February 8, 2013
There are two parties in the promissory note negotiations. On one side is the ECB and on the other, the Irish government. The ECB wanted all along to turn Irish bank debts into Irish sovereign debts. The Irish government wanted to avoid this at all costs, preferring either some debt relief or some mutualization or sharing of the debts.
Once the promissory note was in place the Irish had wriggle room, which the ECB wanted to reduce, while giving as little away as possible.
Lets look at the interests of both parties in turn, beginning with the ECB.
There are two main reasons the ECB wanted the Irish to swap the promissory note for sovereign debts. First it would tidy up, in its eyes, the messy promissory note; it was unorthodox and as long as it was around, ran the risk that the pesky Irish could go rogue, doing a local deal with themselves between their central bank and their government – far away from Frankfurt. If the Irish government said they weren’t paying the note, the Irish central bank would find itself breaking the ECB’s rules on monetary financing. By not paying the note and yet still extending cash to Anglo, the Irish central was simply printing money with nothing to back it up.
The second reason the ECB wanted the Irish to convert the promissory note into Irish government bonds, was because it would create collateral against the money the Irish central bank was printing: and the Irish people would be on the hook. As long as the Irish people are on the hook, the ECB is happy.
Now look at the opening position of the Irish government.
The position of our government was: the banking debt is not ours, it is unfair and Ireland was only doing its bit to save the European banking system by bailing out our bank. By preventing contagion, we are owed a favour. So the Irish government’s red line in the sand has to be to avoid swapping the promissory note into a government bond. Why? Once you do this, the debt becomes the debt of the Irish people – and the ECB are off the hook.
Once you accept that it is Irish government debt, the game is over. So the last thing the government wants to do is convert the unorthodox promissory note into government debt – at any maturity.
The deal on the table is a complete defeat for the Irish government and the Irish people, because at its core, when you strip away all the technical details, it is about transferring bank debt to sovereign debt.
So, it is game set and match to the ECB. Now it is rid of the promissory note – which was only an IOU written by the last Finance Minister with a vague undertaking to clear things up eventually -converting it into Irish sovereign debt, which means you and me are definitely on the hook. The ECB must be sniggering up its sleeve, if it is not actually laughing in our face, at the inability of the Irish negotiators to act on our behalf.
Yet again, our negotiators have sold the people short and given the ECB everything it wanted.
This move will increase overall Irish government debt and in time, will bring forward the risk of a sovereign default in Ireland, which is precisely what the deal was supposed to avoid.
David McWilliams’ new book The Good Room is out now.