After a dramatic night in the Irish parliament that ended with the shutdown of a bankrupt Irish bank, the European Central Bank (ECB) has signed off on allowing Ireland to restructure some of its debt.
Irish Prime Minister Enda Kenny said the move would bookend "a tragic chapter in our nation's history" and is "a historic step on the road to economic recovery."
The government says that closing down the former Anglo Irish Bank, which was absorbed into the state-owned Irish Bank Resolution Corporation in 2011, will relieve pressure to repay the bank's debts in the short term. As a result, the county will need to find one billion euros ($1.34 billion) less per year in budget cuts and new taxes, but will still meet fiscal conditions laid down as part of the bailout.
"We, the [ECB] governing council, unanimously took note of the Irish operation," he said, referring reporters back to the Irish government for further details.
Commentators say the ECB's reticence to speak is because it doesn't want to set a precedent allowing other countries to renegotiate their bailout deals.
"What they're doing is making it absolutely explicit that this is a domestic issue and that it has to be dealt with by the Irish government," says Brian Lucey, economist at Trinity College Dublin.
The confusion started yesterday and continued into the early morning, when the Irish government voted to shut down a toxic state-owned bank, avoiding a 3.1 billion euro ($4.16 billion) payout to the so-called "troika" of the EU-ECB-IMF next month – something it could technically only do if the ECB approved the move, leaving many wondering just what was going on.
The Dáil, Ireland's parliament, held a special sitting at midnight local time to pass emergency legislation to close Irish Bank Resolution Corporation (IBRC), a state-owned company founded in 2011 to take over the assets of Anglo Irish Bank, which itself was taken into state ownership in 2010. The debts will now be assumed by the Irish Central Bank and government-owned National Assets Management Agency.
The rush through parliament began after the plan was leaked and reported by Reuters, with the government announcing the surprise bill and guillotining debate in an attempt to get it passed into law immediately.
Speaking on Irish national radio, Finance Minister Michael Noonan explained the quickfire legislation was required to ensure government control of the bank's assets before any legal action to halt the move could be filed by disgruntled bondholders, who will now lose money on their investment.
"As far as we're concerned the prudent thing to do was to safeguard the assets of the IBRC," he said.
Under the plan, the bank's remaining debt, until now financed using costly promissory notes, will be replaced with a number of interest-only bonds, to be repaid starting in 2038, with the final payment due in 2053.
Economist Lucey says a deal to extend the terms of the debt should be given a guarded welcome.
"Extending the terms, even at the same interest rates is, in broad terms, going to reduce the amount of debt outstanding. That's the good. The bad is that it hasn't been written-off and the ugly is that it copper-fastens the bank debt as national debt," he says.
"It'll help the cash-flow situation, but we still have three of four years before we're back in a budget surplus."
Speaking to The Monitor before the ECB announcement, fellow Trinity College Dublin economist Constantin Gurdgiev depicted the government's move as a gamble designed to force the ECB's hand.
"It's a chess move. The government has gained a pawn but potentially opened itself to a check. Now if the ECB turns Ireland down it would be a very public slap in the face, which puts pressure on the ECB, but it also means that Ireland loses its ability to negotiate a different deal," he says.
Opposition lawmakers vehemently objected to the legislation, complaining they had not been given sufficient time to consider the highly technical 56-page bill. The opposition has been pushing for the bank debt to be repudiated altogether.
They are nervous about a repeat of 2008, when the then-government passed emergency legislation to guarantee savings and bonds in Irish banks, which later cost the country billions. They argue that debt amassed by a private bank is not public debt, and had the government not guaranteed the banks in 2008, it would not have been put on the hook for repayment.
After a three-hour debate, the bill was passed with 113 votes to 35 and sent to the upper house of parliament, the Senate. By 5:30 a.m. it was on its way to be signed by Irish President Michael Higgins, who had cut short a state visit to Italy to sign the legislation.
Much of Ireland's debt originates with a private bank, Anglo Irish Bank. Anglo Irish Bank's debt was transformed into government debt by the 2008 guarantee, a move further reinforced by Ireland's nationalization of the bank in January 2009. This securing of bank debt has proved unpopular with the public and is widely blamed for the country requiring a bailout and austerity program of budget cuts and new taxes. The lender’s collapse has left Irish citizens with net losses of 26 to 30 billion euros ($35.2 to $40.6 billion) and a crushing budget deficit.
During the so-called Celtic Tiger years, Anglo Irish Bank lent heavily into Ireland's overheated property market and the bank's near-collapse after the 2007 property crash precipitated a wider crisis in the Irish banking industry, because of banks' substantial lending into the sector. The country's two main "pillar banks," Bank of Ireland and Allied Irish Banks, were also part-nationalized.
Eight hundred workers lost their jobs as a result of this morning's move. Some are expected to be rehired by the liquidator, KPMG.