There has been a lot of focus in the past few days on stories based on leaks of Thursday’s stress tests results. Perhaps more important, however, is the question of what the plans are for the €150 billion in central bank funding that the Irish banks are currently receiving.
Two interest stories here and here suggest there is lot to be negotiated on this issue. While less visible than the question of the interest rate on Ireland’s EU loans to the sovereign, the questions of how long the Irish banks will have to pay back these loans, and at what interest rate, are perhaps more important.
Here‘s an article I wrote for today’s Irish Times. It argues that a conversion of central bank loans to equity is now the best way to end the banking crisis and avoid a sovereign default.
Enda Kenny has returned from Brussels without any agreement yet to reduce Ireland’s interest rate (Irish Times story here and FT story here). Not surprisingly, Mr. Kenny wasn’t too keen to give up Ireland’s 12.5% corporate tax rate in return for a mere one percent reduction in the interest rate on the EU loans.
To my mind, there is a lot of shadow boxing going on here. The EFSF is an EU institution and it cannot set the terms of its lending on a bilateral basis with individual countries. I’d be surprised if thee tradeoff between these two elements ended up being as explicit as suggested in this weekend’s news stories.
I think the business about interest rates and corporation tax rates has a feel of fiddling while Rome burns. More interesting were Kenny’s comments about the ECB:
“I made the point that for me to conclude a deal here I need to be much clearer in respect of elements related to the ECB,” he said.
“I spoke to president Jean-Claude Trichet and the Minister for Finance will be meeting with him on Monday. He has agreed that I should meet with him before the [next EU summit on March] 24th/25th to discuss a number of issues relating to the ECB and its positions.
“Before the council meets again in two weeks time we hope to be in a much clear position insofar as Ireland’s position is concerned and continue on our progress arising from the mandate that I’ve got about an improvement in the terms of the package for Ireland,” the Taoiseach said.
He continued: “In the next couple of weeks I expect to be in a much clearer position in respect of the state of what we have inherited is in respect of Ireland’s position.
“We’ll have had discussions with the ECB in respect of a number of matters. We’ll have a much clearer picture of what’s emerging from the stress tests and as the principle has now been accepted and implemented of a reduction in the interest rate I . . . would regard that actually as the beginning of a process.”
I reckon they could fill Croke Park if they sold tickets for those discussions with the ECB.
Here‘s a column I wrote for Business and Finance on the challenges facing the new government.