independent

Thursday 17 April 2014

Long-term government bond holdings surge 28pc after IBRC deal

ECB President Mario Draghi

IRELAND’s total long –term government bond debt increased to €115.4bn in February after surging by 28pc following the liquidation of the former Anglo Irish Bank.

The amount of bonds increased from €90.3bn in January, according to the Central Bank. Financial institutions and the Central Bank hold a combined €48.7bn worth.

The increase will be closely watched by European Central Bank officials, who will monitor the debt pile to make sure the Central Bank isn't being used to bankroll government spending.

The Dail passed legislation to liquidate the Irish Bank Resolution Corporation (IBRC) during a hasty late-night session in early February under a plan to deal with the massive annual repayments due under the controversial promissory-note deal.

With IBRC in liquidation, the Central Bank became the economic owner of the promissory notes.

They were replaced by the Government with a series of longer-term, floating-rate bonds to the value of €25bn and with maturities of up to 40 years.

The holdings will be closely watched by ECB president Mario Draghi, who has never given overt approval for the promissory-note swap.

At an ECB press conference after the IBRC was liquidated, Mr Draghi cryptically said that the governing council had taken note of it – ECB speak to confirm its awareness of the deal.

Promissory note

The role of the ECB in the deal was to ensure that any agreement would not constitute monetary financing.

The ECB president told MEPs that the deal would be examined later in the year in order to ensure that it was in conformity with article 123 of the ECB's treaty, which blocks the bank from engaging in monetary financing.

And he said the Central Bank's disposal policy for the bonds was crucial.

Under the Frankfurt bank's rules, monetary financing is strictly prohibited for any member state. The ECB will therefore be keeping a close watch to ensure that the Central Bank disposes of the bonds as planned.

The Government has said that €500m worth will be sold by the end of next year, with another €500m sold between 2015 and 2018, a further €1bn between 2019 and 2023 and €2bn per year after 2024.

Just days after the promissory note deal, Jens Weidmann, the head of the German Bundesbank and a member of the ECB's Governing Council, warned that it was dangerously close to breaking EU monetary rules.

He appeared to cast doubt over the agreement, stating the ECB had to make sure the transaction conforms with the Euro bloc's rules

The Department of Finance stressed that the deal is solid.

Irish Independent

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