Ok, I promise this is the last time I’ll write about promissory notes for a while.
That is not to say that large subventions to the banks were not needed – more than €10 billion has gone into Anglo alone. However, the Minister has been quite clever in the way this has been done. He has issued promissory notes which deliver the capital bang upfront but will be drawn down piecemeal over the next 10-15 years. As a result, the exchequer has had to raise only €200 million to capitalise the banks this year.
Nama, too, has been structured to minimise the impact on the exchequer. Though it is likely to pay over €40 billion for the assets bought from the banks, this will not be in the form of cash and so will not have to be funded in the markets.
I find it funny that the issuing of promissory notes is now regularly described as, like NAMA bonds, a stroke of genius on the part of the Department of Finance: Last year, advocates of NAMA often told us that overpaying for assets was the best way to recapitalise the banks because if we didn’t do it that way we’d have go out and get “real money” by borrowing on the sovereign debt market, i.e. that banks couldn’t be recapitalised with promissory notes.
It is certainly true that promissory notes and NAMA bonds do not require going to the sovereign bond market to borrow the money. However, this stuff is debt and the people who have been worried about our ability to pay back all our debts (and they seem to getting worried again) are well aware that we are accumulating extra debts in the form of promissory notes and NAMA bonds. In this sense, they have the exact same “impact on the exchequer” as regular borrowing.
Note, however, that the promissory note route will put more pressure on the Irish state to come up with money for the banks in the coming years than would a normal debt issuance. €10 billion in ten-year bond issuance requires forking over interest of about €500 million a year over the next ten years before the full amount has to paid off on maturity, hopefully via issuing another ten year bond. An interest-free promissory note for €10 billion would require average payments of €1 billion a year over the same period.
At the end of the day, debt is debt and those who lend to us aren’t easily fooled. I’d prefer to let history judge exactly how clever this debt issuance has been.