Draghi signals support amid German misgivings

Mario Draghi appears to have tacitly endorsed the restructuring of the promissory notes.

In many ways the stakes could not be higher for the ECB. It has a strict mandate, which prohibits monetary financing under any circumstances. If it didn’t comply with this rule, then its credibility would be badly undermined.

Monetary financing is providing direct funding for any member state government. The Government replaced €28bn in promissory notes with long-dated government bonds.

The promissory notes had a repayment schedule of €3.1bn every March for the next decade. The government bonds have an average maturity of 34-and-a-half years.

The head of the Bundesbank, Jens Weidmann and former ECB board member Jurgen Stark, have both expressed concerns over the past few days that the deal breached monetary financing guidelines.

Speaking before the European Parliament yesterday, Mr Draghi said the ECB would examine the deal again later this year. In eurospeak, this means that the arrangement will not unravel. However, the ECB has to be careful what it says in public in an effort to placate the German Constitutional Court among other concerned onlookers.

It is believed Mr Draghi ensured the ECB Governing Council did not block the Government’s proposal last Thursday week.

But that does not mean it is all plain sailing from here. The ECB chief stressed that he would look at how long the Irish Central Bank held onto the government bonds that replaced the promissory notes.

Under the current arrangement, the Central Bank will hold onto the bonds for an average maturity of 14 years. As long as the central bank is holding the bond, the interest rate payments will make their way back to the exchequer.

But if the Central Bank is forced to offload these bonds sooner than it currently envisaged, then it would increase the interest rate costs of the State.

The outcome depends on events between now and next December when the ECB will look at the Irish arrangement. The Government should be mindful to look at the wider picture in the meantime.