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30 Mar 2012 By Hugo Dixon

Ireland has received slim pickings from its deal with the European Central Bank. Dublin is trumpeting the fact that it has been allowed to make a 3.06 billion euro injection to its banks with a long-term bond rather than cash. But the elaborate arrangement actually delays the problem by just a year.

The government understandably wanted to avoid a cash outlay on the 30.6 billion euros in promissory notes – a type of IOU – it gave to the Irish Bank Reconstruction Corporation (IBRC) to shore up its capital. Although the government had enough cash from the euro zone and the International Monetary Fund to make the payment, it wants to conserve as much as possible for a rainy day. But once one unpacks the deal’s mind-numbing complexity, the benefit isn’t great.

The new money-go-round works as follows. Dublin gives IBRC, which is wholly owned by the state, a new bond. IBRC then takes the bond and repos it with Bank of Ireland, a largely privately-owned bank. BoI then takes the bond and repos it with the European Central Bank. Meanwhile, IBRC uses the cash to repay emergency liquidity assistance (ELA) it has received from the central Bank of Ireland.

There are three reasons why Dublin should be far from ecstatic. First, the refinancing is only certain for a year. If its broader promissory note problem hasn’t been fixed by then, IBRC will have to try to repo the bond again.

Second, Dublin’s annual deficit will rise by 90 million euros because the coupon on the bond will be more expensive than the interest rate it would have paid if, instead, it had just borrowed cash from the euro zone and International Monetary Fund.

Third, the ECB has taken a hard line. It has insisted that IBRC pays down ELA on schedule. What’s more, the IBRC isn’t even able to take the new bond and repo it directly with the ECB. The whole operation has instead had to be routed through the BoI which, in the process, is taking a 1.35 percentage point margin.

Dublin has certainly bought some time. But, if this is the best it can negotiate, the prospect of getting a bargain on the overall promissory note restructuring doesn’t look good.


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