The past few weeks have seen renewed public focus on efforts to achieve a reduction in the State’s onerous debt burden. First, the Government’s quest to seek retroactive capitalisation by the ESM (European Stability Fund) of the Bank of Ireland and Allied Irish Banks has continued.

Second, the more recent Irish proposal to repay early the bailout funds owed to the IMF could reap substantial financial benefits. And third, president of the European Central Bank Mario Draghi suggested late last week that the 2013 “deal” on the Anglo promissory note might be revisited (to the possible disadvantage of Ireland).

These are complex and interrelated issues involving both financial and political considerations. Overall, can the Irish taxpayer expect a clear cut beneficial outcome to emerge?

Taoiseach Enda Kenny has continued to argue that Euro leaders agreed in principle at their July 2012 summit to consider the possibility of retroactive bank capitalisation for Ireland.

However, it soon became clear that the wording of the summit communique (agreed under considerable pressure at 4am in the morning ) meant different things to different people, especially so far as German political leaders were concerned. Significantly, since then, no major European political leader has publicly voiced support for the Irish position. The Government’s campaign appears to have run into the sand.

Minister for Finance Michael Noonan last week suggested retroactive capitalisation was not necessarily to Ireland’s advantage as the financial position of the Irish banks was starting to improve significantly.

Retaining the State’s involvement might be more positive for the Irish taxpayer than if shares were to be sold to an external official agency less equipped to run the banks effectively. To many observers, this conclusion made a great deal of sense.

Second initiative

In the light of this, the Government has now focused greater attention on a second initiative, namely, early repayment of €18 billion owed to the IMF. The interest rate charged to Ireland ( a “ penal” rate on loans in excess of normal IMF limits) is significantly higher than current market rates. Thus, using available liquid assets and/or borrowing on the market so as to extinguish the IMF loans would save the exchequer considerable amounts, currently estimated at around €375 million per annum, if (which is perhaps unlikely) the full €18 billion were to be repaid .

There is, nevertheless, a snag. The IMF has welcomed this proposal as it is anxious to reduce its unprecedentedly high exposure to euro-indebted countries. However, there are concerns that the EU would then end up bearing all of the credit risk associated from the troika bailout. For this reason, all the bailout agreements specify that any early repayments are to be made to both the IMF and the EU simultaneously. While the EU Commission appears to support the plan, changing the current agreement would require the assent of each euro area member (and Britain, Norway and Denmark, which have also lent to Ireland ). This is ultimately a political matter and some in Europe may be worried about precedent setting, especially where much larger sums are involved, such as for Greece. Late last week, a third element further complicated the picture. Draghi raised publicly the question of whether, if Ireland’s external financial position has improved so much, the “Anglo deal” of last year should be revisited.

Although somewhat complex technically, the essence of the 2013 agreement is as follows. The infamous “promissory note” held as security for lending by the ECB to finance Anglo Irish’ s obligations was replaced by long-term government bonds held by the Irish Central Bank. The interest paid on the bonds was in turn transferred back to the Irish budget as Central Bank surpluses. Provided the bonds continued to be held by the Irish Central Bank, this arrangement can be interpreted broadly as akin to a virtually interest free loan to the government by the ECB.

Although the ECB went along with the 2013 agreement, it did so with considerable unease. Criticisms voiced subsequently by the German Bundesbank (as well as internally by the ECB) centred on the argument that the deal may have violated the prohibition on the ECB providing “ monetary financing” to governments.

In order to try to satisfy the reservations of some ECB governing council members, as part of the 2013 deal, the Irish Central Bank is committed to gradually selling the bonds on the open market, subject to financial stability considerations. Such bond sales would imply a budgetary cost (interest payments would no longer be returned to the exchequer) and the extent of (alleged) monetary financing by the ECB would be reduced. The agreement stipulated that the Central Bank would in any event sell a minimum of € 500 million of bonds per year, starting next year.

Draghi’s intervention in effect suggests that if Ireland is now able to repay the IMF early, the Central Bank should dispose of these government bonds at a faster rate.

In responding to Draghi’s comments, the Irish Central Bank, for understandable market sensitivity reasons , did not divulge details of its current or prospective planned sales of the bonds. It also noted that the timing of the disposition of the bonds is a matter for the Irish Central Bank. While formally this is correct, the political underpinnings of these interrelated arrangements should not be be disregarded.

Budgetary estimated

The potential loss to the exchequer from an acceleration of bond sales would depend critically on the extent to which this would differ from the current plans of the Irish Central Bank, which are presumably reflected in budgetary estimates, as well as prevailing and prospective interest rates. However, the effect could be to offset the gains from early repayment to the IMF, were these two aspects to end up being linked, as implied by Draghi.

Careful calculations are needed to maximise potential gains from possible interrelated changes to the structure of Ireland’s debt.

However, given the complex technical and political issues involved, it would not seem wise at this stage to count with any certainty on early and decisive savings accruing to the Irish budget and hence to the citizenry. Donal Donovan is a former deputy director of the IMF. A member of the Irish Fiscal Advisory Council, this article is written in his personal capacity.