Converting Irish debt controlled by Troika

Back in October of last year the Irish Finance Minister Michael Noonan said that his government’s goal is to be able to complete the three-year Troika bailout on time and resume normal operation late in 2013. Now that Ireland has regained access to the credit markets, the focus is on prepping the country to leave the Troika bailout programs.

At the time Noonan was declaring his desire to get out of the Troika bailout programs, I posted on how the talk was of retroactively recapping Irish banks with Troika money. The Irish banks and the debt the state incurred in bailing them out are Ireland’s principal problems. Apparently, Christine Lagarde and the IMF were in favour of this but others within the Troika were not. The key in these negotiations will be the Germans. And the Irish are pressuring them to ascent to this move. The Spanish-language press also reported at that time that the Irish were pressuring the ECB to let Ireland join Spain and Italy in the favoured country category, making them eligible for ECB bond purchases. In return, the ECB supported Ireland’s move to get the banking deal sorted but nothing has happened on that front.

Now Ireland has issued medium-term government paper as well as nationalised bank debt. ANd these issues are trading well. It seems that Ireland is on the road to recovery and can exit the Troika programs. But the debt levels are still very high at 120% government debt to GDP. And so the push to convert the Troika debt is on. Yesterday, the European Commission said that it would support this, making it more likely that it will occur. The EC cannot own equity in the state of Ireland. So, this reduces the number of places where Irish national debt can be reduced. I believe what we could see is a Troika debt to equity in the nationalised Irish banks swap followed by a sell off of the equity once things are under control. This would be similar to the equity sales of AIG or General Motors in the US.

The key outstanding issue in my view is the Irish property sector which has not definitively bottomed. If more losses are to accrue to Irish banks, it would not make sense politically for the EC to own a piece of these nationalised banks.

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