DUBLIN/FRANKFURT – The European Central Bank moved towards agreeing a deal on Thursday to ease Ireland's debt burden after Dublin rushed through emergency legislation to liquidate Anglo Irish Bank.
Prime Minister Enda Kenny has staked his administration's reputation on cutting the cost of bailing out Anglo Irish, now known as Irish Bank Resolution Corp, or IBRC, and the ECB's governing council in Frankfurt was considering a fresh proposal after rejecting a previous plan last month.
A deal had appeared imminent late on Wednesday but officials decided further work was needed, one source close to the negotiations told Reuters. The ECB Council was discussing an Irish deal at its regular, twice-monthly meeting on Thursday.
In essence, the government has given up on hopes of passing on to the Irish central bank the responsibility for debts the state ran up to rescue Anglo Irish; it now hopes to be allowed to pay off that debt over a longer period, easing its finances.
"This closes a sad and tragic chapter in our economic history," Kenny told a special session of Ireland's lower parliamentary house that stretched until 3 a.m as lawmakers rushed through the winding up of the failed bank.
Anglo Irish was brought down by a real estate crash after a bubble inflated by cheap credit. Fearful of knock-on effects, the Irish state stepped in, landing itself with a huge debts that forced it into austerity budgets as the economy shrank and obliged it to accept a conditional bailout from the EU and IMF.
Technical negotiations between the ECB and Irish officials have dragged on for 18 months, with the central bank conscious that any deal given to Dublin to ease the crunch in debt repayments would set a precedent for other countries, such as Spain, which are also dealing with large bank debts.
However, European leaders also need a success story to emerge from the region's debt crisis. A rescheduling of the promissory notes given by Ireland to IBRC could help Dublin emerge on schedule this year from its EU-IMF bailout program. Ireland would issue longer-terms bonds in place of the notes.
Under Dublin's new plan, first reported by Reuters on Wednesday, IBRC's liquidation was necessary so that the Irish government no longer had to make a politically toxic 3.1 billion euros of annual payments on the promissory notes stretching out until 2023. The next such payment is due next month.
The government had originally hoped to unveil the liquidation of the former Anglo Irish in conjunction with a deal from the ECB, but the Reuters report obliged ministers to immediately legislate for the bank's demise.
Finance Minister Michael Noonan told parliament the government could not deny the report and therefore risked destabilizing the bank's position.
"I would have preferred to be introducing this bill in tandem with a finalized agreement with the European Central Bank," Noonan said. "But we had to move."
Under the plan put to the ECB, the 28 billion euros in promissory notes will be replaced with long-term government bonds, meaning that Ireland can make more gradual repayments, a source familiar with the discussions told Reuters.
The ECB had rejected a preferred solution two weeks ago when Dublin wanted the Irish central bank to hold a long-term bond for a minimum of 15 years, a proposal Frankfurt deemed to be "monetary financing", prohibited by EU law intended to prevent governments in the euro zone destabilizing the currency.
The 15-year clause is now being dropped, a second source said. If the ECB signs off on the plan, most of IBRC's balance sheet will pass to Ireland's central bank after the scandal-hit bank is liquidated, another source said.
Rescheduling the payments will mean Ireland's debt agency, which began to pave the way towards its emergence from bailout strictures last year by re-entering long-term debt markets, will have to raise less cash in each of the next 10 years.
Avoiding the hefty interest charge that kicks in with this year's payment on the notes would also reduce the budget deficit, still among the highest in Europe, by more than one percentage point, according to Finance Department estimates.
While some interest charge will still likely be paid, the deficit that currently stands at just below 8 percent of annual output will be cut to some degree and may lead to public demands for the government to ease up on its austerity program.
"The critical aspect is whether there's some scope for a little less austerity and managing that will be a significant issue," said KCB Ireland economist Austin Hughes, referring to a further 3.1 billion euros of tax hikes and spending cuts Dublin has pledged to implement later this year.
"My sense would be that our partners would want this to be regarded as a windfall gain that should be ferreted away but politically there will be pressure for a somewhat less austere budget in December," he said of other euro zone states.
Irish bond yields were broadly unchanged. And with a deal on Anglo Irish already priced in by many investors, traders said there would not be a big jump if the ECB gives the thumbs up. It would, however, support yields as Dublin returns to the market again in the coming weeks.
In the early hours of Thursday, opposition lawmakers, angered at the short time they had to digest the highly technical, 58-page bill, complained that they did not yet know what, if anything, would be agreed with the ECB.
On Twitter, people dubbed the session #promnight, a play on the promissory notes whose cost has made them infamous among the general public. Kenny's large majority prevailed and the lower chamber voted in favor of the bill by 113 votes to 36.
President Michael D. Higgins signed the bill into law at around 7 a.m. (0700 GMT) following the all-night sitting of both houses. He cut short a state trip to Rome to do so.
Anglo Irish and its profligate lending policies were at the heart of Ireland's financial crisis. The bank's near-collapse in 2008 pressured the government into guaranteeing the entire financial sector, sucking it into a downward spiral and in late 2010, a 67.5-billion euro loan from the EU and IMF.
Three of the bank's former executives, including its former CEO, will go on trial next year on fraud charges.
Anglo Irish's assets, of between 12 billion and 14 billion euros, will be transferred to the state-run bad bank, the National Asset Management Agency, or NAMA, which will pay for them by issuing its own state-backed bonds, a source familiar with the situation said.
Accountancy firm KPMG was appointed as liquidator. However the IBRC board was only informed about the liquidation plan on Wednesday, according to sources familiar with the matter, while remaining staff members were told via email.
IBRC, which was due to be gradually wound down by 2020, employs about 775 people. Their contracts were terminated, as is usual in a liquidation, but Noonan said he expected KPMG would rehire most of them to help wind down the bank.
(Additional reporting by Stephen Mangan in Dublin and Laura Noonan in London; Editing by Peter Cooney, John Stonestreet and Alastair Macdonald)