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Ireland Was Right to Force ECB’s Hand on Debt-Relief Plan

By the Editors
February 07, 2013 7:00 PM EST

Ireland has reached a debt-relief deal that, in principle, could serve as a precedent for European leaders in their dealings with other financially troubled governments. All you have to do is ignore the details of how it happened.

At issue is an obligation the Irish government took on in 2010, during the rescue of the now-defunct Anglo Irish Bank. At the urging of the European Union, and in return for emergency loans from the European Central Bank, the government issued an IOU that allowed Anglo Irish to pay its bondholders. The IOU has since been a heavy burden on Irish taxpayers, requiring annual payments of more than $4 billion.

This week, the ECB effectively accepted an Irish proposal to reschedule the debt -- a move that the country’s extraordinary efforts to fulfill its EU-mandated austerity program thoroughly justify. The government will exchange the IOU, which consists of 10-year promissory notes paying an 8 percent interest rate, for longer-term bonds paying about 3 percent. Irish Prime Minister Enda Kenny said the swap will save taxpayers about $27 billion over the next decade.

Flash Point

What could be wrong with this? Nothing -- except for the small detail that Ireland had been pressing for a solution exactly like this for almost two years, only to be met with intransigence. The matter had become a flash point in Irish politics and a source of bitter resentment at the EU. In recent weeks, the ECB had reportedly rejected a debt-relief plan identical to the one Ireland is now executing, arguing that converting the notes to bonds would amount to illegal “monetary financing” -- that is, printing money to finance the Irish government’s budget deficit.

Ultimately, Ireland forced the issue by moving ahead with the liquidation of the toxic remains of Anglo Irish, a decision that also triggered immediate action on the promissory notes. Presented with a fait accompli, ECB President Mario Draghi said the debt restructuring had been “noted,” a wording that has been widely interpreted as grudging acceptance from the ECB.

Criticizing the ECB for its foot-dragging and indecision has its limits. It has had to work within a legal framework that was devised for different times, in blissful ignorance of the calamity that would descend on the euro area in 2008. Of all the EU institutions that have been called upon to act in the crisis, the ECB under Draghi’s leadership has proved the most effective. It’s no exaggeration to say that his intervention last summer -- when he promised to do “whatever it takes” to keep the euro area intact -- saved the whole project from imminent disaster.

Nonetheless, it’s depressingly characteristic of the EU’s approach to the entire sovereign-debt crisis that legalistic nit-picking and lack of firm leadership delayed what was both necessary and inevitable. If Ireland hadn’t acted, the government would still be pleading, the ECB would still be consulting its lawyers, and Irish taxpayers would still be on the rack.

Instead of quietly signaling their approval, the ECB and the EU should see the Irish deal as an opportunity to set an example for the rest of the euro area’s struggling governments. Ireland deserves generous treatment not just because the terms of its early EU assistance were so brutal, but also because it has since made heroic efforts to control public borrowing and restore the economy to health.

Here’s what the message should be: Governments that do their part can expect to be treated with flexibility and solidarity by their EU partners. And they won’t have to ambush anyone first.

To contact the Bloomberg View editorial board: view@bloomberg.net.

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