THE PRESIDENT of the European Central Bank has said his institution has not yet considered whether the arrangements between the Central Bank of Ireland and the Irish government are in breach of European law.
Mario Draghi also appeared to differ from the Department of Finance on his understanding of the deal – saying the deal to swap promissory notes for Irish government bonds would see the Central Bank of Ireland sell the bonds as soon as it could.
Speaking to the Economic and Monetary Affairs Committee of the European Parliament, Draghi said the meeting of the ECB’s Governing Council earlier this month did not need to formally approve the Irish arrangement because the ECB was not a party to it.
“This is a transaction between the Irish government and the Central Bank of Ireland,” Draghi said. “The Governing Council didn’t have to pass a judgment on this.”
He said, however, that the legality of the deal – and whether it was in breach of the EU treaties, which forbid central banks from creating money to assist individual governments – had not yet been appraised.
“It will do so, however, in the context of the yearly assessment of monetary financing situations in the different banks and the different members of the Eurosystem.”
Draghi later said that if it was determined that the deal was illegal, the ECB would “see what remedial legal action has to be taken”.
A spokesman for the ECB told TheJournal.ie this afternoon that those appraisals are usually carried out when the ECB’s annual report is compiled in spring each year.
This would indicate that no authoritative test on the legality of the Irish deal might not be undertaken for another 12 months.
“There will be a time where there will be an assessment from the perspective of Article 123 [the article which bans 'monetary financing' by central banks] but not at this point in time,” Draghi told MEPs.
Draghi and Dublin differ on disposal
Speaking positively of the Irish deal, Draghi said the arrangement had eliminated a “huge” system of emergency loans to Irish banks “which had been going on for many years”.
“From this viewpoint, the [emergency lending] has disappeared and there are some tradeable government bonds,” he said.
However, in what could be a crucial differing between the ECB and the Irish government, Draghi said the Central Bank of Ireland would sell its €25 billion of government bonds – obtained in exchange for the promissory notes – “as soon as possible, compatible with financial market stability”.
This is dramatically different from the Department of Finance’s documentation on the deal, which claims there are annual limits on the volume of bonds that the Central Bank would sell every year.
Limits imposed by Ireland mean the Central Bank can only sell €2.5 billion of bonds before the end of 2018, with €1 billion each year thereafter until 2023 and a limit of €2 billion a year from 2024 onward. As a result, the Central Bank could not finish selling off the bonds until 2023.
This is crucial for Ireland, because the government will only pay an effective interest rate of 0.75 per cent on the bonds for as long as they are held by the Central Bank – whose profits are eventually returned to the Exchequer anyway.
Draghi acknowledged that the “disposal policy of the Central Bank of Ireland of these bonds” would be “crucial in the future”.
The Central Bank, responding to the deal two weeks ago, had also said the bonds would be sold “as soon as possible, provided that conditions of financial stability permit” – but that it would do so in full compliance with the rules that block central banks from funding governments.