Peter Muhly/Agence France-Presse — Getty ImagesA branch of Anglo Irish Bank in Belfast, Northern Ireland.
LONDON — The Irish government, trying to lighten the staggering debt burden of bailing out some of its biggest banks four years ago, reached a deal on Thursday with the European Central Bank to give the country more time to repay some of those loans.
The agreement, which came after 18 months of negotiations with the central bank, will enable Ireland to swap 28 billion euros ($38 billion) of high-interest promissory notes — a form of i.o.u.’s — that were used to bail out Anglo Irish Bank in 2009 for long-term government debt.
Although crucial details of the agreement were not disclosed, it appeared to be another important milestone in Ireland’s slow emergence from a banking and real estate crisis that had cut living standards, caused unemployment to soar and left cities scarred by half-finished building projects.
The deal could also be an important step for the euro zone, showing that it is possible for a member to survive the painful financial adjustments needed to recover from the crisis without leaving the currency union. Besides Ireland, Greece and Portugal have borrowed huge sums from the central bank and other international organizations to bail out their governments, while Spain has done likewise to rescue its banks.
By exchanging the promissory notes for government debt, Enda Kenny, the Irish prime minister, and his governing party, Fine Gael, have secured more time for Ireland to put itself on a firmer financial footing.
They have also won a significant concession from the central bank, which had repeatedly rejected Ireland’s plans to restructure some of its debt. The central bank, based in Frankfurt, has been concerned that a refinancing deal for Ireland would set a precedent that could be followed by other countries that have also bailed out big lenders.
Mario Draghi, the central bank’s president, declined to comment on the Irish deal during a news conference Thursday, suggesting that reporters direct their questions to Irish officials.
Mr. Kenny was more than happy to trumpet the deal. “The promissory notes represent a highly onerous and unfair legacy of the banking crisis,” Mr. Kenny told the Irish Parliament on Thursday. “The legacy banking debt hoisted on the Irish taxpayer is a heavy burden.”
Analysts said the debt restructuring was an important step in Ireland’s recovery because the government could either repay existing debt faster than previously expected or pump the extra cash directly into the local economy.
“Ireland has been pushing hard for this deal,” said Jonathan Loynes, the chief European economist at Capital Economics in London. “It’s a victory for Ireland over the European Central Bank.”
After stepping in to save many lenders that made too many bad loans during the 2000s, Dublin eventually had to turn to the European Union and the International Monetary Fund in 2010, which provided a 67.5 billion euro rescue package.
One big part of that bailout, the nationalization of the giant bank Anglo Irish, had left Dublin with onerous annual interest payments of 3.1 billion euros. The figure is about the same amount that Irish politicians have said they need to make in additional cuts in yearly government spending to reduce the country’s debt levels. The hefty interest payments caused widespread anger across Ireland, whose population has already endured several years of tax increases and government spending reductions.
The interest rate on the new government debt is expected to average about 3 percent, instead of rates above 8 percent on the promissory notes. The restructuring also will cut the country’s budget deficit by one billion euros a year, according to a statement from the Irish Finance Ministry, though Ireland’s deficit as a percentage of its overall economy will still be one of the highest in the euro zone.
As part of the deal, the Irish government passed emergency legislation on Thursday to liquidate Anglo Irish Bank, which fell into trouble in the buildup to the financial crisis by lending billions of euros to real estate developers. Many of those loans went bad after Ireland’s real estate bubble burst. The bank had been renamed the Irish Bank Resolution Corporation after its failure and bailout.
Under the terms of the liquidation, Anglo Irish’s loans will be transferred to the National Asset Management Agency, the so-called bad bank set up by the local government. Other assets could be sold to outside investors.
Anglo Irish had been at the center of controversy since the beginning of the financial crisis. Three of its former executives, including its former chief executive, Sean FitzPatrick, are facing fraud charges in connection with loans that authorities have said were granted improperly.
The new legislation, which was signed into law after an all-night parliamentary session, had been rushed through because details of the debt-restructuring plan were leaked on Wednesday. Even as lawmakers were debating the Anglo Irish liquidation, the hashtag #promnight — in reference to the promissory notes — started to trend on Twitter as the Irish public eagerly awaited the outcome.
Politicians had hoped to wait to announce the liquidation after agreeing on new terms with the European Central Bank.
“I would have preferred to be introducing this bill in tandem with a finalized agreement with the European Central Bank,” the Irish finance minister, Michael Noonan, said in a statement.
Despite persistent questioning at a Frankfurt news conference on Thursday, Mr. Draghi resolutely declined to offer any information about the central bank’s role, if any, in helping Ireland reduce its interest payments.
He said the bank’s governing council, which concluded its monthly meeting Thursday, merely “took note” of the Irish action. Mr. Draghi may have wanted to avoid any impression that the central bank was giving a financial break to the Irish government because its charter prohibits it from financing euro zone governments.
Ireland’s multibillion-euro lifeline in 2010 came with strings attached. International creditors demanded that Ireland adopt austerity measures that would cut public spending by $20 billion by 2015.
Salaries for many public sector workers, including nurses and teachers, have been reduced about 20 percent. Welfare programs like social protection and child benefits have been cut. And a series of new taxes has been introduced to refill the government’s coffers.
At first, the cuts plunged Ireland’s economy into recession, but the country’s gross domestic product is expected to grow 1.1 percent this year, much better than the mere 0.1 percent growth projected for the entire euro zone.
Despite the gradual recovery and now a reduction in the country’s debt burden, the Irish prime minister cautioned that more work had to be done to revive the country’s economy.
“Let there be no doubt, this is no silver bullet to end all our economic problems,” Mr. Kenny said on Thursday. “There is still a long way to travel in our country’s journey back to prosperity and full employment.”
Jack Ewing contributed reporting from Frankfurt
Article source: http://dealbook.nytimes.com/2013/02/07/ireland-to-liquidate-anglo-irish-bank/?partner=rss&emc=rss