Borrowing to replace promissory note ‘could be seen as new bailout’

Borrowing money from the EU’s loan fund to replace the €31bn Anglo promissory notes will require amending the country’s bailout programme and could be seen as a second bailout, officials have confirmed.

This runs the risk of the country losing its poster-boy status as successfully dealing with a difficult situation and emerging from its mountain of debt. This would make it difficult for the country to return to the markets to borrow at affordable rates next year.

It could also increase the country’s debt by 20%, pushing it up close to 140% of GDP next year, a level at which the markets would judge the debt to be unsustainable.

Germany has been arguing against looking for a new loan that could run the danger of frightening the markets and destabilising the euro. German officials are also very much opposed to any country tapping the EU rescue fund for any reason because of domestic pressure from voters to cut down on bailouts.

Irish officials have held preliminary talks at a technical level with officials from the EFSF to explore how to refinance the promissory notes.

“You would have to amend the Irish programme,” a source close to the discussions said. “This may be seen as a second bailout, and there is an understandable reluctance to take this on at a political level because of the way it would be seen.”

Irish officials have been adamant it would not be a second bailout and have been shying away from describing it as a restructuring of the country’s debt, preferring to describe it as a “re-engineering”.

Officials agree informally that it makes sense to try to swap the very expensive promissory notes at 8.3% interest rate for a longer-term loan at a lower rate. But they warn that the cost in the long term may be higher, if markets saw it was a restructuring.

“Market rates have come down significantly for Ireland and everything is running very smoothly. Nobody wants anything to happen that would change that”, the official said.

The ECB is anxious that if Ireland does attempt to change the promissory notes that it would do so through borrowing from the EFSF rather than repeating the complex arrangement that it put in place to put off paying the €3.1bn last week.

However under the terms of the EFSF, the money borrowed would have to be added to the country’s debt. This would not be the case if the money came from the new rescue fund, the ESM, that kicks in in July. This could also be cheaper for Ireland as the cost is expected to be lower than under the EFSF.