Minister for Finance Michael Noonan is stepping back from his plan to impose losses on senior Anglo Irish Bank bondholders after European Central Bank chief Jean Claude Trichet warned him that such a move would damage Ireland's standing in markets.
Mr Noonan held talks for 30 minutes on this morning with Mr Trichet, who has long resisted any manoeuvre to impose losses on senior bank creditors.
The Minister said it was not for him to close the senior bond question, but said he was obliged to observe advice from people such as Mr Trichet.
Saying the Government was unlikely to seek voluntary burden-sharing with senior bondholders, Mr Noonan went to say the ECB chief had made "fairly good arguments" against any coercive measures to impose losses on such investors.
"I said it was outstanding business, and he said the situation in effect in terms of that had disimproved for two reasons," Mr Noonan told reporters in Wroclaw, Poland, at the end of a two-day meeting of EU finance ministers.
"First of all that private sector involvement in Greece had a very quick knock on effect into Italy and Spain and private sector involvement didn't seem to be the way forward if you were trying to encourage the markets," the Minister said.
"Secondly, he said Ireland had done particularly well over the summer. He mentioned the narrowing of bond spreads and he said that he felt that anything to do with burden sharing might knock to the confidence of the market and the spreads would go back out again and that we might lose the ground we had gained."
Speaking later after a press conference, Mr Trichet declined to comment on his meeting with Mr Noonan.
On a separate matter, the Minister told reporters there was evidence that retail deposits in Irish banks are increasing. "Irish depositors stayed in and over August the deposits have moved up slowly so it's moving in the right direction since we recapitalised," he said.
Asked if the senior bond question remained open, the Minister said the Government will reflect on Mr Trichet's views and a similar stance adopted by EU economics commissioner Olli Rehn.
"It's not for me to close it but you nave to listen to the advice and I know what happened in Italy, the difficulty they go into," he said.
"I'll put it to you this way, the amount of money outstanding in unguaranteed senior bonds in Anglo is just about EUR3 billion. If you did some kind of voluntary burden sharing you might gain EUR100 million, which seems to me that one wouldn't risk guarantee for that level of money.
"One wouldn't risk reputation for that. Anything coercive, the European authorities are dead set against it. So we'll reflect on it. "
Mr Noonan said his priority in relation to Anglo now was to seek longer maturities and a lower interest rate on the promissory note loans used to recapitalise the bank. He raised this matter with Mr Trichet, but there was a "non-committal" response from the ECB chief.
"He hadn't been warned about it or briefed about in advance so he was pretty non-commital but he agreed that we could access some of his technical people if we were trying to design an alternative," Mr Noonan said.
He said there was no discussion with Mr Trichet about a call last week for swifter budget cuts in Ireland from outgoing ECB executive board member Jürgen Stark.
"That wasn't raised. Nobody asked me to do anything other than what we are doing. As a matter of fact the whole mood of the meetings and of the colleagues from around Europe was Ireland was doing very well," he said.
"I was trying to explain to them that we're only starting and not to get too optimistic because there's a lot of difficult decisions to be made, but you'd think we were back in the markets and had everything done from the reaction of the colleagues from around Europe.
"So there's no doubt that our reputation has been enhanced but as I say I keep reminding people it's a very good beginning but there's a lot to be done."
Mr Stark was interview by The Irish Times in the hours before his resignation from the ECB was made public.
"Mr Stark's advice was a bit of a parting shot because when he did the interview he knew he had resigned but he didn't say that and he was gone four hours later," Mr Noonan said.
"I read the interview and I thought there was a lot of good things in it. But we're operating to an agreed programme with the European authorities and the memorandum of uinderstanding says that we have to get to a deficit of 8.6 \[per cent]\ in the next budget and we'll take whatever correction is necessary to get to that figure, or slightly below it."
Asked about Mr Stark's suggestion that it would be better now to go for an even deeper cut, Mr Noonan said a lot of other people had said that before.
"Some of the Irish economists say that as well. But I'm not reflecting on him at all I think he's a fine man and very knowledgeable but within our system at the present he's not part of the European authority we're dealing with. And we have a memorandum of understanding which had sound conditions and we're going to abide by the conditions."
