The strange case of the Irish promissory notes

The European Central Bank seems to be leaking its precious liquidity in Ireland–some of which would be much welcomed in Spain, too.

Ireland bears a huge debt burden because of its banking crisis. Irish banks were rescued by the government with public debt. During those desperate days we all went through in 2010-2011, the Bank of Ireland granted emergency loans under the umbrella of the emergency lending assistance or ELA, a sort of allowance from the ECB to central banks facing situations in which action is urgent.

ELA, in principle, should have been a short-term mechanism. Yet, in the countries where it has been used–Spain among them–, ELA had to be prolonged out of pure necessity. In truth, given its duration, it has become an excuse to partially monetise debt, although not a sufficient volume of it, of course. In Ireland, it was impossible to balance and close the account and the new bank–resultant of the remains from the failed ones–could not access ECB credit, so the national central bank provided promissory notes in exchange of toxic assets. Yes, it was tricky trick to keep afloat the new entity, as those notes could be placed with the ECB.

The plot thickened in February, when the Irish parliament–in agreement with the ECB–voted in favour of converting those notes into new debt with 30 to 40 years of maturity. This move means that that debt has now been restructured, that its actual value has been reduced by almost 43 percent, and that the Irish government gets to retain the liquidity it obtained via those promissory notes. Moreover, Ireland can issue new debt in more comfortable, sustainable conditions.

Everywhere in the eurozone’s periphery, we are left wondering: why couldn’t we do the same? We, too, need liquidity and some debt conversion plan without which we will struggle to exit our current recession. Why?, indeed.

My take is that Brussels is committed to make a model case out of Ireland, to show it as the right example of how to behave to return to economic growth. The reality, nevertheless, is that Ireland is not winning, but dodging its way through, and only sometimes. In the meanwhile, Brussels’ discourse becomes ever more twisted and patronising, awarding prizes or punishing depending on its short-sighted policies.

One thing must be acknowledged, though: when politicians are too stupid to avoid corruption, it is very hard to apply for the role of the next right example country.

About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://

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