March 13, 2012 7:33 pm

Rehn rebukes Dublin over bid to defer debt

The European Commission has dismissed a request by Dublin to defer a €3.1bn payment related to its banking debt, ahead of a potentially difficult Irish referendum on the European Union’s fiscal compact in a few months time.

Dublin had asked the EU authorities to allow it to defer a payment due on March 31 on promissory notes that it issued to cover the cost of winding up Anglo Irish Bank – the lender at the centre of Ireland’s banking crisis.

On Tuesday, Olli Rehn, the EU’s top economic official, issued a stinging rebuke to Irish efforts to delay the rapidly approaching payment on the loan, saying Dublin had to live up to its obligations.

“I actually wonder why this has to be asked at all,” Mr Rehn said after two days of meetings with EU finance ministers in Brussels. “The principle in the European Union and the long European legal and historical tradition is, in Latin, pacta sunt servanda – respect your commitments and obligations.”

The Irish government has for months been trying to restructure the promissory notes, worth €31bn, that it issued two years ago. Dublin argues that it shielded the wider eurozone financial system by rescuing its banks and agreeing to European Central Bank demands not to impose losses on bank bondholders.

Although officials said Mr Rehn has been supportive of the Irish case in closed-door negotiations with the ECB and other eurozone lenders, his comments were the most direct rejection of the Irish effort to date. They signalled growing annoyance with Dublin’s efforts to use its upcoming referendum on a new eurozone fiscal treaty as leverage to get the notes restructured.

“The European Union is a community of law,” Mr Rehn said. “That assumes by definition that each and every member state respects the commitment it has taken, and this goes for Ireland as well.”

Enda Kenny, Ireland’s prime minister, has said the government’s aim of restructuring the notes is a completely separate matter to the referendum on the EU fiscal compact. But privately Irish officials admit the €3.1bn payment, which is equivalent to the annual budget cuts imposed to meet deficit reduction targets, could poison the referendum campaign that is due to begin in April or May.

Dublin issued the promissory notes in March 2010 to Anglo and Irish Nationwide Building Society as it struggled to contain a widening banking crisis caused by a property crash. The notes are government “IOUs” that promise to pay €31bn of the estimated €34.7bn total cost of bailing out and winding down both banks. They are issued directly to the banks, which use them as collateral to draw down exceptional liquidity assistance (ELA) funds from the Central Bank of Ireland.

The notes have become a major source of tension in Ireland, with critics saying their huge cost to the exchequer is threatening Ireland’s recovery.

Dublin is not seeking a writedown of the notes. Instead it wants to restructure the funding mechanism to extend the payments over a much longer timeframe. This would reduce the amount of money that Ireland would have to raise over the next few years, helping to ease its return to bond markets.

Gerry Adams, president of Sinn Fein, accused the government on Tuesday of “kow-towing” to its masters in the EU by not seeking a write-off of the promissory notes.

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