Ireland has struck a deal to defer a €3.1 billion cash repayment for the former Anglo-Irish Bank.
An agreement has been secured to swap the IOU payment due tomorrow, known as a promissory note, in favour of a long-term Government bond.
Finance Minister Michael Noonan said the long-running negotiations with Europe were successful but urged caution.
“We all want to arrive at a successful conclusion that is in the interests of Ireland and the EU,” he said.
About €30 billion was owed to Europe over the next 10 years in promissory notes – a type of State IOU or Government promise to pay debts.
Earlier this week Central Bank governor Patrick Honohan said a plan to spread out cash repayments, which also included some debts from Irish Nationwide, over a longer timeframe was now likely.
Mr Noonan announced plans to defer the second installment.
“While this development in relation to the end March payment is a positive development, we must keep our eye on the greater benefits which would derive from the re-engineering of the promissory note and also the potential improvements for the continuing banking sector which could also stem from the ongoing technical discussions,” he said.
“It is for these reasons that we must look at the recent developments, as what would be an initial step to facilitate a project where, if we are successful, it will be in the medium term rather than immediately.
“These discussions will continue and the Government is focused on developing an alternative solution to the promissory note arrangement in IBRC.”
Anglo, rebranded the Irish Bank Resolution Corporation (IBRC), today announced losses of €873 million for last year compared to €17.7 billion in 2010.
Mr Noonan said the settlement removes the need for the Government to dip into its €85 billion bailout fund and pay cash.
“There is a significant cash flow benefit to the Exchequer in 2012 and our long-term debt sustainability is enhanced,” he said.
The move will knock €90 million off general Government deficit for this year and it will also give Ireland greater flexibility in plans to go back to the markets, the minister added.
Pearse Doherty, Sinn Féin finance spokesman, said that pushing Anglo debt down the road is not a victory.
“There will be no real benefit to ordinary citizens suffering under the weight of austerity because of this deal,” Mr Doherty said.
“This deal takes an unjust banking debt which we should not be paying and turns it into a sovereign debt which we will pay at a later date. The key here is that we will pay it. There is no write-down and this is not a victory.”
While the deal could ensure a speedier return for Ireland to the markets, it will have no effect on what is expected to be another austerity Budget at home next year.
The deferred payment does not save the Government €3.06 billion – it simply means it will not be forced to take the money in cash from bailout funds.
“If we soften the fiscal targets and say we don’t need to do what we’re doing then it won’t work,” said Mr Noonan.
The Finance Minister described the negotiations with the European Commission and European Central Bank as very complex, but insisted a long-term Government bond would ensure repaying Anglo’s debts will become more manageable and ensure financial stability.
“If you bought a house on a five-year term and you pay big annual instalments over five years, you pay less over all than you would over 25 years,” Mr Noonan went on.
“But the annual payments would be so large and burdensome that they would weigh you down.”
The Government will present the bond to the IBRC, which will then hand it to the Bank of Ireland which will then turn the bond into cash, which it will get from the European Central Bank at a rate of one per cent, Mr Noonan said.
The cash will then be given to the IBRC, which then hands the money to the Irish Central Bank. It will then notify Frankfurt that the debt has been paid.
“There is a lot of complexities in this promissory note issue. It’s a very complex arrangement in the first instance so it needed complex financial engineering to make sure it can be paid in this way,” he added.