Promissory Notes and Deficits

After the announcement that the €4 billion used to recapitalise Anglo Irish Bank last year has to be included in the General Government Deficit, I was surprised to see speculation on this blog and elsewhere that the €8.3 billion in promissory notes issued this year might not count towards the deficit. Yesterday in the Dail, Brian Lenihan made it clear that this full amount was being added to the general government debt:

The recapitalisation of €8.3 billion by issuing a promissory note has been recorded as increasing Ireland’s general Government debt by that full amount in 2010 and, pending the agreement of the restructuring plan, it is appropriate not to include it in the deficit measurement until the matter can be reviewed on foot of any decision made by the European Commission on the plan.

So, the full amount has been added to the stock of debt but we are awaiting a decision on whether it adds to the deficit.

Personally, I like my stock-flow identities to add up, so I can’t see any reason why the full amount wouldn’t be added to the deficit. Perhaps others who understand the statistical issues better than me could explain how these additions to the debt—which are clearly “non-financial transactions” as defined by Eurostat—will not be counted as part of the general government deficit.

31 thoughts on “Promissory Notes and Deficits”

  1. Karl
    I think there is a procedural issue – until European Commission evaluates the Anglo plan, there is no final decision on whether some fraction of the injection should be treated as a financial transaction, even if it is clear that a substantial fraction (even 100 percent) is a capital transfer. Once that is decided, the capital transfer will indeed be included in this year’s GGB.

  2. Since the real agenda is devaluation, the uncertainty is a God send. Nothing the markets (!) like less than uncertainty. Why, if someone actually bet on the issue, they might make money. Forex was the biggest market, until they invented derivatives ………

  3. I am not going to try and understand Eurostat. But it seems to me that the situation is somewhat analagous to the relationship between P&L and the Balance Sheet. My read of your comments Karl is that you would like the Reserves on the Balance Sheet to equal the accumulated sum of the P&Ls. However, there are several movements in the Reserves which the accountants believe would be misleading if included in P&L, generally transacations or revaluations that are perceived as one-off.

    Hopefully these big capital injections into Anglo are one-off (ish) and so it may be misleading to suggest that the Government’s annual fiscal deficit includes them.

  4. I would have thought that the promissory notes would only be added as they are paid out on? Some this year, some next, etc. Otherwise we might as well add next years projected deficit to the GGD now.

    They may be a contingent liability, but they are not yet an actual one.

    In addition, I thought there was an addition twenty billion of funding for Anglo? Some paid immediately, some paid as promissory notes? The figures have become so mad, they have become a little blurred in my head!

  5. Sounds as if Lenihan has parked the promissory notes in a suspense account for the moment.

    Nick Leeson would be happy to give a presentation of the delights of suspense accounts for the determined fraudster.

  6. While the notes will only be paid out on over the years, it is my clear understanding that they go onto the deficit in one go — as a liability taken on by the state. The only reason this has not happened so far is, as referred to by Philip above, that the EU is still mulling the Anglo plan. If it was felt that the state could get any return from Anglo, technically the full amount of the notes might not move onto the deficit ( as this part would be an investment, not a capital transfer) but this seems most unlikely. The reality is that some time in the next few months the 8.3 bn anglo note and 2.6 bn nationwide one — and maybe whatever goes into EBS — will go onto the GGD.

    The only question is how quickly the rest of the money which may be needed to plug the anglo hole becomes needed and how the state deals with this. I have seem some estimates from credible sources that 6 – 7 billion of the remaining 10 bn may be needed this year, but this will all be tied up with the debate about whether anglo is shut down and how quickly.

    Either way our official “ggd” for this year is going to be very high again. Though as we won’t need to find all the angl/nationwide money this year, this will overstate the cash hit on the exchequer in 2010.

  7. @Cliff Taylor
    Very interesting
    So the GGD for 2010 could be approaching 20%!

    In reality, even though the 2010 figure will look scary and may spook the markets somewhat, it is better than drip feeding 1.5% pa onto the GGD over the next 10 years.

  8. @yoganmahew

    Yeah the Lenihan has certainly made it clear that the promissary note would be added to 2010 debt (deficit or otherwise) all in one go. An accounting issue I believe, I think Anglo can tecnhically claim all or some of the €8.3bn at any stage and therefore it is practical to assume it as a liability for the year.

    Of course, I also heard, in the wake of the 1st NAMA announcements that the promissary note would be claimed a little by little each year by Anglo but this appears to have fallen by the wayside (unless anyone can correct me).

    Still waiting further clarification on the next €10bn though..

  9. @dreaded est

    yep. or even a bit more if the full 10 billion extra went in this year. On the one hand a scary number, on the other it was money already commited to by BL in his Dail speech. So your guess is as good as mine in terms of market reaction, though in the current environment it priobably isnt good to be transparently top of the borrowing league. I agree , as you say, that it is better than the drip feed , given the pressure we will be on to cut the ggd number from 2011 on.

  10. It is a strange one, as Karl alluded to last week, it is surely the shallow investor who gets shocked by the a new deficit when it is quite clear the debt was always accounted for in the National.

    If they are that shallow though or if we fall foul of S&P again then who cares.

    PS: What a quote by EU Commisisoner Olli Rehn in today’s times, “Who are Standard & Poor’s anyway?”

  11. @Rob S
    It is one of perception IMO.

    While everyone knew we were put €4bn into Anglo last year and we wouldn’t be getting it back.

    The reality of seeing the €4bn adding 2.5% to the deficit seems to have spooked them.

    So while at the start of the week our 10 year spread was close to Spain and Italy and significantly below Greece and even Portugal. As I type our 10 year spread is now 110bps above Italy & Spain’s and only 29bps below Portugal’s.

    Adding 8% or 9% to the deficit would spoke them again IMO but it would be better than a drip feed of 1% pa for the next 10 years.

  12. @D_E
    It probably makes sense then to ‘recognise’ next years deficit and anything else we can think of. Then we can be within 3% next year and call 2012 a double dip :/

  13. Wow, it’s almost as if the debt the state incurs is actually debt! Do any advocates of the “cute hoor” theory (we’re so clever that we use our mad accounting tricks to put one over the global bond market) have anything to say on this? Anyone?

  14. @ EB: The Boone and Johnson piece is quite informative, but there are a few gaps. But I would not rate these omissions as critical to the piece.

    There are two very difficult predicaments that have to be sorted: political willingness to conduct fiscal affairs properly (most unlikely), and the ‘Growth’ paradigm (busted!).

    Governments of states will seek to protect themselves (and their citizens) at the expense of all others. It cannot be otherwise. The EU experiment may or may not succeed: it depends on whether or not individual states judge the EU survival as being essential to the survival of their own state. Time will tell.

    The ‘Growth’ paradigm is unfixable – using business-as-usual processes. These latter will do a good, temporary cosmetic job. Sometime, possibly within the next two – five years, the penny will clang on the floor. Then all bets will be off. The issue will be the inability to access an adequate supply of liquid (primarily transport) fuels. This will destroy, once and for all, the ‘Growth’ paradigm. Absent growth: debt defaults.

    B Peter

  15. Excellent article from the usually well informed Johnson but is this bit accurate ?

    ‘ We saw the first glimpse of this on Tuesday, when both Spanish and Irish short-term-debt auctions virtually failed.

  16. @paul quigley
    “Excellent article from the usually well informed Johnson but is this bit accurate ?

    ‘ We saw the first glimpse of this on Tuesday, when both Spanish and Irish short-term-debt auctions virtually failed.”

    http://www.ntma.ie/Publications/2010/Irish_Treasury_Bill_Auctions_Q2_2010.pdf
    It doesn’t look like there was an scheduled short-term auction (one a month on or about the sixth). There is also no announcement notice for last tuesday.

    If there was an unscheduled auction, I am not surprised it failed; the calendar is planned carefully with purchasers well aware in advance (I believe). But I don’t see that there was one – I haven’t seen anything about it elsewhere.

    I do think that our next problems will come from a failed short-term rollover, though…

  17. When I was a kid we used to play a card game called “Comm’upence” in which you had three lives represented by the stake-coins (those lovely old Irish coins with the animals on them…remember?).

    The first player who lost all his lives, as per the house-rules we played by, got to stay in the game on the so-called ‘cat’s life’.

    It occured to me even then how rarely it was that the cat’s life player ended up being the first to get knocked out of the game. Inevitably, it was the second player to lose all his coins who took the dive. A quick exercise in probability ‘counting’ would show that this is indeed the case statistically.

    So, Greece gets the cat’s life, while Ireland or Portugal get knocked out of the game first?

  18. @Pat Donnelly – interesting Irish Examiner link/.. “…
    not to use the extra cash as a cover for cutting back on state funds already allocated to the capital building programme”

    I’m sure the thought never entered their (government) heads.

    This isn’t a spoof is it? I would have thought that if anything that looked like another SSIA scheme cropped, up at a time like this, it would take so much money out that the retail sector would collapse

  19. @ yogan

    ‘I do think that our next problems will come from a failed short-term rollover, though…’

    Looks like NTMA are going to kick the auction can down the road. They must be expecting a good summer.

  20. @Joseph

    Fair point.

    It is flexible though, you can give in weekly payments, take your cash back whenever (although naturally lose your lump sum).

    It certainly seems like a reasonable method of saving if nothing else.

  21. @paul
    😕
    Invisible post?

    Anyway, the NTMA look like they have pulled next weeks auction.

    I believe our financing needs were planned to be 29 bn for the year – 20.5 bn for the deficit and 8.5 bn rollover. Some of that may be short-term that will roll over more than once in the year, hence the relatively high number?

    So far they are saying they have, what, 20 bn in the bag?

    There’s a fair-size rollover in July, I believe, so the NTMA will have to or get off the pot then.

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