Ireland’s sovereign debt monetisation

Little more than three years ago, Ireland’s taxpayers were saddled with around 40 billion euros of debt, after their government had been pushed by the European Central Bank into rescuing its largest commercial banks, which had been left floundering in the wake of Ireland’s property price collapse; but there was not enough ‘cash’ to finance the rescue.

Instead, promissory notes were issued to the value of 30 billion euros. Those notes served as collateral to raise a 30 billon euro loan from Ireland’s independent central bank. The proceeds were then used to reimburse the creditors (largely northern European banks and other financial institutions) of Ireland’s failed banks.

Ireland’s loss was Europe’s gain and so a very bad deal for Ireland’s taxpayers, who faced a commitment to honour promissory notes, with annual payments of around 3 billion euros. At those magnitudes and bearing 8 percent interest, the burden was untenable. So, last year a ruse had a trial run. Instead of 3 billion euros in cash, government bonds bearing 3 percent interest were issued and swapped for the promissory notes then due. No one seemed to give the move much attention.

Last week, the ruse was applied full on. This time, bonds to the value of 30 billion euros were issued (and all remaining promissory notes withdrawn) so that Ireland’s failed banks could be placed into liquidation. This was apparently achieved without prior approval from the European Central Bank; but the impending move was leaked to the press. To preclude a possible court injunction, Dáil Éireannsat through a long night to pass the necessary legislation. At a press conference on Thursday, a somewhat bemused ECB President Mario Draghi made the following remarks:

‘On Ireland, let me say this, there wasn’t a decision to take. The Governing Council unanimously took note of the Irish operation and I’m going to refer you to the Irish government and the Irish central bank for the details of this operation which was designed and undertaken by the Irish government and the Irish central bank. I can only say today that we took note of this.’

Sovereign debt within the eurozone has been openly monetised and will remain so pending a schedule of debt repayments beginning only in 2038 and running through until 2052; which is not something that the Governing Council would wish to make clear.