The Impact on the Exchequer

Ok, I promise this is the last time I’ll write about promissory notes for a while.

Pat McArdle, still keen to minimise the link between the cost of bank bailouts and our fiscal problems, writes:

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.

And also:

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 againare 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.

27 thoughts on “The Impact on the Exchequer”

  1. +1

    Sticking it on the credit card…

    Besides, didn’t Mr. Bacon tell us that zero coupon bonds absolutely couldn’t be countenanced as recapitalisation fodder? That this would lead to a lack of confidence in the banks, illiquidity, plagues of locusts?

  2. I generally agree with you. Debt is debt and, regardless of the mechanism, we will have to pay it back. It doesn’t matter if we put it on the credit card or on the overdraft.

    But, “At the end of the day, debt is debt and those who lend to us aren’t easily fooled.” How much faith do you have in the rationale of the markets? I think most of us would agree that not a lot has changed about the Irish fiscal scenario over the past six weeks, but the markets do seem to be bouncing around a bit. Obviously one can’t easily tease out the full effect of Greece contagion on this, but to me it seems there is quite a bit of testosterone in the air. How much money would you put on the bond markets not over-reacting to different mechanisms of debt accrual?

  3. I thought all were in agreement that eurostat wouldn’t be swayed of the talk of promissory notes and therefore we would have the full cost (€10.3bn this year so far) of recapitalising Anglo on the 2010 deficit?

    Hardly, “minimising the impact on the exchequer”.

  4. How long more, I wonder, can the Government remain sitting on the €15+ billion of state equity sitting in various semi-states and not generating adequate returns? Selling these off would replenish the NPRF, reduce net sovereign debt, generate reasonable returns via re-investment by the NPRF, give a further clear signal to the markets of the Government’s commitment to restructure its balance sheet in a fiscally responsible way and provide investment opportunities for long-term infrastructure funds – not to mention the efficiencies that would be driven through in these moribund sectors that would benefit all citizens.

  5. Does Pat McArdle’s articles are so obviously the party line that its just cynical for him to pretend that he is an independent journalist.

  6. I noticed the other day that some credit union loans are issued as promissory notes. Smart move maybe the credit unions are ingenious too.

    What I didn’t like about Pats article is that to link the anti-fiscal adjustment crowd with the anti NAMA and anti anglo bonfire group. It is accepted that some times these groups overlap but most serious economists accept that the fiscal adjustment, caused in large part by this administrations pandering to special interest groups was at least partially necessary although I would question the formulae they used and at least hit the pension tax rebate and introduced a property tax.

    The promissory note argument is farcical. I am sure the management in the Alabama Bank of losers congratulated themselves with their ingenuity when they they managed to turn their mortgage book into a an AAA investment in much the same way.

    Debt is debt is debt. You either pay it back, roll it over, inflate it away or default. I wish that somebody in the department of Finance would realise this and stop playing silly games.

  7. Never ceases to amaze me about this blog that when something does not toe the party line here the correspondent is taken to be a Government apologist. Mc Ardle just says that the Minister is being clever and I do not think that is saying it is right. Maybe Eurostat will not agree with Finance on these Notes. Now if it was Saint Morgan writing the article every word would be taken as Gospel ………….

  8. @TRP

    Oh come on! McArdle is blatantly parroting the party line. Many of the soundbites echo statements Lenihan has made in the past few weeks.

    He even parroted this line without question: “Both the Wall Street Journal and the Financial Times have commented favourably on what has been achieved and on the lack of popular protest that accompanied it.”

    Could he not even hint at the fact that these sources have an interest in policy going in a particular direction?

  9. @TRP,

    I’ve seen no evidence of a party line here. The Government is trying to establish a specific narrative – “things are not as bad as the doomsayers make out, we’re in control of things, making the right decisions, doing clever things and influential commentators like what we’re doing”. Even without any external evidence it is always wise to be sceptical of the spin a government, any government, puts out. When an assumed-to-be independent journalist/commentator appears to parrot this line one’s scpeticism is increased.

    This board relies to a considerable extent on objective evidence. Drawing on this evidence a more accurate, perhaps, version of the story is “nobody knows precisely how bad things are -or how they might end up, the European Commission and the ECB are calling the shots, within fairly tight parameters they are allowing us some discretion as to how we implement their dictats so that we can convey the impression that we are still in charge (even if they really are) and those who cheered on the previously booming unregulated global financial market think we’re stars.”

  10. @TRP

    Yes saint Morgan should be sent to Iona.

    Deja vu anybody. Why don’t we bring back Bertie to “talk up” the economy.

  11. @TRP

    The people with the Idee fixe are actually the department of finance. The very dangerous idea that can spend 30 bn on the Anglo/IBNS/EBS bonfire and add the NAMA folly relief program is a complete delusion.

    You have the nationalised Anglo giving NAMA debts to the the nationalised NAMA. The Department of Finance printing promissory notes like there is no tomorrow and congratulating themselves because some journalist in FT said something nice.

    So what that ECB sees Irish Government Paper as Tier 1. Maybe they are wrong.

    According to the logic of the Department all Greece has to to role over its debts is
    1. Set up a bad bank or call one of their existing ones bad.
    2. Print Greek paper in promissory notes to add to Tier 1
    3. Tell the bad bank to take the notes to the ECB and convert the notes into cash
    4. Tell the bank to use the cash to buy Greek paper at the next auction.

    Simple isn’t it

  12. Well blow me over there is not a dissenting voice. Is it any wonder John left this place ? When you run out of something sensible to say always introduce Bertie or is it now the Greeks bearing gifts !!!

    Surprised none of the smart guys here missed out on the fact that the Government’s contribution this year to the NPRF was fulfilled by last years acquisition of AIB and B of I shares as part of recapitalisation of these Banks. At least Mc Ardle keeps us up to date on the latest trends in Government Finances. Is Saint Morgan is still ruminating down in the basement of the UCD Arts Block to find some new dark secrets to keep some people here happy ?

  13. @ Paul Hunt

    not to mention the efficiencies that would be driven through in these moribund sectors that would benefit all citizens.

    Yes, because Eircom worked out so well? What is it now, run out of a PO box in Australia and co-owned by the Chinese?

  14. @ TRP

    ‘Surprised none of the smart guys here missed out on the fact that the Government’s contribution this year to the NPRF was fulfilled by last years acquisition of AIB and B of I shares as part of recapitalisation of these Banks’

    What is the purpose of the NTMA Advisory Committee when decisions on NPRF asset purchases can be pre-empted, and for entirely other purposes, by the MoF ? The fallout from that bit of jiggery pokery is not yet clear.

  15. @ TRP

    ‘Surprised none of the smart guys here missed out on the fact that the Government’s contribution this year to the NPRF was fulfilled by last years acquisition of AIB and B of I shares as part of recapitalisation of these Banks’

    Actually i noticed that too. The interesting thing is that if you subtract the cost the NPRF from the sums from last year the underlying deficit is GETTING WORSE, not stabilizing as claimed.

    Of course Tom is quite happy to ignore the 10 billion plus that went to Anglo this year which puts us firmly into the international record of all deficits, ever

  16. “Of course Tom is quite happy to ignore the 10 billion plus that went to Anglo this year which puts us firmly into the international record of all deficits, ever”

    Does anyone know what the all time international deficit record is?
    If the various notes are included our 20% of GDP or 25% of GNP for 2010 must be close

  17. @Paul Hunt – “How long more, I wonder, can the Government remain sitting on the €15+ billion of state equity sitting in various semi-states and not generating adequate returns?”

    It’s just a matter of time.

  18. @EWI,

    I’m sure we’ve been around the houses on this before. The Eircom privatisation was brought to us by the people who brought us this Pearl Harbour of a banking crisis. They also constructed the elaborate policy and regulatory edifice that allows many semi-states, particularly in the energy sector, to continue ripping off consumers. You’re perfectly free to argue that a botched privatisation should prevent consideration of any further privatisation – as many people do, but I’m sure you’ll be willing to concede that not everyone will be convinced.

  19. @TRP

    I’m with you. Sorry I’m not a professorf or anything like that so it remains that the intellectual centre of gravity of this space is pathologically dismissive of anyone supporting any aspect of the official line.

    Of course getting away with a promise is better than having to stomp up hard cash now. Is it clever? Damn stupid to do otherwise if you can get away with it. It is not a miracle cure like turning liabilities into assets or changing the rules so you can torch bondholders and leave everything else intact.

  20. @BW II,

    On the contrary. I think this board conveys a healthy scepticism of any announcements by the people who brought us this Pearl Harbour. Until governments produce something that resembles an income statement, funds flow and balance sheet – rather than the current set of “tennis club” accounts, and which even the smallest business is required to produce, any clever ruses are bound to be treated with scepticism. They can be assessed only in the context of that sort of conceptual framework and if they fail to pass muster then so be it.

  21. If the coming crash is big enough, those debts due to those who cease to exist (except as an earner for the accountant/receivers) may be negotiated down, by large fractions.

    Borrow only from those institutions that are most likely to bite the dust hard and soon!

    Think of those fortunates in the USA who may suffer foreclosure only by court action. The foreclosure is impossible unless all the paperwork is produced in court. It is very seldom that can occur. Upshot:those in possession cannot be thrown out! Depending on their local statute of limitations, they will have free full title after 6 or 12 years! Now is a time to be wise! Now is a time for strokes! That is why I am backing Ireland ahead of Greece!

  22. The IFSC can be a store of goodies or uglies. Since it appears to be a black hole, with no light coming out whatsoever, it might be in a position, given the personnel employed there, to be useful to the state?

  23. @Garry
    “There was some good news at the weekend. Since most countries, Ireland included, propose to export their way out of recession, there was a concern as to where the demand might come from given that one country’s exports are another’s imports. Accordingly, the IMF was given the job of running simulations to see whether the individual forecasts supplied to it by the G20 countries added up.”
    Not Macardles, but apparently 2+2+2=4… who knew? I’ll have another bottle, thanks.

    (It’s not so much an opinion piece as a report. Before the IT went to pot, this would have been considered “news”, with “opinion” being someone’s view on the wisdom or otherwise of the measures taken. Alas, we have reportage disguised as opinion; luckily most of what passes for news is spin, otherwise one might be tempted to conclude that there is no daily national paper of note in the country).

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