The other guys blinked first
In the staring match between Ireland and the EU and the ECB, the other guys blinked first. Yesterday's announcement by Finance Minister Michael Noonan that Ireland would not have to make a cash payment on the €3.1bn tranche of the Anglo promissory notes due to be paid tomorrow represents a significant triumph for the Government.
Who now remembers Tanaiste Eamon Gilmore's fighting talk of it being "Labour's way or Frankfurt's way" during last year's general election campaign? However, 13 months later this government has made considerable progress in reversing some of the most objectionable features of the November 2010 EU/IMF bailout.
While reducing the interest rate on the EU portion of the bailout represented a major step forward, that achievement was never going to be fully recognised until progress had been made on the thorny issue of Irish bank debt. As things stand, the Irish taxpayer is being expected to pick up the full €64bn tab for bailing out the Irish banks. This is despite this country being forced to repay more than €70bn of senior bank debt, much of it to British and mainland European banks, at par.
This unsustainable debt hangs like a millstone around the neck of the Irish exchequer, making a nonsense of claims that we can return to the bond markets next year.
Yesterday's announcement, under which the Government will issue a long-term bond rather than hand over €3.1bn in cash, represents the first major breakthrough on the issue of bank debt.
But only a first step. Indeed there is much that remains unclear following yesterday's announcement, not least the interest rate which the Government will pay on this long-term bond.
However, with the next payment on the promissory notes not due until the end of March 2013, yesterday's announcement does create breathing space during which a comprehensive solution to the bank debt issue can be thrashed out. This must include not just the €31bn of Anglo promissory notes but also the more than €50bn of loss-making tracker mortgages on the books of the Irish-owned banks.
Over the next 12 months, a mechanism must be devised that stretches the repayment period on Irish bank debt out over several decades and reduces the interest rate paid on these debts to nominal levels.
It is only this combination of a much longer repayment period and a much lower interest rate that will draw the poison from this issue and prevent it from overshadowing the debate on the critical fiscal compact referendum, which is now scheduled to take place on May 31.
Now that progress has finally been made on this issue, the sooner a comprehensive settlement can be agreed and the current uncertainty ended, the better. A lot more work remains to be done but yesterday's announcement represents a good start.