Ireland is making use of a secret arrangement between eurozone central banks to ensure its controversial debt swap doesn’t fall foul of a ban on monetary state financing, according to sources.
There are limits on how many of its own government’s bonds a eurozone central bank can hold in its investment portfolio to make sure it doesn’t directly finance the state, the people said on condition of anonymity.
The Irish central bank risked exceeding that limit when it assumed €25bn of government debt as a result of Ireland’s seizure of Anglo Irish Bank Corp, they said.
To avoid breaching the rules, the Irish central bank will be allowed to borrow unused capacity from counterparts in the 17-nation bloc, the people said. One suggested the extra capacity would be provided by the Eurosystem of Central Banks rather than from individual central banks that have room to spare in their investment portfolios.
The procedure is permitted under the confidential Agreement on Net Financial Assets, or ANFA. A spokesman for the Frankfurt-based European Central Bank, which has never published the terms of ANFA, declined to comment on the Irish case. The Irish central bank also declined to comment.
The Irish government announced in February that it would swap so-called promissory notes used to rescue Anglo Irish for long-term bonds with maturities of up to 40 years. The bonds will be held by the Irish central bank, which can return the interest it receives for the securities to the Government.
The deal drew criticism from Bundesbank President Jens Weidmann, who said it has a “fiscal nature”.
While the Irish central bank said it has been “very careful” not to breach the EU ban on central banks financing their governments, the Government says the deal will save the state €20bn in the next decade.
ECB President Mario Draghi has never formally blessed the overall Anglo Irish agreement, saying only that policy makers have “taken note” of it.
It’s not unusual for a central bank to be left with assets in the case of a bank failure, when collateral used in refinancing operations is kept and eased onto the market to recoup losses. The Bundesbank said in February it had completed the sale of securities inherited after the collapse of Lehman Brothers in 2008.
The ECB may yet pressure the Irish central bank to accelerate the pace at which it sells long-term government bonds to avoid excessively reducing the Government’s interest-payment burden, two of the people said.
The Government says the Irish central bank will sell a minimum of €500m worth of bonds by the end of next year, with sales stretching beyond 2024.
Draghi told lawmakers at the European parliament in February that the “disposal policy” of the Irish central bank regarding the assets will be crucial to ensuring compliance with Article 123 of the EU’s founding treaty. The ECB assesses compliance with ANFA at the end of each year.
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