Ireland clinched a long-sought agreement Thursday with the European Central Bank to restructure the loans used to bail out its failing banks, a deal expected to reduce the national debt by €20 billion ($27 billion) in the coming decade and help the country's expected exit from its own international bailout.
Red-eyed lawmakers applauded Prime Minister Enda Kenny as he announced the breakthrough after more than a year of negotiations with ECB governors. The deal should allow Ireland, which has imposed severe austerity measures since 2009, to reduce planned cuts and tax hikes in coming years.
His announcement came hours after lawmakers voted to dissolve a government-owned "bad bank," the Irish Bank Resolution Corp. — the focal point for Ireland's divisive 2010 agreement negotiated with the ECB to repay foreign bank bondholders in full. That agreement had required Ireland to make annual repayments of €3.06 billion ($4.1 billion) through 2023 and more payments through 2031 totaling €48 billion, including 8 percent interest.
Kenny said ECB governors had agreed to replace that crippling formula with new Irish government bonds that won't need to be repaid for a generation. He said Ireland for more than two decades would pay only the annual interest-rate payments, or yields, on the bonds until they start maturing in 2038, sharply reducing current payments and shaving more than €1 billion ($1.35 billion) off next year's budget deficit.
"In effect, we have replaced a short-term, high-interest-rate overdraft that had to be paid down quickly through more expensive borrowings, with long-term, cheap, interest-only loans," Kenny said.
Finance Minister Michael Noonan said the annual yields of the bonds would float in line with market expectations, currently between 3 percent and 3.5 percent, reflecting Ireland's improving reputation among foreign creditors as a country that pays its bills and doesn't default.
Kenny, who rose to power two years ago on a pledge to slash Ireland's bank-bailout costs, said Ireland's improved power to reduce its deficits should help the country end its reliance this year on loans from European Union partners and the International Monetary Fund.
Ireland was forced to take the EU-IMF bailout in 2010 as the cost of rescuing Ireland's six banks destroyed the government's own ability to borrow. Ireland ultimately was forced to nationalize five banks.
The government created IBRC just two years ago to hold the battered loan books and impaired property assets of Ireland's two most reckless property speculators, Anglo Irish Bank and Irish Nationwide Building Society. The pursuit of those defaulting debtors, and the management of an IBRC property portfolio valued at €12 billion, will be transferred to Ireland's much bigger "bad bank" for toxic property-based loans, the National Asset Management Agency or NAMA.
Under terms of the EU-IMF deal, the government must slash spending and raise taxes to reduce its 2015 deficit to the eurozone limit of 3 percent of gross domestic product. Ireland expects to make its 2013 deficit target of 7.5 percent and now believes it can reach the 2015 goal with less painful austerity steps, although the introduction of two deeply unpopular taxes on property and water will proceed.
The Department of Finance estimated that, should the government press ahead fully with planned tax hikes and spending cuts, Ireland now could achieve a 2014 deficit of 4.5 percent rather than the 5.1 percent bailout target, and reach 2.4 percent in 2015 rather than the 2.9 percent targeted.
The Central Bank of Ireland, whose governor sits on the ECB board, said it hoped gradually to sell newly acquired government bonds totaling €25 billion ($34 billion) to private investors.
"The bonds will be placed in the Central Bank's trading portfolio and sold as soon as possible, provided that conditions of financial stability permit," the Irish Central Bank said in a statement. It pledged to sell at least €500 million annually through 2018, €1 billion annually through 2023, and €2 billion annually after that.
Opposition leaders criticized Kenny for failing to persuade the ECB to accept partial write-offs of debt as part of the deal. But Kenny stressed that Ireland had never sought to default, because that would undermine its efforts to repair its creditworthiness.
Economists and Irish business leaders applauded Thursday's deal as much-needed relief for a country suffering nearly 15 percent unemployment, rising mortgage defaults and its biggest emigration wave since the 1980s.
"The deal is better than expected and will improve Ireland's debt sustainability and reduce our funding requirements over the coming years. The extended period of the new bonds will allow growth and inflation to reduce the real cost of servicing this debt over time," said Danny McCoy, director of the Irish Business and Employers Confederation, which represents 7,500 businesses in Ireland.
Karl Whelan, a Trinity College Dublin economist, said the surprisingly long terms of the new bonds gave Ireland "the best possible scenario for repayment."
"When you put payments off into the far future they should be easier to handle," he said, noting that the remaining €28 billion to pay represents a staggering 20 percent of Ireland's current GDP. "But in 30 years' time GDP will be higher and prices will have gone up, so that bill might represent just 5 percent of our GDP. In 30 years we could go out and borrow that money again and just roll it over. It really never gets paid back."
Kenny's announcement followed a dusk-to-dawn drama at Ireland's parliament as the government, hinting Wednesday night at a debt deal, summoned lawmakers for a midnight debate on a bill to liquidate IBRC immediately.
Noonan defended IBRC's overnight dismantling as necessary given the risk that private creditors of IBRC would have filed lawsuits Thursday seeking to lay claim to properties and blocking government plans.
He said the government had no choice after its plans to close IBRC, secretly drafted months ago as part of its backroom negotiations with ECB governors, were leaked to international news agencies Wednesday.
"Did you ever hear of a liquidation that was announced one day and not implemented for several days or weeks?" Noonan told lawmakers, many of whom were given just minutes to read the nearly 60-page bill.