January 22, 2013 4:40 pm

Ireland signals use of ECB bond plan

Ireland signalled it could become the first eurozone country to take advantage of the European Central Bank’s new limitless bond-buying programme, saying it was laying the groundwork for an application as a way to help pave the way out of its €67.5bn bailout programme.

Mario Draghi, the ECB president, unveiled the programme last year as a way to bring down borrowing costs for countries such as Spain and Italy by becoming a buyer of last resort for government bonds that private investors were shunning.

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At the time, both Italy’s and Spain’s bond yields were edging perilously close to levels where other eurozone countries were forced into a bailout, and Mr Draghi’s decision has been credited by EU leaders with sharply reducing the risk of a eurozone break-up.

Still, Mariano Rajoy, the Spanish prime minister who was widely expected to be the first to apply, has resisted tapping the programme – known as Outright Monetary Transactions – raising concerns in some quarters that markets might not trust it as a backstop if it is never tested.

Michael Noonan, Irish finance minister, warned that his government had not yet decided to seek the ECB’s help. But he said Dublin would attempt to meet all the criteria for the programme in a matter of months, giving the government the option to apply ahead of November, when its bailout funding runs out.

Mr Draghi has said publicly that the OMT programme would only be available to countries already in the bond market, and Mr Noonan said Ireland’s debt agency was planning two auctions of long-term debt in order to qualify.

“There is no inhibition for Ireland applying for OMT, but we need to be fully back in the market first,” Mr Noonan said after a meeting of EU finance ministers in Brussels. “The preliminary steps would be to have two issuances of nine-year paper or its equivalent, and then we’re in a position to apply.”

The International Monetary Fund has backed an Irish OMT programme, but it would only come if Dublin applied to the eurozone bailout fund first – something that might be politically difficult for Enda Kenny, the Irish prime minister, who has been touting Ireland’s pending return to “fiscal sovereignty”. Aid from the ECB and the bailout fund come with conditions similar to a full-scale bailout.

Olli Rehn, economic chief of the European Commission – which, along with the IMF and ECB, is one of the “troika” of international lenders managing Ireland’s bailout – said OMT would be one of the tools presented to Dublin shortly in a “menu of options” that would provide a backstop once bailout funding runs out.

“[OMT] is something that should not be ruled out and is one option that should be considered as a way to pave the way to a successful return to market financing for Ireland or, for that matter, for Portugal,” Mr Rehn said.

Mr Noonan has also sought billions of euros in debt relief from the EU in order to win back investor sentiment, and on Monday asked fellow ministers to lengthen the maturities on bailout loans as part of that effort, something already accorded to Greece.

But Dublin is pushing for a greater prize, the restructuring of €31bn of loan notes agreed with the ECB during the height of the crisis to bail out failed banks. A €3.1bn annual payment is due on March 31, adding a sense of urgency to Dublin’s negotiations with Frankfurt.

On Tuesday, the Irish High Court began proceedings in Dublin on a case challenging the government’s use of the promissory notes to wind up the banks. The case, brought by the Irish Mortgage Holders Association, claims the notes should be voided because they were never sanctioned by a vote in parliament.

The case is awkward for the government, which is defending the legality of the notes in court while lobbying the EU to have them amended.

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