been technical discussions involving the EFSF.

It is understood the ECB will support the idea of the EFSF bond depending on technical details and on what impact it has on Ireland's debt profile.

But the idea will also have to be approved by the board of the EFSF, which is essentially made up of the 17 euro zone governments.

However, it is understood that it may be possible to reach headline agreement on the idea at the May 14 meeting of eurozone finance ministers in Brussels, with the technical aspects being agreed later.

These would include the maturity of the bond, legal issues, the interest rate, and how exactly it would replace the promissory notes.

Much will depend on the sixth review of Ireland's bailout programme by the Troika of the ECB, the IMF and the European Commission.

The ten to 12 day Troika mission is due in Ireland from April 16. If it presents another favourable picture of the government's implementation of the bailout programme then that might provide "fertile ground" for developments to accelerate, said one diplomatic source.

At that point the much vaunted Technical Paper by the Troika on the promissory notes could be completed and presented to officials from the euro zone's 17 finance ministries which form the Eurogroup Working Group.

The Working Group normally meets the week before euro zone finance ministers gather in Brussels for their monthly gathering.

"If the technical work is finalised and circulated to member states there will be contacts to sound out the willingness of member states," a source said.

The Minister of Finance Michael Noonan has already lobbied the French finance minister Michel Baroin on the issue, during his meeting with his counterpart in Paris on March 15.

On that occasion Mr Noonan said he would go back to seek the support of Mr Baroin once the Troika's technical paper was complete.

If the soundings are favourable a proposal could go before the Eurogroup meeting on May 14.

Essentially it would be up to the Irish government to make the request, said one EU source. "The ball is in Noonan's court."

The ECB is thought to be in favour of the EFSF getting involved.

It would allow the Irish Central Bank to end its policy of providing so-called Emergency Liquidity Assistance to IBRC, a practice Frankfurt has publicly disapproved of as recently as last week.

An EFSF bond would be closer to the ECB's preferred collateral for accessing normal ECB finance.

"The promissory notes are non-tradeable assets and quite risky to borrow money against," said one diplomatic source. "It would also contribute to the improvement of the Irish debt profile."

At an informal meeting of eurozone finance ministers in Copenhagen last Friday Mr Noonan acknowledged that an EFSF bond would give the ECB the kind of collateral it preferred.

But he stressed that such a bond would be "of no use to Ireland" if it did not guarantee long-term, ongoing access for IBRC to cheap ECB financing.

While Department of Finance officials have acknowledged that securing an EFSF bond is one of a number of options being looked at, it's not clear if it is the only option.

The Taoiseach Enda Kenny and a number of cabinet ministers have persistently said that the promissory notes issue is entirely separate from the referendum on the Fiscal Compact.

Although much could go wrong in the sequencing between now and May 14, and although final approval will need the support of , in several cases, both the governments and parliaments of EFSF guarantor countries, diplomats are aware of the perception that a deal on promissory notes just two weeks before the referendum could be seen as "buying off" Irish voters.

"We have to live with that," said one source.

It is understood that the European Commission supports the idea of using the EFSF to resolve the promissory notes issue.

According to one diplomat, further evidence that the government is meeting its targets under the bailout programme would help to sell the idea politically.

"What is needed is the political acceptance of the EFSF [board], if it is backed by a strong performance of Ireland implementing the programme," the diplomat said.

However, the idea of using EFSF resources for an Irish problem could run into political opposition in Germany, where the Bundestag has only recently - and reluctantly - accepted a second bailout for Greece.

Any further use of the EFSF for Ireland may require the approval of a key Bundestag committee.

However it is possible that political agreement could be delivered by euro zone finance ministers pending final approval by the various political constitutencies across the eurozone.

"There is no lack of goodwill towards Ireland," said one senior EU source. "But there are legitimate questions that will be asked, and we will need to have good answers. We're asking European taxpayers to assume more risk, and they will need to see the reasons why."

Sources stressed there would be no "conditionality" attached to a new EFSF bond. "It would simply be reflected in the updated Memorandum of Understanding [between Ireland and the Troika]," a source said.

The EFSF's current lending capacity is €240 billion. The fund has already extended rescue loans to Ireland, Greece and Portugal, and it will run in parallel with the new, permanent EU fund, the ESM, until mid 2013.

According to one source, a €28 billion EFSF bond extended to Ireland "would need to be guaranteed", and would therefore impact on the facility's coffers.