Exclusive: ECB rejects Irish bid on promissory note - sources

Sat Jan 26, 2013 10:25am EST
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(Reuters) - The European Central Bank has rejected Ireland's preferred solution to a dispute over the cost of servicing money borrowed to rescue a failed bank, EU sources familiar with the talks said on Saturday.

Dublin wants to avoid having to pay 3.1 billion euros a year until 2023 to service a promissory note it issued to underwrite failed Anglo Irish Bank during a meltdown of the main Irish lenders after a real estate bubble burst in 2008.

Irish Finance Minister Michael Noonan had proposed converting the note into long-term government bonds that would be taken up by the Irish Central Bank with the intention of keeping the bonds in its portfolio for a long period.

The sources said the ECB's Governing Council discussed the plan for the first time at a meeting on Wednesday and Thursday and agreed that it amounted to "monetary financing" of the Irish government, banned under article 123 of the EU treaty.

"The ball is now back in the Irish court," one source involved in the deliberations said.

"This is an issue of principle. There is a real concern in the Governing Council because you can create precedents when you do things for one country. Then others may say 'why not for us?'," the source said.

"We must be sure the solution doesn't open a window in terms of monetary financing."

A spokesman for Ireland's finance department declined to comment. Officials from the central bank and government were not immediately available for comment.

Avoiding the hefty interest charge that kicks in with this year's payment would help reduce Ireland's budget deficit, still among the highest in Europe, by more than one percentage point, according to finance department estimates.   Continued...

The Euro sculpture is pictured in front of the headquarters of the European Central Bank (ECB) in Frankfurt, January 17, 2012. REUTERS/Kai Pfaffenbach