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IRELAND'S leaders have betrayed every single promise they made en route to power – except their express commitment to get a better deal for the taxpayer on the odious debt represented by the repayment of €31bn in promissory notes.
Any deal on this debt would include pushing out the term of repayment from 10 years to perhaps 30 years, perhaps converting the notes into fully fledged government debt by issuing a government bond. Reducing the annual payment on this debt to manageable levels – €1bn instead of €3.1bn per annum, say – is the Government's objective as this would make Ireland more creditworthy in the eyes of foreign bondholders, from whom we'll need to borrow in the future.
The Government's commitment to this objective is not in any doubt. Every single member of Government has repeated the mantra domestically and internationally that this deal will help Ireland's fragile recovery.
Despite our leaders ratcheting up the rhetoric, the Government's first set of debt-relief proposals has been refused by the European Central Bank, pushing the Government to re-examine what Central Bank Governor Patrick Honohan, in his evidence to the Oireachtas, recently called "a set of proposed transactions designed to deliver for Ireland, while not taking other decision makers too far out of their comfort zone".
The promissory notes exist to make payments to the Irish Bank Resolution Corporation (IBRC). It uses money advanced by the State (plus interest) to run its operations and pay down money borrowed from the Central Bank called Emergency Liquidity Assistance. ELA was created out of thin air by Ireland's Central Bank, and will be deleted as the payments come in from the Irish Government to IBRC and then to the Central Bank.
The question you're naturally asking is: if this ELA is the source of the problem, and it is virtual money created on a computer, and deleted on a computer, then why bother paying it at all?
The answer: the European Central Bank would view deleting ELA as something called 'monetary financing', which is illegal under Articles 103 and 123 of the Maastricht Treaty. Monetary financing is the direct lending of ECB cash to governments and their public sectors.
If governments could access ECB funds at will, any time there was a bad bank blow-up or even a bad budget deficit, governments could turn on the printing press willy-nilly, get rid of any liability, and contribute to inflation across the eurozone. The ECB's prime directive is to maintain price stability. So monetary financing of €31bn isn't going to happen.
A further argument the ECB makes is that this type of behaviour might set a damaging precedent for other eurozone states. Imagine if Spain, which has 11.5pc of eurozone output, asks for the same deal for its damaged banks that Ireland got?
Article 103 says governments can lend to publicly owned solvent banks but the ECB isn't responsible for any debts run up on their behalf. It's on the State. On March 13, 2012, Olli Rehn refused the Government's request for a break on its debt by declaring pacta sunt servanda – contracts are sacred – so respect your commitments and your obligations, pixie heads.
Well, that's all fine, but last August, when Greece needed €3.2bn to meet its creditor obligations, the ECB agreed to increase the treasury bill limit the Bank of Greece could accept as collateral for loans, essentially allowing the Greeks to issue worthless T-Bills in exchange for euro, which is monetary financing.
Yet last November 8, ECB President Mario Draghi declared there would be no help for Greece because any help would amount to monetary financing.
Wait, what? Didn't the ECB just allow Greece to print money by the back door? Yes or no?
The ECB's policy with respect to different states has been different. That's a good thing – we are different. But pretending there is a uniform application of the rules won't wash, especially when there is €31bn of odious debt at stake.
Similarly, in 2008 and 2009 the ECB happily lent to Anglo Irish Bank and Irish Nationwide in the full knowledge that they were functionally insolvent, contrary to Article 103 and Council regulation 3604/93.
The ECB's policy with respect to Spanish banks has also been inconsistent. Yet apparently Ireland's case for a change – not a derogation – of the timing of its obligations is one step too far. This despite the fact no other EU member state has had to deal directly with banking collapses on the scale we have. Our state aid to banks is roughly 365pc of our national output.
If the Government doesn't get a durable deal on the promissory note, which is acceptable to the ECB, the Irish people and the international markets, it will be a legal and political argument that wins. The economic argument is undeniable. If the Irish Government doesn't get a deal, then its domestic and international credibility will implode. Support for the Coalition is falling in the face of persistent austerity, and will disappear if it fails to deliver its only remaining unbroken promise.
An ancient German proverb holds that charity sees the need not the cause. Like it or not, Ireland needs the ECB's charity, despite the cause being our failure to regulate our banks. The Government's strategy of ingratiation relies upon it. Without the ECB's charity, the Government may not survive to see its fifth birthday.
Stephen Kinsella is a lecturer in Economics at University of Limerick
Irish Independent
