Ireland Gets New EU Bank Debt Deal

Taoiseach Enda Kenny has hailed the outcome of last week's EU summit as a "seismic shift" for Ireland, while Tanaiste Eamon Gilmore called it a "game changer".

In a dramatic overnight meeting which concluded after 13 hours in Brussels at around 4.30am last Friday, EU leaders agreed to a new principle that could cut the link between banking debt and sovereign debt.

Significantly, the statement released after the meeting specifically mentions Ireland and says the deal can be applied retrospectively to Ireland.

Ireland has pumped €64 billion into banks over the past few years, and this effectively caused Ireland's borrowing costs to soar to a level so high, that the country needed the assistance of the IMF, European Commission and European Central Bank.

Bond yields fell to their lowest level since before that rescue following Friday's announcement, and there is now real hope that the deal could boost Ireland's chances of returning to the markets by the end of next year.

That would mean Ireland could exit the bailout program and regain economic sovereignty.

The breakthrough was only possible because of the difficulties of Spanish banks, and a warning by their Prime Minister that the country would not be able to afford borrowing at current bond yields for much longer.

There were also fears that Italy could be in serious trouble too.

German chancellor Angela Merkel had been strongly opposed to the idea of allowing governments to be bypassed and for EU bodies to lend directly to banks.

But Italy's prime minister Mario Monti threatened to withhold support for a €120bn growth package that was agreed at the summit, if something wasn't done about bank debt.

The summit was the 20th since the euro crisis began, and undoubtedly the most significant for Ireland since the country entered its rescue program.

As well as funds from the new ESM (European Stability Mechanism) into banks without putting them on the State's balance sheets, EU leaders also promised to "examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment program."

While Ireland will not have any of its debts forgiven, the new policy will allow Ireland to re-engineer the loans and put them on a longer term basis of possibly 35 or 40 years.

That would reduce the burden on Irish taxpayers and improve the prospects of economic growth.

"What was deemed to be unachievable has now become a reality and that principle has been established, decided and agreed upon by the council and heads of government," Mr Kenny said.

"That means that heads of governments' decision will now be referred to the eurogroup [of eurozone finance ministers] for an analysis of how best this might be used in Ireland's case to re-engineer the debt burden... which is what we set out to do.

"In the case of countries that are going to be involved here, where funding is made available through the EFSF it will later be transferred to the ESM, and that is also the case in reference to Spain.

"The fundamental principle of the ESM providing funding to break the link between sovereign and bank debt has now been agreed by the heads of government. It allows in Ireland's case the opportunity to re-engineer in a number of ways the debt burden on our taxpayers," he said.

Central Bank Governor Professor Patrick Honohan said the deal was welcome.

"If financial markets and growth conditions in Europe can indeed be stabilized; if financing conditions for Ireland can be improved; and if restraint remains the policy watchword at home, the corner can soon be turned," he said.

Finance Minister Michael Noonan said the details of the new arrangements for Ireland will be worked out between now and the end of the year.

He said the deal would not make this year's budget any easier - as Ireland is still spending far more than it takes in tax revenues.

But he said it was a good news story that will lead to significant savings in the long term.