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Irish bond swap? More like money printing

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In little steps, the central authority of the euro zone is being eroded in favour of the member states. Ireland's massive debt restructuring at the end of last week has not been approved by the European Central Bank. It has just taken "note" of the Irish government's decision to issue 40-year bonds to replace €24-billion ($32.4-billion) in promissory notes (government IOUs), created at the height of Ireland's debt crisis to enable the ECB to lend money to Ireland's insolvent banks. Anglo-Irish Bank was finally liquidated on Thursday in order to pave the way for the notes-to-bonds swap.

The bonds are great for Ireland, as they give the Irish people some relief from the cost of the disastrous decision by the Irish government to stand behind Anglo-Irish, the main villain behind Ireland's financial collapse.

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The Irish government issued the promissory notes to the defunct banks as a financial guarantee to enable them to continue trading, but the interest rate is high at 8 per cent and their repayment is front-end loaded – Ireland's crippling austerity measures are equal to the annual €3.1-billion repayment on the promissory notes. The replacement bonds, announced last week as Dublin finally pulled the plug, have maturities up to 40 years and an interest rate of 3 per cent, which means the value of the principal will be heavily eroded by inflation. You have to ask whether a future Irish government might simply choose to forget to repay it.

The only fly in the ointment is the ECB, which had accepted the promissory notes as collateral for further liquidity lending to the insolvent banks. Replacing those notes with bonds causes problems for the ECB. Under the EU treaties, Europe's central bank is barred from monetary financing of a state – printing money, in laymen's terms. Anything that smells less scented than an IOU from Dublin is suspect at the ECB.

Still, Mario Draghi, the governor of the ECB, is keeping his counsel. Ireland is the poster child of euro zone restructuring, having swallowed its gruel, worn its hairshirt with good grace and done the evil deed of preserving the carcass of Anglo-Irish Bank. To reject this bond swap fudge so late in the game would be more embarassing than allowing a low coupon 40-year sovereign bond to disappear over the horizon.

If this is money printing, nobody seems to care. The ECB is on the back foot and, slowly but surely, the central authority that binds the euro together is being loosened.

Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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