ECB defeats Noonan over burning the bondholders
Finance Minister gives up on plan to save taxpayers' money in Anglo
Published 18/09/2011 | 05:00
FINANCE Minister Michael Noonan will have to abandon his plan to burn unsecured bondholders in Anglo Irish Bank because of renewed and increased opposition from the European Central Bank. The move could cost taxpayers €700m.
Mr Noonan said Ireland was now likely to pursue other angles, rather than continuing to press for bondholder losses, because of "strong opposition" from the European authorities who, he said, are "dead set against" a coercive approach.
Economist Colm McCarthy and Sinn Fein's Pearse Doherty yesterday both criticised the paying of any senior bondholders in the bank.
Speaking to the Sunday Independent moments after landing back from Poland, Mr Noonan denied that there had been any threat to withdraw low-interest funding to Irish banks if he pressed ahead with burden-sharing.
His denial comes after this newspaper reported last week that the ECB boss Jean-Claude Trichet threatened our former finance minister, the late Brian Lenihan, with the withdrawal of funds unless Ireland requested a bailout.
Mr Noonan said that during his meeting with Mr Trichet he raised the issue of burning senior bondholders at the now-defunct bank, but that Mr Trichet's opposition to any burden-sharing had increased significantly.
"He has been dead against it, but since the attempts to introduce burden-sharing in Greece and the contagion into Italy and Spain, he has only increased his opposition," Mr Noonan said.
"Private-sector involvement in Greece had a very quick knock-on effect into Italy and Spain and private-sector involvement didn't seem to be the way forward if you were trying to encourage the markets," Mr Noonan quoted Mr Trichet as saying.
"Trichet said that while the amounts are not big, the risk is considerable," he added. "He said Ireland is doing well and is seen as the model programme country, as reflected in the sharp drop in our bond spreads. He said it would be foolish for us to put all that good work at risk.
"The amount of money outstanding in unguaranteed senior bonds in Anglo is just over €3bn," Mr Noonan said.
He added: "If you did some kind of voluntary burden-sharing you might gain €100m," and "one wouldn't risk one's reputation for that."
Anglo Irish, the recipient of a €29.3bn bailout, had its credit rating cut in June by Standard & Poor's to CCC, four levels above default, after Mr Noonan said senior bondholders may face losses. The ECB has consistently opposed this possibility.
"I asked Trichet for his advice, I know him fairly well now and he's a very good and fair man," Mr Noonan said.
Mr Noonan said he would now reflect on his meeting with Mr Trichet and would discuss the matter with the Cabinet in the coming days.
At the meeting, Mr Noonan also said he wanted to replace the controversial promissory note with a long-term low-interest loan, which would be a far less expensive option.
"The previous government got an interest holiday on the promissory note for this year and next year, but from 2013 it will be charged at an interest rate of over eight per cent, which is extraordinarily expensive. The aim is to reduce the burden on the taxpayer as much as possible," he said.
"There's no new penalty on the Irish taxpayer," Mr Noonan said. "If we didn't have to pay, there would be an advantage to the taxpayer down the line, but I think we can get a much bigger advantage if we pursue another piece of negotiations around an alternative piece of financial engineering to the promissory-note arrangement."
The possible changes to the promissory notes haven't yet been discussed with credit-rating companies, he said.
Mr Noonan said Ireland may save more money than expected from interest-rate cuts on its government aid packages, based on preliminary EU estimates of its loans from the European Financial Stability Mechanism.
EU officials indicated that "the actual reduction would be 3.75 per cent, which is very serious money", he said.
However, economist Colm McCarthy has said the policy of paying off bondholders in a defunct bank is crazy.
"I hope Noonan posed the following question: when have unguaranteed bondholders in a defunct bank, which has lost eight times' its shareholders' funds, been paid off by a government already removed from the bond market and in an IMF rescue programme?" he writes in today's Sunday Independent.
Meanwhile, Sinn Fein's Pearse Doherty said the decision not to burn the bondholders was a "smack in the face" to Irish taxpayers.
"As a result of this decision, taxpayers' money will be used on November 2 to pay out €700m to an unsecured, unguaranteed senior bondholder in Anglo Irish Bank.
"This is a Government that talks the talk but does not walk the walk. It is clear now that Fianna Fail, Fine Gael and Labour have sold taxpayers down the river and condemned us to debt for generations to come."
Elsewhere, economic and financial chaos still looms large over Europe as EU finance ministers failed to agree a definitive plan to avert a Greek default or ease the pressure on European banks.
ECB boss Jean-Claude Trichet and Germany roundly rejected calls from US Treasury Secretary Timothy Geithner for them to bolster a €440bn rescue fund for troubled member states.
Ministers yesterday discussed the introduction of a tax on financial transactions, but strong resistance from the US means the idea has been scaled back from a global tax to just being a European one.
As they left the meeting yesterday, it was clear that ministers were far from agreement. Opponents warned that such a tax will only work if it was imposed globally, because otherwise banks would just move transactions to places with no tax.