Noonan’s 40-year bond gets mixed response

The suggestion that Finance Minister Michael Noonan is considering using a 40-year bond to try to plug the promissory notes gap has been met with mixed responses from analysts.

Davy’s economist Conall MacCoille said that a similar plan had been floated by Spanish authorities and promptly shot down by the European Central Bank.

“Spain proposed a plan to recapitalise Bankia by issuing bonds to be used as collateral at the ECB short-term three-month financing window,” said Mr MacCoille.

“The rejection of that proposal suggests that there will be resistance within the ECB to extending its assistance to the Irish sovereign.”

Mr MacCoille said one of the main problems for the ECB is that the proposal by Ireland to remove a €3.1bn funding obligation from the Government’s balance sheet and fund it with 40-year bond comes to close to the Government directly drawing down ECB funding.

“The European Central Bank may be reluctant to extend such funding to the Irish sovereign, coming close to monetary financing of governments or, arguably, outright monetisation of debt,” he said.

However, Goodbody’s Dermot O’Leary sees some merit in the plan, which was revealed by anonymous sources on Monday.

Mr O’Leary said the plan being touted by the Government in the media to replace the payments with a long-term bond could save the Government money in the future, as interest payments on bonds are due to restart in 2013.

“There are benefits to this plan, though. Firstly, the funding situation for the Irish sovereign would be immediately improved.

“Secondly, depending on the interest rate on the bonds, the annual interest cost would be reduced; after an interest holiday in 2011 and 2012, interest payments start in earnest in 2013, when a payment of €1.6bn will appear on the Government accounts.

“This is equivalent to 1% of GDP, significant in the context of a 2.5% of GDP consolidation effort,” he said.

Mr O’Leary also said that a resolution of the bonds issue would require the support of the ECB and the possible drawing of funds from the European Stability Mechanism.

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