Business Irish

Friday 23 March 2018

EU Deal: Noonan says no ease on Budget 2013 but benefits in longer term

German Chancellor Angela Merkel leaves a two-day European Union leaders summit in Brussels early this morning. Photo: Reuters
Italy's Prime Minister Mario Monti leaves the summit. Photo: Reuters
France's President Francois Hollande
Taoiseach Enda Kenny talks with German Chancellor Angela Merkel at the two-day European Union leaders summit. Photo: Reuters

Sarah Collins and reporters

FINANCE Minister Michael Noonan said today that the landmark debt deal in Europe that will mean taxpayers will no longer shoulder the costs of the massive bank bailout will not mean an easier Budget 2013.

However, he signalled there may be easier budgets in the future if debt servicing costs are reduced.

This is already being anticipated by the bond markets – the cost of Irish borrowing fell to 6.33pc today from above 7pc following a deal in Europe for Spain, Italy and Ireland.

"They want to break the vicious circle between the banks and the sovereign," Mr Noonan told RTE News.

"This is a medium term project and we're making significant progress."

In an unexpected twist during marathon talks in Brussels earlier this morning, Ireland was granted a reprieve on its bank debt pending the outcome of a review by euro finance ministers.

European shares gained the most in seven weeks on the news which also resulted in a slump in the cost of borrowing for Italy and Spain although some investors remain skeptical about how the proposals would work in practice.

Taoiseach Enda Kenny said today that the move was ground-breaking.

"There has been a seismic shift in European policy achieved here in that what was deemed to be unachievable has now become a reality," he said.

It is still unclear how the bank debt would be separated from the national debt, but it could involve using the bloc's future rescue fund, the European Stability Mechanism (ESM), to retroactively assume some of the burden.

"The fundamental principle of the ESM [European Stability Mechanism rescue fund] providing funding to break the link between sovereign and bank debt has now been established and agreed by the heads of governments here and will allow us, in Ireland's case, an opportunity to re-engineer in a variety of ways the debt burden on our taxpayer," Mr Kenny said.

EU leaders said in a statement after the meeting that eurozone finance ministers would "examine the situation of the Irish financial sector with a view of further improving the sustainability of the well-performing adjustment programme".

The review could happen as early as July 9 when ministers hold their next scheduled meeting - and the target date for the ESM to enter into force - but any concrete deal would likely take longer to work out, officials say.

Ireland has been pushing for over a year to lengthen the repayment period and cut the interest rate burden on €31bn euro in promissory notes, or IOUs, issued to pay off and dismantle the former Anglo Irish Bank.

A future deal would piggyback on talks ongoing with the European Central Bank on the IOUs, according to government sources, though a final deal would likely address the totality of the country's €70bn banking sector bill.

The deal comes as part of a wider package agreed to ease the pressure on Spain and Italy, who are facing extortionate costs to borrow from financial markets despite sticking to swingeing austerity plans.

Italian premier Mario Monti and Spanish prime minister Mariano Rajoy held the talks hostage last night until they were granted emergency help to rescue them from a market rout.

That help includes a pledge to recapitalise Spanish banks directly using the ESM rescue fund, shifting the debt off the government's books.

The ESM will also stand ready to buy the bonds of stressed states in the open market, a power that already exists but has never been used.

Germany insisted that the radical measures be used only for countries that comply with EU debt and deficit rules and after a new European banking supervisor - most likely the European Central Bank - is in place, which could happen by the end of the year.

"We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area," said Herman Van Rompuy, who chaired the 14-hour meeting.

"We are opening up the possibilities to countries who are well-behaving... to use financial stability instruments... in order to reassure markets and to get again some stability around some of the sovereign bonds of our member states," he said.

Monti and Rajoy had refused to sign off on a €120bn growth package until EU paymaster Germany approved short-term measures to ease their cost of credit.

The clash highlighted tensions between northern creditor countries and heavily indebted southern states over the future shape of the troubled 17-nation currency bloc, now in the third year of a sovereign debt crisis.

German Chancellor Angela Merkel, leader of Europe's biggest economy, said she was satisfied with the result although she had dismissed any need for emergency support for Italian and Spanish bonds earlier this week.

"We made a good decision today, in particular concerning growth and combating unemployment and also on future measures for the EFSF and ESM. We will continue to work on long-term measures. I believe that we will reach a good conclusion tomorrow," she said.

Eurozone leaders return today to discuss longer-term plans to build a much closer fiscal and banking union, on which they asked Van Rompuy and the heads of the European Commission, ECB and Eurogroup finance ministers to present detailed proposals by October.

The special terms for Italy and Spain, cobbled together hastily in an effort to halt spreading contagion in bond markets, drew immediate demands for improved terms from one country under an EU/IMF bailout programme.

Spain formally applied for up to €100bn in assistance this week to recapitalise banks laden with bad debts due to a similar burst housing bubble.

Cyprus became the fifth country out of 17 euro zone members to appeal for a rescue due to the east Mediterranean island's heavy exposure to Greece's debt crisis.

As the leaders argued, Italy beat Germany 2-1 in the Euro 2012 soccer semi-final, the underdog knocking the favourite out of the contest.

Asked whether he expected Italy to go on to beat Spain in Sunday's final, Monti deadpanned: "I never speculate about financial markets or football."

(additional reporting Reuters)

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