Promissory note deferral may lead to spending cuts

The country may yet have to pay a high cost for the deferral of the €3.1bn promissory note payment as the ECB is deeply unhappy with the deal and the extra cost to the exchequer may have to be made up in government spending cuts.

The Government will have to show the troika when they return next month where it will find the extra €90m the arrangement involving the Bank of Ireland has cost.

The ECB is deeply sceptical of the deal, believing it comes very close to breaking its rules against funding governments, and has warned that more funding for the banks is unlikely.

Finance Minister Michael Noonan, however, went full steam ahead at the EU finance ministers meeting in Copenhagen, insisting the banks need a commitment from the ECB for medium-term low-cost funding.

But ECB executive board member Jörg Asmussen reiterated the bank’s statement, casting doubt on its willingness to provide more day-to-day funding for the banks. “The eurosystem has provided unprecedented support for the Irish banking sector,” he said.

Mirroring the attitude adopted by Economics Commissioner Olli Rehn that Ireland must pay its debts, the former German minister said: “It is of the utmost importance that the commitments of the Irish state are met in line with standing contracts and agreements.”

While Mr Noonan brushed off the terse ECB statement, saying it expected Ireland to make future payments on time, the bank is known to be furious with him, warning the deal came close to breaching its rules.

His demand for more money for the banks further infuriated it, with sources warning that the governing council would be even more reluctant in future to make concessions, such as agreeing to provide €3bn liquidity on the new bond used in the promissory note deal.

The ideal way to cut the cost of the €31bn Anglo promissory notes is if the EFSF, the EU’s rescue fund, agreed to refinance it over a longer time and at lower interest rates. The ECB would be happy to provide liquidity to the banks on foot of such good quality bonds.

However, this needs every country to agree and Germany is reluctant, warning that it could be seen as the country accessing a second bail-out, and damaging the country’s credibility.

Dermot O’Leary of Goodbody said the extra €90m the deal will cost the exchequer will become a problem if the Government’s tax take is less than expected or if spending overshoots.

The Government may also have to make up the shortfall of income from the household tax. A 50% failure rate would leave state coffers €80m short.

Mr Noonan welcomed the first disbursement of €100m funds from Denmark from a total €400m the country has agreed to lend Ireland as part of the EU/IMF rescue.

The loan is for seven and a half years and the variable interest rate will have 1% added to the market rate.