Ireland to Use Bond, Not Cash, to Make Payment

Move conserves bailout cash for other uses, says finance minister

Ireland will make a scheduled payment of 3.1 billion euros ($4.1 billion) to the Irish Bank Resolution Corp. (IBRC) at the end of March with a bond, not with bailout cash. Finance Minister Michael Noonan said that the move was designed to provide flexibility around the country’s eventual return to capital markets.

Bloomberg reported that the move buys time for Ireland to win concessions on the terms of its 2010 bailout that will be easier on its people. In the wake of concessions made to Greece for its second bailout, it appears that greater flexibility may be available for the Irish as well, and the bond payment in lieu of cash provides breathing space for Ireland to negotiate.

Noonan was quoted saying that Greece’s second rescue “could be taken as a signal that the European authorities no longer see” the existing terms of Ireland’s bailout “as set in stone.” He added that a wider solution is more likely in autumn than in July, and told lawmakers in Dublin, “The funding that would otherwise have been used to make the payment should potentially allow greater flexibility around when and at what level Ireland returns to the capital markets.”

Thomas Costerg, an economist at Standard Chartered Bank in London, was quoted saying, “This temporary solution allows the Irish government to gain some time to try to extract as much concessions as possible from the Europeans and the European Central Bank [ECB]. Given all the concessions made to Greece recently, Ireland has the upper hand in the negotiations with the EU [European Union].”

IBRC was created out of the former Anglo Irish Bank Corp. and Irish Nationwide Building Society in 2011, and Noonan may have plans to use bailout funds in the end to refinance the cost of bailing out IBRC.

Noonan’s plan provides for the state to give the bond to IBRC in lieu of cash. IBRC will sell the bond to Bank of Ireland Plc, the biggest lender in the country, once Bank of Ireland wins shareholder approval. Then Bank of Ireland can use the bond to draw on ECB funding.

IBRC must buy the bond back within a year, but in the meantime it can use the proceeds from the sale to cut down its debt to the Irish central bank. IBRC reported that in 2011, its debt to the central bank rose to a total of 40.1 billion euros from 28.1 billion in 2010.

Brian Devine, economist at NCB Stockbrokers, based in Dublin, said in a note that the plan is “a positive in terms of Ireland’s funding profile and will save the country 3.06 billion euros in cash that had been set aside to meet the repayments in 2012.”

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