ECB's Noyer reassures investors over 'haircuts'

City A.M. Reporter
EUROPEAN Central Bank policymaker Christian Noyer sought to bolster market confidence in Ireland's bailout, using a speech in Tokyo today to reassure investors of the plan's success.

Eurozone ministers – acting under pressure to prevent the crisis of confidence in the region's finances from engulfing Portugal and Spain – also backed a long-term mechanism intended to prevent the debt crisis from tearing the zone apart.

Noyer, the first member of the ECB's policy council to speak after eurozone ministers sealed an €85bn (£72bn) loan package for Ireland on Sunday, said he was confident the deal would bring down Dublin's borrowing costs to more normal levels.

"There is no reason to doubt the recovery plans of the two countries," Noyer said in the speech, referring to Ireland and Greece.

But market reaction showed investors thought the crisis that started with Greece's budget blow-out more than a year ago was far from over.

The euro rose slightly against the dollar in early Asian trading on Monday, but quickly slipped back to two month lows.

"I don't think this is going to be a silver bullet. I think there are still going to be some question marks on Portugal and Spain," said Peter Westaway, chief economist at brokers Nomura.

One of the questions that has been dogging markets for weeks and helped drive Ireland off the cliff was whether and under what circumstances private bondholders could be made to take losses, or "haircuts", on eurozone government debt.

The new European Stability Mechanism outlined on Sunday would make private investors share the pain in the case of a debt default or restructuring, but it would apply only to debt issued after 2013.

Noyer, who is also governor of the Bank of France, said that he believed even then it should remain only a theoretical possibility.

"As far as I'm concerned, I exclude that there will be haircuts in the future. It will be a major objective of all members of EU to do everything necessary to be in a position to fully honour their debts in the future," he said.

European officials have been at pains to play down the links between Ireland and Portugal, widely seen as the next euro zone "domino" at risk.

Troubles in Portugal could quickly spill over to Spain because of their close economic ties.

Noyer today joined the chorus, saying Portugal was making good progress in consolidating its public finances.

With anxiety rattling bond markets, the Irish government had been under intense pressure to accept a bailout despite repeatedly saying in recent weeks it did not need one.

"This agreement is necessary for our country and our people. The final agreed programme represents the best available deal for Ireland," Irish Prime Minister Brian Cowen said.

The deal aims to help Dublin cover bank debts amassed when a property bubble burst and bridge its budget deficit, which ballooned to about a third of the country's annual economic output.

Debt worries have marred Europe's recovery from global recession for the past year, severely denting confidence in the 12-year-old euro currency and leading to what amounts to a showdown between European politicians and financial markets.

Some €35bn was earmarked to help fix Irish banks, of which €10bn will be an immediate capital injection and the rest a contingency fund. Ireland will contribute €17.5bn in cash and pension reserves.

The rest of the emergency loans, which Dublin said were granted at an average interest rate of 5.8 per cent, will help cover the giant hole the banks have blown in public finances. The IMF will contribute €22.5bn.

In a key concession, Ireland was given an extra year, until 2015, to bring its budget deficit down to the EU limit of three per cent of gross domestic product.

And Cowen, whose government is close to collapse over the EU/IMF bailout, said the deal did not involve any change to Ireland's jealously guarded 12.5 per cent corporate tax rate.