Noonan downplays prospect of early deal on bank debt

Minister for Finance Michael Noonan downplayed the prospect of any imminent deal to recast Ireland’s banking debt as he stressed…

Minister for Finance Michael Noonan downplayed the prospect of any imminent deal to recast Ireland’s banking debt as he stressed that an EU pledge to review the bank rescue still stands.

With hopes of an agreement this month all but gone, Mr Noonan pinpointed dates next year in relation to the Anglo Irish Bank promissory note scheme and using the ESM fund to rescue AIB and Bank of Ireland.

Arriving in Luxembourg for EU talks, he reiterated that he is still pushing some kind of a breakthrough before the Budget in talks with the European Central Bank with Anglo.

However, he said the key date was next March, when another €3 billion payment falls due.

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“The political timeline is to get a new arrangement on the promissory note by March when the next tranche of money has to be paid a €3 billion call which is very onerous,” Mr Noonan told reporters.

“But it would help me doing the budgetary arithmetic if something could be arranged - or a statement of intent could be achieved - before the Budget.”

Asked if that was feasible, he said that was a question for the ECB. “I’m only at one side of the discussion. I would hope that certainly the march date is feasible.”

Similarly, Mr Noonan suggested talks on a new euro zone bank supervisor could drag on into next year.

The establishment of such a supervisor – operating within the ECB – is a precondition for any direct bank recapitalisations by the ESM.

“I think everybody in the group are aiming for the 1st of January,” he said.

“At the last meeting I was at there were suggestions it would be some time between the 1st of January and March. They were allowing for some weeks of drift after Christmas but nothing significant.”

While a German-Dutch-Finnish statement two weeks ago cast doubt over the scope of any such interventions, Mr Noonan said EU leaders’ decision in June break the link between bank and sovereign debt still stands.

“The position is that the policy position as set out by the heads of state and government on the 29th of the June is the policy that prevails,” he said.

“Anybody commenting on that might be variations on a theme but the policy prevails, we’ve had assurances of that from the Commission and from the European authorities.”

Mr Noonan noted the ESM had set out the pricing of loans for any bank recapitalisations and said that implied this was a policy “which everybody intends to implement”.

Asked if the position set out in Helsinki reflected German government policy, he said it was not for him to speak about the German policy.

“The evening of the Helsinki statement, the Dutch authorities put out a statement saying that what they meant by ‘legacy’ was banks that had become insolvent and were no longer functioning as banks but that functioning banks would not be caught in their definition of legacy,” he said.

“So in terms of applying that formula to Ireland they were excluding Anglo Irish Bank, but were including AIB and Bank of Ireland.”

Ireland is seeking European Union help to refinance €30 billion of promissory notes. It is also looking for EU aid in refinancing other bank debt.

Separately, Euro zone finance ministers delivered a united defence of Spain ahead of the meeting, saying the country was taking steps to overhaul its economy, funding itself successfully in the financial markets and did not need a bailout, at least for now.

Arriving at the Luxembourg meeting to discuss Greece and Spain and to inaugurate the euro zone's permanent bailout mechanism, the ESM, German finance minister Wolfgang Schaeuble said Madrid had made clear it wanted no help.

"Spain needs no aid programme. Spain is doing everything necessary, in fiscal policy, in structural reforms," he told reporters as he arrived for a gathering that will also discuss plans to establish a single supervisor for euro zone banks.

"Spain has a problem with its banks as a consequence of the real estate bubble of the past years," he said. "That's why Spain is getting (EU) help with banking recapitalisation."

Luxembourg finance minister Luc Frieden took the same line but added that if Spain were to make a request for aid beyond the 100 billion euros already earmarked to recapitalise its banks, it would be examined.

"I think we should deal with such a request when it comes, but so far the Spanish government is undertaking reforms which go in the right direction," he said.

Finance ministers agreed in June to provide up to €100 billion for Spain's banks, many of which are weighed down with bad property loans and need to be recapitalised.

An independent audit has shown the banks need around €40 billion, less than originally expected, a result Austria's finance minister, Maria Fekter, said was positive.

"We have the banking application from Spain," Ms Fekter said. "We are likely to hear today that this 100 billion euros is not all needed, that Spain needs significantly less." Many in the financial markets are convinced Spain will not be able to meet its sovereign funding needs at an affordable cost without euro zone and European Central Bank support, especially with several of its regions requiring a bailout from Madrid.

A euro zone source said ministers may also discuss Spain's 2013 budget, outlined last month, which the International Monetary Fund and the European Commission both believe is based on an over-optimistic forecast of a 0.5 per cent economic contraction next year.

The IMF forecast of a 1.2 per cent recession may be revised further downwards tomorrow.

As well as Spain, ministers will discuss the situation in Greece, where intense negotiations continue between the government and the 'troika' of inspectors from the Commission, the ECB and the IMF over budget cuts for 2013-2014.

But Jean-Claude Juncker, the chairman of the Eurogroup, said no developments on Greece, which has fallen behind on its second bailout programme, were likely at least until the troika finishes a report on the country's debt situation. That report is now expected in early November.

"I don't think that we will have any major decisions on Greece," Juncker said. Asked whether a decision on Greece could be expected soon, he replied: "Hope never dies."

Today's meeting will also discuss plans for the ECB to be given responsibility for supervising all euro zone banks and the idea of creating a single budget for euro zone countries, issues that will be discussed further by eurozone and EU leaders at a summit in Brussels on October 18th and 19th.

But little formal progress is expected, with questions unresolved about how many of the euro zone's 6,000 banks the ECB will be charged with overseeing and whether it will be able to start its new role from January next year.

Instead, the only firm action taken today was the unveiling of the European Stability Mechanism (ESM), a €500 billion, rescue mechanism for the 17 euro zone countries.

The ESM, which replaces the temporary EFSF, will be used to lend to distressed euro zone sovereigns in return for strict fiscal and structural reforms that aim to put economies that have lost investor trust back on track.

"The start of the ESM marks a historic milestone in shaping the future of the European monetary union," the fund's chief executive, Klaus Regling, told reporters: "The euro area now is equipped with a permanent and effective firewall, which of course is a crucial component in our strategy to ensure financial stability in the euro zone."

The fund's lending capacity will be based on €80 billion of paid-in capital and 620 billion of callable capital, against which the ESM will borrow money on the market to lend it on to governments cut off from sustainable market funding.

From today it has a capacity of 200 billion euros and it will reach its full capacity gradually by 2014.

Additional reporting: Agencies

Arthur Beesley

Arthur Beesley

Arthur Beesley is Current Affairs Editor of The Irish Times