ECB’s Irish doubts highlights broader uncertainty
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
LONDON — Bank bondholders aren’t the only ones fretting about what the Irish bailout means for them. Even the European Central Bank is unsure of its status and has posted its concerns on its website. If the ECB doesn’t know the score, what hope is there for private creditors?
At issue is Ireland’s new banking law passed last week. This gives the government temporary powers to restructure lenders that have received state aid, including carte blanche to change the rights of subordinated debt. It could also allow the state to subordinate senior creditors by stripping assets and transferring liabilities.
The ECB’s interest lies principally in some 136 billion euros of loans to Ireland-based banks — outstripping its total capital and reserves. But the ECB is also worried that the law could affect the independence of Ireland’s central bank, chiming with criticisms from opposition lawmakers that the bill gives the government too much power.
Specifically, the ECB wants the law to include explicit clauses asserting the principal of central bank independence over and above any provisions elsewhere in the legislation. But it has also taken the opportunity to reassert its view that a resolution regime that radically alters bondholder rights must be balanced against the need for financial stability.
The precise legal rights and wrongs are murky. The Irish government has rejected the ECB’s concerns, and few analysts believe the spat is going to derail Ireland’s bailout. Tweaks and twiddles may be all that’s needed to address the ECB’s concerns, in particular about central bank independence.
Even so, the confusion highlights broader fears that are emerging at a time when governments across Europe pass legislation to ensure creditors share the pain of future bailouts. If legislation is perceived to be cobbled together, unfair or unpredictable, investors will shun debt issued by weaker banks, making it harder for them to wean themselves off government support. A myriad different national regimes across Europe would be damaging.
The twist creates fresh uncertainty about the status of senior bank creditors — an issue that may accelerate next year if pressure grows within Ireland to apply haircuts here too.
If the ECB, a secured creditor and public sector body, is nervous about its legal status, then private sector creditors should be doubly so.