An attempt by Ireland to ease its debt burden was thrown into disarray early on Thursday as the government scrambled to introduce emergency legislation to liquidate Anglo Irish Bank, the failed lender, without having secured a key debt swap deal with the European Central Bank.
The government had intended to announce the liquidation of the bank alongside a deal with the ECB on replacing €28 billion in costly promissory notes, used to bail out Anglo Irish in 2009. But leaked reports of its plans on Wednesday afternoon forced the government to go ahead with the liquidation before reaching agreement in Frankfurt on replacing the notes.
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The promissory notes have become a lightning rod for public anger over austerity and Ireland's treatment in its international bailout at the hands of the euro zone authorities, particularly the ECB. The annual payments of €3.1 billion to repay interest and principal are more or less equivalent to the value of austerity measures implemented by Dublin each year.
The outline of the Irish proposal to replace its promissory notes remained vague but appeared to involve replacing them with sovereign bonds that would be cheaper to service and could potentially serve as collateral for ECB funding, ending a period of so-called Emergency Liquidity Assistance that the Anglo Irish rump has relied on and is subject to fortnightly reviews by the ECB.
Even if the ECB agrees to the proposal, a deal risks being seen as too little amid widespread domestic calls for an outright debt writedown rather than making the debt cheaper to service.
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"You're winding up the bank minister, but you're not winding up the debt," Pearse Doherty, Sinn Fin's finance spokesman, said in rowdy parliamentary session that went into the early hours of Thursday morning to liquidate the bank before daylight, when bondholders might attempt to stop the liquidation.
The rush to liquidate the bank prompted accusations in the Dil of serious fumbling by the government. Michael D. Higgins, president, flew back early from a trip to Italy in order to be available to sign the legislation into law if it is passed.
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Joe Higgins, a Socialist Party deputy, described the government's efforts as "a chaotic and grotesque way to run a state".
Three people with knowledge of the proposal suggested that the former Anglo Irish assets would be shifted on to the balance sheet of the National Asset Management Agency. Dublin set up Nama as a "bad bank" in 2009 to clear toxic property loans with a face value of €74 billion from the balance sheets of its main banks.
The ECB has had concerns that the restructuring of Ireland's debt could lead other euro zone countries to seek similar ways of reducing their debt burdens. However, Ireland was the only euro member with the burdensome promissory notes and is considered as something of a poster child in its reform efforts.
Asked about the Irish promissory notes proposal, the ECB would only say talks were "ongoing". The ECB's governing council meets later on Thursday but there was no indication whether or not agreement would be reached amid some suggestions that policy makers may need to refer back to their national central banks.
A deal would be a big relief to Dublin, easing its return to markets and exit from its international bailout program due later this year.
It comes after a two-year lobbying campaign by Dublin to be allowed to restructure the promissory notes that were agreed with the ECB at the height of the financial crisis. The ECB has rejected previous Irish proposals saying they were akin to monetary financing of governments, prohibited under EU treaties.
Anglo Irish Bank is now called Irish Bank Resolution Corporation. In January, the FT reported that IBRC was accelerating the sale of tens of billions of euros of property-backed loans. The lender was due to be liquidated by 2020.
Anglo Irish was the bank at the center of Ireland's financial crisis after lending tens of billions of euros to property developers during the building boom that followed Ireland's adoption of the euro in 1999.
The lender's collapse has saddled Irish taxpayers with net losses of between €26 billion-30 billion.