Minister for Finance Michael Noonan has said the agreement on debt burdens announced by European Union leaders today is unlikely to make the job of framing December’s budget any easier.
He said the agreement represented "a seismic shift" in EU policy and that it was "more important now more than ever" that the State continued to fulfil its bailout programme "because that positions us to get the additional help that is signalled in this policy statement".
Mr Noonan said the most significant thing that had happened overnight in Brussels was that Europe had switched its policy position on linking banking and sovereign debt. This, he said, was something that appeared highly unlikely as recently as a fortnight ago, and could make Ireland's future position more sustainable.
The Minister said the Government had sought to lengthen the repayments and improve interest rates on some of the State's debt, particularly in relation to the Anglo Irish Bank promissory notes, but that European leaders had now "gone beyond that".
"What we want to do is negotiate a scheme where we can effectively transfer from the sovereign debt the recapitalisations already done so that our position is more sustainable and we get back into the markets," he said during an interview on RTÉ's News at One programme.
Mr Noonan said he was not yet sure about the full picture regarding how the agreement would work but details would be fleshed out in the period between a meeting of EU finance ministers on July 9th and the end of the year.
"We're not sure what the full story is yet. But what they have announced…is that the Eurogroup will examine the situation of the Irish financial sector with a view to further improving the sustainability of the well performing adjustment programme," he said.
"That means that, first of all, all the banks are included in the examination and then what we'll be trying to negotiate is a way to ensure that the intention of the policy statement is implemented, so we can separate the bank and sovereign debt."
Asked if the agreement meant that the entire sum of some €35 billion poured into Anglo Irish Bank and Irish Nationwide Building Society would still have to be paid, Mr Noonan replied: "I don't think it is possible to work on one side of the balance sheet without working on the other side.
"So, if one were to shift debt off the balance sheet of any individual bank, I think it follows that one would shift assets of a certain or potential value into the same special purpose vehicle to match the debt."
As an example, he said, if the State were to shift debt off institutions such as AIB or Bank of Ireland "the corollary would be that part of the shareholding held by the State would be transferred as well.
"Then, as time goes by, and over a period of time the value of your shares would be enhanced…In other words the value of shares on one side of the balance sheet would eventually pay for the debt that was transferred on the other side of the balance sheet over a period of debt."
Mr Noonan said much financial engineering still had to take place and that this would not be in the shape of a debt write down but rather "a little" sharing of some of the burden with colleagues in Europe.
The Minister said the new arrangements would not make the planning of the upcoming budget any easier, as they were unlikely to be in place in time, but that reduced costs when it came to servicing the State's debt would improve the budgetary position in subsequent years.
Asked by how much it would improve the position, he said it was impossible to give a figure at this stage.
"It will make no difference at all to next years budget except that in general terms if you see the spreads coming down on Irish bonds in today's market that's good for the economy, for inward investment and job creation but in the actual fiscal figures and amount of tax we have to correct and so on, that will make no difference to next year's budget."
He added that "for the first time" European authorities were making a distinction between well performing countries complying with their programmes and the ones that were not. "So effectively what they are saying is that if you deliver on your programme and accept all the conditions, Europe will give you additional help."
