Europe

Irish prime minister downplays EU debt deal fears

EU and Irish flag
Image caption Ireland has secured a new debt deal that should reduce the burden on Irish taxpayers

The Irish Prime Minister Enda Kenny has downplayed the significance of a statement by the finance ministers of Germany, the Netherlands and Finland that could threaten an EU deal on the Republic's bank debt.

The Irish government is hoping the ministers' comments are part of a negotiating process.

At the end of June at an EU summit in Brussels the heads of government reached an agreement aimed at breaking the link between banking debt and sovereign debt by allowing a future bailout fund to recapitalise banks directly without first lending the money to states.

They also agreed to look again at the Irish banking debts.

The government in Dublin, which has put an estimated 62.7bn euros into its banks, welcomed the deal as "seismic" and a "game changer".

But more cautious observers were sceptical noting the equivocal language in the communique and the less than overwhelming enthusiasm coming from the German Chancellor Angela Merkel.

The Irish government hoped to have an agreement by the end of October after the EU had dealt with Spain.

But with the Spanish resisting going into a bail-out programme that deadline increasingly seems unrealistic.

Despite that there has been good news for the Irish government in recent months with the yields on its bond prices falling significantly.

Doubt

Then on Tuesday night the finance ministers of the only eurozone countries with triple A ratings - Germany, Finland and the Netherlands - issued a statement putting, in the view of many, a big question mark over Dublin's interpretation of the "seismic" shift.

They said the future bailout fund, the European Stability Mechanism (ESM), could only recapitalise banks once the European Central Bank's new role of supervising the financial sector was in place.

It would also have to have proven its effectiveness and critically, for the Republic, the ESM could only get involved with problems arising after the supervisory regime is set up, and would not be able to deal with banking problems that occurred in the past.

That seems to contradict the Irish government's understanding of the June agreement and to suggest the ESM cannot be used to deal with Irish banking legacy issues - the Irish government has put 34.7bn euros into the now defunct Anglo Irish Bank and the Irish Nationwide Building Society.

The support for Anglo came in the form of promissory notes - which promised to re-pay monies owed - over a 20 year period.

There was a hope that the repayment period for those notes would be extended to 30 or 40 years because at the moment they cost the Republic's taxpayers over 3bn euros every year and will continue to do so up until 2024.

So, a relaxation could mean quite a saving in interest payments.

Agreement

On Wednesday morning Mr Kenny went into the Dail to take questions on the statement from the three creditor nations.

Repeatedly he stressed that the June agreement had been signed up to by all 27 EU countries saying the previous night's statement had been agreed by just three.

He implied that those countries had their domestic problems about bailing-out other euro zone countries but he admitted that his government was given no advance warning about their statement.

Fianna Fail accused him of not doing enough to secure the deal by the end of October.

Sinn Fein said the government's strategy of dealing with the banking debt was "all smoke and mirrors" and independent TD, Shane Ross, characterised the three countries' statement as being "unfriendly, unhelpful and possibly deliberately damaging to Ireland".

The prime minister stood his ground but with another tough budget expected in December he knows that recent favourable market sentiment towards the Republic of Ireland must be maintained if the state is to successfully leave its bail out programme.

And that means that in the coming weeks a close eye will be kept on both developments at EU level affecting Irish banking legacy issues and on the yields on Irish bonds.

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