Central Bank governor Patrick Honohan expressed confidence in an RTE interview last Sunday that the promissory note deal with the ECB would not unravel. A week later, the unravelling appears to have begun, with statements from the president of the German Bundesbank Jens Weidmann to the effect that he was unhappy with the deal, followed by a commitment from ECB president Mario Draghi that it would be re-examined.
The benefit of the deal to Ireland lies in the delayed disposal into the market of the new bonds issued to the Irish Central Bank. Access to funding at the ECB's low lending rate diminishes as the bonds are replaced with more expensive market funding. A minimum disposal schedule has been agreed, but it would appear there will be pressure to accelerate the schedule.
Dr Weidmann's concern is that the deal blurs the ". . . clear line between monetary and fiscal issues" and that the legality of the arrangement is therefore in doubt. Prior to Dr Weidmann's appointment to the ECB governing council, in the summer of 2010, Mr Draghi's predecessor Jean-Claude Trichet blurred that distinction in a manner whose legality is not clear either. The eurozone had no central fund for rescuing troubled banks (it still doesn't) and, fearing the contagion effects of bank bondholder haircuts in Ireland, the ECB pressured Irish authorities to take enormous debts of failed banks onto the state balance sheet. The ECB, lacking a bank resolution fund, decided to use the Irish Exchequer instead. The deal on the promissory notes should be seen as a partial recompense for this, arguably illegal, action by the ECB. There are no powers in any European treaty permitting the ECB to levy bank bailout costs on the Exchequer of an individual member state.
If the ECB backtracks on the prom-note deal, it will be time for the Government to test the legality of what was done by Trichet's ECB in 2010. There are explicit provisions in the ECB statute that entitle a member state to challenge the acts of the ECB at the European Court of Justice.