Jörg Asmussen’s talk to the IIEA
This post was written by John McHale
Thanks to Eoin Bond for the link to the text of Jörg Asmussen’s talk to the Institute for International and European affairs (see here). While it will undoubtedly be controversial, I think it is a balanced take on Ireland’s crisis and crisis-resolution efforts, and in particular the support that has been received from the eurosystem.
However, I do wish to take issue with the account of the recent efforts to restructure the repayment schedule on the promissory notes, something that has been receiving a great deal of attention here in recent weeks.
Mr. Asmussen says:
I understand the strong desire of the authorities to minimise the costs associated with the banking sector rescue, including costs incurred to date, and those still to come. Let me make some comments in this area. When the programme for Ireland was designed, the costs of the banking sector measures already in place, including the promissory notes, were fully factored in. The annual cash repayments of promissory notes is thus financed by programme resources. That programme is on track. Any deviation from that programme should be considered very carefully indeed. The perceptions that have built-up around Ireland’s successes in the programme should not be jeopardised. It has been hard-won and it is worth fighting for. Therefore, the ECB remains of the opinion that Ireland should honour its commitments stemming from the promissory notes, as foreseen. This in our view is the best way to regain sustainable market access.
I don’t disagree that Ireland’s best interests are served by honouring its commitments to both market and official funders. But there is a significant difference between reneging on a commitment and a renegotiation with official creditors aimed at the shared goal of resolving Ireland’s funding crisis through re-entry into market funding. While there has been a sustained improvement in Irish bond yields, the extent of near-term funding needs will be a barrier to market re-entry. The originally agreed repayment schedule on the promissory notes envisaged reasonably rapid repayment of the principal and interest – with payments of €3.1 billion beginning in 2011. It is true that the resulting funding needs were recognised at the time of the design of the programme. What was not known at the time was the how broader euro zone tensions would escalate, making it more difficult, despite significant progress in demonstrating the capacity to honour commitments, in bringing bond yields down to levels consistent with robust debt sustainability. It is hard to see how a negotiated rescheduling of the repayment schedule based on the common interest in Ireland’s success would have any adverse reputational spillovers. Indeed, the improved maturity profile on the outstanding obligations of the State should have a significantly beneficial effect on creditworthiness.
Interestingly, Mr Asmussen appears supportive of a restructuring of the promissory notes that would involve paying them off through a long-maturity loan from the EFSF, and paying off the Emergency Liquidity Assistance (ELA) ahead of schedule. This would improve the maturity profile. But it would come at the cost of a higher interest rate given the very low ultimate interest rate on the ELA. It is possible that the ECB thinks Ireland is asking for too much – a low interest and a long maturity. (And we must recognise the ECB’s general discomfort with the ELA arrangement to begin with.) But an overly purist position can be self defeating in terms of the broader goal of finding a route through the euro zone crisis. The Irish authorities have worked steadily to make the necessary and hugely difficult adjustments and avoid a default that would be both damaging domestically and damaging to the euro zone. Given the quite particular remaining challenge that Ireland faces in regaining market access, I do not think it is unreasonable to expect this particular targeted change in the negotiated supports in the common interest of euro zone stability.