The European Central Bank has rejected Ireland's preferred solution to a dispute over the cost of servicing money borrowed to rescue a failed bank.
Dublin wants to avoid having to pay €3.1 billion a year until 2023 to service a promissory note it issued to underwrite failed Anglo Irish Bank during a meltdown of the main Irish lenders after a real estate bubble burst in 2008. Irish Finance Minister Michael Noonan had proposed converting the note into long-term government bonds that would be taken up by the Irish Central Bank with the intention of keeping the bonds in its portfolio for a long period.
Avoiding the hefty interest charge that kicks in with this year's payment would help reduce Ireland's budget deficit, still among the highest in Europe, by more than one percentage point, according to finance department estimates. Relations between Dublin and the European monetary authority have been tense since the ECB refused during the bailout negotiations to allow Ireland to make senior bondholders of Irish banks take a share of the losses incurred in the rescue.
European Economic and Monetary Affairs Commissioner Olli Rehn said that eurozone governments were looking at ways to help Ireland back to full market access that could include extending the maturity of the bailout loans it received in late 2010 or possibly extending a precautionary credit line to Dublin from the eurozone's ESM rescue fund.
The latter option could open the way for the European Central Bank to buy short-term Irish bonds on the secondary market to help bring down its borrowing costs under the ECB's Outright Monetary Transactions policy.
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© Reuters
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