Mario Draghi, left, stands next to Noonan at last week's finance ministers' meeting
Given the eurozone crisis has, for more than a year, failed to seriously rankle the financial markets, those of us still preoccupied with its aftermath and how it is changing Europe can occasionally feel like a small band of obsessives offering up Talmudic pronouncements of interest to a dwindling number of fellow crisis junkies.
But occasionally one of those textual debates rises to the level of importance that’s worth the attention of a broader audience. And one of those occasions seems to have occurred over the last couple of weeks regarding Ireland and the European Central Bank’s bond-buying programme, known as Outright Monetary Transactions (OMT).
For those who haven’t been following this obsessively, the discussion is important because most officials and market analysts credit OMT with, essentially, ending the hair-on-fire phase of the eurozone crisis last year. Read more
Ireland's Enda Kenny, left, and Germany's Angela Merkel meeting last year in Berlin
With just over a month of funding left in Ireland’s €67.5bn three-year bailout, Irish prime minister Enda Kenny sent a subtly-worded letter to his fellow EU leaders as they gathered in Brussels today for their two-day summit.
At first glance, the letter (we’ve posted a copy here) seems to simply repeat messages that Kenny has made in the past: he’s weighing whether to request a line of credit after they exit the bailout; he wants quick completion of the eurozone’s “banking union”; he continues to hit his bailout targets.
But a closer read between the lines shows a more complicated game going on. In essence, Kenny is reminding other leaders they have failed to live up to promises made to Ireland last year that would have significantly lowered the Dublin’s sovereign debt levels. An annotated look at the letter after the jump.
Finance ministers MIchael Noonan of Ireland, center, and Vito Gaspar of Portugal, right, with the EU's Olli Rehn at January's meeting.
After Greece last year won a restructuring of its €172bn rescue that included an extension of the time Athens has to pay off its bailout loans, Ireland and Portugal decided they should get a piece of the action, too.
So at the January meeting of EU finance ministers in Brussels, both Dublin and Lisbon made a formal request: they’d also like more time to pay off their bailout loans. According to a seven-page analysis prepared for EU finance ministry officials a few weeks ago, though, the prospect is not as straight forward as it may seem.
The document – obtained by the Brussels Blog under the condition that we not post it on the blog – makes pretty clear that while an extension might help smooth “redemption humps” that now exist for Ireland (lots of loans and bonds come due in 2019 and 2020) and Portugal (2016 and 2021), it’s not a slam dunk case. Read more
Ireland's Kenny, right, with European Commission chief Barroso at start of the Irish EU presidency.
Ireland appears to be taking advantage of the comparatively positive sentiment in the eurozone that has marked the start of the year by moving back into the bond markets in a major way.
Last week, Dublin raised €2.5bn by issuing additional five-year government bonds, and then days later was able to convince private investors to buy €1bn in debt it holds in one of the largest banks nationalised at the peak of its banking crisis. This morning, the government was at it again, announcing a €500m auction in short-term t-bills will take place tomorrow.
Despite the winning streak, there’s still a lot of nervousness in official circles about whether Ireland can fully emerge from its bailout when its €67.5bn in rescue loans run out in November. All this has led to a debate in Dublin about whether Ireland should seek additional aid, such as a line of credit from the International Monetary Fund or the EU – which would be backed by the European Central Bank’s new limitless bond-buying programme – to provide a backstop to new Irish bonds.
The Irish website TheStory.ie got its hands on the new European Commission report on the Irish bailout, which makes clear on page 44 that Dublin is in discussions with the troika about whether the ECB’s bond-buying programme – known as Outright Monetary Transactions – can be accessed: Read more
Enda Kenny, Ireland's prime minister, during a November EU summit in Brussels
One of the hardest things about keeping on top of the eurozone crisis is the tendency for issues once regarded as done and dusted to re-emerge months later as undecided. In the new year, there are two places where this revisionism will be thrust back into the limelight: Cyprus and Ireland.
In Cyprus, two hard-and-fast principles, long believed sacrosanct, will be tested. The first is eurozone leaders’ long-held insistence that Greece is “unique”, in that it would be the only eurozone country where private holders of sovereign debt would be defaulted on.
With Cyprus’s bailout likely to double the country’s debt levels, officials say debt relief must come from somewhere or Nicosia faces a burden rivalling Greece’s – somewhere in the neighbourhood of 190 per cent of economic output. Haircuts for private bondholders could be one option to lower that, though for the time being Jean-Claude Juncker, outgoing head of the eurogroup of finance ministers, insists it’s off the table.
Which takes us to controversial option two: wiping out senior creditors in Cypriot banks. If creditors don’t need to be repaid, than the size of the bailout can be much smaller. This may appear more palatable to eurozone leaders – after all, about €12bn of the €17.5bn in bailout funding is need to recapitalise Cyprus’s collapsing banking sector – but it would also break unspoken rules. Read more
Ireland's Enda Kenny, right, with German counterpart Angela Merkel at the EU summit.
It’s been a good week for Ireland.
Not only has last week’s EU summit deal on bank recaptalisation pushed benchmark borrowing rates down to pre-bailout levels (today they were trending down again, to 6.2 per cent, lower than even Spain’s). But it has also enabled Dublin to venture out on the open market for the first time in two years: tomorrow, it will sell €500m in 3-year bills. Small, but a highly-symbolic turning point nonetheless.
Despite the positive market reaction, there is a decent amount of debate in the hallways in Brussels about what, exactly, the deal means for Ireland. As a reminder, eurozone officials agreed to change the rules of future bank bailouts so that the €500bn eurozone rescue fund can inject cash right into struggling banks, something specifically intended for Spain’s upcoming €100bn EU bank rescue.
When Ireland was bailed out, all such money had to be funnelled through the state, meaning it added to Dublin’s ballooning national debt. During the late-night negotiations, Irish officials – aided by backing from the European Central Bank’s Jörg Asmussen and Klaus Regling, head of the bailout fund – were able to insert language saying Ireland would be considered for similar treatment.
Since Ireland has spent about €64bn on shoring up its collapsed banking system, and its overall debt level now stands at about €185bn, moving those debts off its books would surely be the “game changer” touted by Enda Kenny, the Irish prime minster. But how much of that debt could realistically be moved off Dublin’s books? Read more
Enda Kenny, the Irish prime minister
Although the crisis summit is focused on Greece, there are signs that Portugal and Ireland may benefit from today’s deal, too. According to a senior European official, leaders are close to an agreement that would see lending rates on Lisbon’s and Dublin’s bail-out loans be cut – though no word on how much.
Currently, Portugal and Greece pay 200 basis points above the borrowing costs of the eurozone’s €440bn bail-out fund, while Ireland – because of an arcane dispute with France over corporate tax rates – still pays 300 basis points. There’s been some talk that this could be lowered to as little as 50 basis points for all three, but our source was mum on that point. Read more
Until Portugal imploded, most of the focus of the two-day summit was expexted to be on the new Irish prime minister Enda Kenny, who failed to secure a cut in Dublin’s bail-out loans during an emegency gathering two weeks ago. Read more
Following the hugely successful auction of Irish bail-out bonds Tuesday, Klaus Regling, head of the eurozone agency that raised the cash, said the offering “confirms confidence in the strategy adopted to restore financial stability in the euro area”. But is that really what investors were telling us?
To be sure, the first-ever use of the eurozone’s €440bn rescue fund, the European Financial Stability Facility, was an unmitigated victory for Regling and his nascent organisation – though, let’s remember, that the agency which actually did the heavy lifting was Germany’s debt agency, which is rather experienced in such auctions.
And investors would not have flocked to the issue – some €44.5bn in orders came in for a €5bn offering – if the markets thought the euro was about to implode.
But as my London-based colleague and sovereign debt savant David Oakley quoted one fund manager saying: “We are buyers of this bond because it is very safe and offers extra yield over German Bunds.” Which seems to be the prime motivator here. Read more