February 7, 2013 6:17 pm
By restructuring the burden of the bank debt it had so foolishly taken on to its sovereign ledgers, Ireland has reaped a diplomatic victory that will bear immediate economic fruit. Yet it is only one of the deals it must strike with the eurozone – for the single currency’s sake as well as for Ireland’s.
Dublin’s late-night liquidation of what was left of Anglo Irish Bank was a long-overdue zombie slaying. In one blow, the government ended the Irish central bank’s emergency liquidity assistance – vulnerable to European Central Bank veto – and eased the fiscal strain of a promissory note issued to Anglo. The central bank’s claim on the promissory note in the liquidation was swapped for a cheaper, longer-term state-guaranteed bond from Nama, the agency warehousing the other toxic waste from Ireland’s banks.
If the move has a whiff of three-card monty to it, it is because the status quo ante also involved some fancy financial footwork. ELA, the only funding available to the rump Anglo, was accepted by the ECB only against the promissory note, which in effect had the government owing money to its own central bank. The ELA repayment schedule implied a €3.1bn-a-year additional fiscal squeeze only to pay for annual monetary contraction; the worst possible policy mix.
The restructuring did not quite earn Frankfurt’s blessing – Mario Draghi, the ECB president would only “take note” of the Irish action. He could hardly be more enthusiastic: stuffing the national central bank with sovereign bonds – a retrofitted quantitative easing – is, to put it mildly, bad form under eurozone monetary rules. But it is good that an economically and politically indispensable move was not blocked. Greater fiscal breathing room should help both market confidence and growth in Ireland.
It will be good for the eurozone too. It badly needs a success story to show that troika rescue programmes come with exit doors. So Ireland and its partners need to strike two more deals. As the opposition rightly argues, restructuring the promissory note does not make the public liability for banks losses lower, just easier to bear. Europe must still make good its promise to separate bank and sovereign debt.
That, added to this week’s deal, may throw open Ireland’s door to bond markets. When that happens, Dublin should – proudly – ask for ECB bond market intervention to be activated. With words alone, Mr Draghi has kindled tentative market confidence in the euro. With a little more help, Ireland can present him with a worthy candidate for putting words into action.
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