High Noon – Noonan should wait for Draghi to blink first
FAILURE to agree a satisfactory deal on the promissory notes will force Ireland to seek a second bailout. With the worsening situation in Italy and Spain increasing the risk of a wider eurozone crisis, Ireland's negotiating position is much stronger than we think.
Almost two years after first taking office, the moment of truth has arrived for this Government. Having promised the Irish public, and the international bond markets, a deal on our €63bn of bank debt, will it be able to deliver?
Ireland's bank debt consists of two main parts. There is the €32.1bn which the Government has injected into the Irish banks by way of various recapitalisations and then there are the €30.7bn of promissory notes, basically IOUs from the Government, which were used to bail out the former Anglo Irish Bank and Irish Nationwide Building Society.
It is these promissory notes, which are repayable at €3.06bn a year out to 2023, €2.2bn in 2024, €900m a year from 2025 to 2031 and a final €100m in 2032, that are at the heart of the Government's current difficulties.
While the recapitalisation money, with the exception of the €4bn that went into Anglo and Irish Nationwide, will eventually have some residual value – the Government was able to sell €1bn of Bank of Ireland contingent capital notes last month – the promissory notes are utterly worthless. The only question is who ends up footing the bill.
The ECB not surprisingly is proving reluctant to pick up the tab. After all, isn't Ireland now recovering?
All of those assurances from the Taoiseach and other Irish government ministers about how well we were doing now look suspiciously like hubris. Will nemesis follow?
If it does then we in this country won't be the only ones to suffer. The dramatic reduction in Irish bond yields, which peaked at over 14 per cent in July 2011 are now down to under five per cent, has been driven by market expectations of a deal on Ireland's bank debt. If investors conclude that the ECB isn't prepared to cut us some slack then the recent reduction in Irish bond yields will be undone in double-quick time.
The problems with renegotiating Ireland's bank debts come at the same time as things have started going very wrong elsewhere on the eurozone periphery.
In Italy, the Lazarus-like political resurrection of former Prime Minister Silvio Berlusconi continues to gather pace. The worsening scandal at MPS, Italy's third-largest bank, is threatening to turn previous predictions of a left-wing victory in this month's Italian general election on their head.
Adding further spice to this piquant sauce is the fact that Mario Draghi, the current ECB president, was the head of the Bank of Italy, the body charged with regulating the Italian banking system, at the time when things were going awry at MPS.
A victory for the right would send shockwaves through the eurozone. Mr Berlusconi's comeback has seen him adopt a strong anti-euro and anti-German line.
Meanwhile events in Spain are going from bad worse. On Thursday Santander, Spain's biggest bank, announced that it was writing off a further €19bn of bad property loans. This news came as Spain's unemployment rate climbed above 26 per cent.
With the eurozone's third and fourth-largest economies in such dire straits, the last thing the ECB needs is for the Irish bailout to go wrong now. They need us at least as much as we need them. This means that we have a much stronger hand in the promissory note negotiations than one might think.
So, in the run-up to the March 31 deadline, Michael Noonan shouldn't be afraid to look Mr Draghi in the eye and wait for him to blink first.