Budget Calculation Update: Promissory Note Interest Payments

It was always going to be unlikely that the process of briefings for opposition parties would be kept secret. However, with what appears to be authoritative and pretty detailed information all over today’s Irish Independent, it may just be best if the Department of Finance publicly released the briefing information it provided to the opposition politicians yesterday.

One of the more mysterious aspects of the budgetary finances is the magic promissory notes. By my count, we will have issued about €30 billion of these by the end of the year: About €25 billion to Anglo and about €5 billion to INBS.

In this post earlier today, I pointed out that while the principal payments on these notes didn’t count against the general government deficit (because these will all be registered as part of this year’s deficit) they will still be part of our ongoing financing requirement in the coming years.

I didn’t write earlier about interest payments on these notes (the figures I was writing about were just my guess about the annual principal payments). One reason I didn’t discuss interest payments is that I wasn’t sure there were any: They could just be zero coupon bonds. However, it looks as though they are not. On Prime Time this evening, Joan Burton and government junior minister Billy Kelleher agreed that the annual interest cost of the promissory notes was going to be €1.5 billion. With €30 billion or so in notes issued, it now appears that the notes have an interest rate of 5%.

Now, as far as I know (and I’m happy to be corrected) these promissory note interest payments of €1.5 billion a year will count against the general government deficit.

Here I’ve updated the calculations from my Irish Taxation Institute presentation to incorporate the “if the promissory notes pay 5%” scenario. The bottom line?  If one adjusts last year’s budget projections for (a) New projections from the Central Bank for nominal GDP (b) A projected decline in revenue of €1 billion (c) €1.5 billion in promissory note interest payments, then the starting point for this year’s budget prior to any adjustments would be a deficit of €22.5 billion or 13.9% of GDP.

Note that even if one didn’t factor in negative effects of fiscal adjustments on GDP, then with a Central Bank GDP projection of €162 billion, hitting the original deficit target for 2011 of 10% of GDP would require adjustments of €6.3 billion (162*0.039). Factoring in the contractionary impact of budget cuts on GDP, it would likely take €7 billion in adjustments to get to a 10% target.

As I say, these calculations are based on a 5% interest rate on the promissory notes. My interpretation from Minister Kelleher’s apparent confirmation of Burton’s comments is that this is the correct rate. However, I think it’s time for the government to fully clarify the terms of these notes as soon as possible.

68 thoughts on “Budget Calculation Update: Promissory Note Interest Payments”

  1. I can understand why Ms. Burton expressed shock. I presume this measure has been forced on the government by the ECB? If they want to use, what are essentially ten year promises, as collateral at the ECB, they must be interest bearing instruments.

    I must admit to being shocked too. I had always considered them as a free, if temporary, money card. Sort of like the interest-free period on a credit card.

    I still can’t quite credit it. Why do they not pay like NAMA bonds? Pegged at EURIBOR? As we’ve figured out, NAMA bonds attract a small haircut and are cheap. Why not make a new class of NTMA bonds? The current expense would be somewhere around 500 million per year if they were all issued at once. Hey, I’ve just saved 1 bn from the deficit, only another 21.5 bn to go (based on Karl’s figures above).

    There must be some misunderstanding somewhere. This can’t be the initial cost. I can credit that it will cost 5% to turn them into ‘proper’ bonds and that this will happen over ten years or less, but not that we will be paying the full cost immediately.

  2. @ DE\Hogan

    Remember that somewhere in this nexus, you need to factor in that this is one arm of the state making interest payments to another arm. If the payments count against the GGB (and I think they do) then they put extra pressure on us to meet whatever targets for that measure that we’re supposed to achieve. But you could argue that there’s some Anglo Equivalence Theorem that says the cost of the bank bailout isn’t changed by the interest payments on the notes. (This may be more of a Modigliani-Miller theorem now that I think of it or perhaps … Fingletonian Equivalence.)

  3. @ DE

    Anglo has indeed proven to be an extraordinarily efficient vehicle for transferring state money to “others externally” as you call them. However, if you factor in that the government has been pretty determined to see all these external folks paid back anyway, the receipt or lack thereof of these interest payments probably won’t make much difference.

  4. 7 billion in cuts to get the deficit down to 10% of GDP! Jesus, Mary and Joseph we are totally shafted. There isn’t a hope in hell that this strategy will work.

  5. @Karl
    It makes a difference if they need the interest payments to repay the “external parties”.

    If instead the government had given Anglo a promissory note 2 which didn’t bear any interest would €30bn have been enough to repay everyone?

  6. @ DE

    “If instead the government had given Anglo a promissory note 2 which didn’t bear any interest would €30bn have been enough to repay everyone?”

    In that case, they would have given a €35 bn Note 2 (or whatever it took) since the point of providing the note was to see that (almost) everyone got repaid.

  7. I had thought the promissary notes were similar to letters of credit. That is to say when there was a call for cash, the government would have to go out and borrow it. yes/no?

  8. @Ahura
    That is what we were originally told. If what Ms. Burton, confimed by Minister Kelleher, said on Prime Time is true, we were sold a pup.

    I still can’t believe it. An interest bearing IOU. That’s the last time I’ll stand anyone’s round for free. Next time, it’ll be with dibs on.

  9. When did that Irish Taxation Institute presentation occur? I never got a notification in the post. We’re goosed.

  10. @Karl
    “you need to factor in that this is one arm of the state making interest payments to another arm.”
    Ah, come on. If I thought this would speed the wind-down it might be fine. But it isn’t. The depositors are going to be paid top dollar to stay. The interest isn’t going to go to anything useful.

    Mrs. YM closed an INBS account today that had reached its term and was asked “are the interest rates not high enough”. Remember that Fingleton junior was shopping his high rates and governemnt guarantee from the UK branch of IrishMutallyAssuredDestruction or iMAD as it is known.

    And why? Because a quicker wind-down would expose the mad, bad, but politically connected borrowers who don’t fancy paying back their negative equity speculative loans. It’s a scam, the whole thing is a scam. We are being ripped off so the well-connected can get writedowns on the loans they took out on shares, mezzanine tranches of commercial property, development land, horses and the like. They are the backbone (as in backers) of the two main political parties and the senior echelons of the civil service.

    Do I sound paranoid? You bet I do. Is it likely that a crony elite are trying to cover their trail following a property bubble, banking crisis and a fiscal collapse? You bet it is. Ask Kevin. It’s what was attempted everywhere else.

  11. @ Karl

    im sorry, count me confused.com

    How can they have an interest coupon on them? Haven’t we already issued other promissory notes to some of the banks? Are these paying coupons? Where is the coupon going – you said from one arm of the state to the other? So is this just a statistical issue, ie if we want to get the deficit down to 3% we have to account for this as well? But doesn’t it turn up elsewhere as an income or profit? First Rooney, now this, not a great day by any means…

  12. @Bond. Eoin Bond.
    “ks? Are these paying coupons? Where is the coupon going – you said from one arm of the state to the other? So is this just a statistical issue, ie if we want to get the deficit down to 3% we have to account for this as well? But doesn’t it turn up elsewhere as an income or profit? ”

    Doesn’t it depend what Anglo does with the interest payments. It could be just a – for the deficit but or a corresponding + for Anglo.

    But it could also be – + – (if you know what I mean) if Anglo needs this interest to repay people.

    “First Rooney, now this, not a great day by any means…”

    Agreed!

  13. Watching Mike soden and the lads on the Vince Brown show.

    Pathetic really.
    I would almost feel sorry for these esteemed gentleman but for the fact that the banks and their goverment are now roaming around my house looking for revenue to shore up their losses.
    Mike is threading on thin ice with his strange ideas about wealth creation.
    A man who created credit out of thin air is under the impression that he can lecture us about wealth creation. – unbelivable.

    Still he is doing a service to us all as we gaze dumbstruck at the vast contradictions withen a bankers mind.

  14. @ Hogan,
    the only thing I can think of is that the dof have been instructed to account for future payments relating to these promises even though actual payments might not be made during the year. It wouldn’t be too different to a rating agency-style argument that should a promise be unexpectedly called on, the interest would fall due sooner than expected.

    Was mrs a carpetbagger?

  15. It seems most likely it’s as DE and Karl Whelan have outlined already; that the notes are to balance against money that Anglo owes, with interest, to “external parties”.

    The idea on the notes is not to have to pay off these parties today, but if Anglo owes the “external parties” money plus interest then the counterbalancing note has to accumulate interest too.

    It’s not a coupon payment, but it is perhaps more like an accrual in the national accounts. An accrual is real enough to count.

  16. If the figures turn out to be as outlined in ‘Karls slide no.5’, one would have to wonder why the NTMA saw fit to leave the bond market until early next year. Surely they knew these figures before that decision was taken?

  17. Another of Mr. Lenihan’s rabbit out of the hat ideas gone haywire. I am starting to loose count at this stage. However, the ECB are very definitely keeping track.

  18. @ Karl, DE et al
    Presumably based on the “wost case scenario” model that seems to always be exceeded by another “worst case scenario”, am I right in making an assumption that the Anglo hole probably was reduced by €1.5 billion per annum for each year or pro rata each year up till when this money is indeed “called” by Anglo to pay down bonds etc. In that case is the worst case scenario for Anglo of €35 billion actually after deduction for this “income” if you were to take an absolute measure of the debacle ….

  19. Also, the 1.5 billion has been around for a couple of weeks.

    Brian Cowen answering Joan Burton as she speculated about the cost of Anglo prior to the latest announcement on 29 September

    The Taoiseach: Are we going to have a serious discussion or not? If it was of that order (30 billion), the interest that would arise, taking the average this year and last year of 5%, would mean a payment of €1.5 billion every year. The figure of €30 billion would be added to the national debt and as the Deputy is aware, the question of paying interest on the national debt and then paring down the national debt arises in regard to growth that comes into the economy over time, as happened in the past ten years during good times, when we saw our national debt-GDP ratio go down from €60 billion to €28 billion even though the volume payment of debt was around the same figure. Our economy grew, therefore, and out of that we were able to reduce the percentage of our debt as a percentage of our GNP.

    If we look at the bank position and the reason the Governor would be suggesting this is a manageable situation, and I agree with him, it is on the basis of a €1.5 billion payment to be made annually. Our current deficit, in terms of spending and revenue, is €18.5 billion.

    In the first instance we have to look at improving our public finances over a period that will deal with the current deficit of approximately €18.5 billion but in respect of explaining to the public the impact this has in terms of taxpayers’ exposure and what it would cost, if it were a figure of €30 billion it would involve something in the region of €1.5 billion per annum.

  20. @ Frank/Karl

    i thought Biffo’s reference to the 1.5bn was more a big picture abstract figure, ie the banks are gonna cost us 30bn, we pay roughly 5% on our funding, therefore they cost us 1.5bn a year, even if the actual cost may be less in the earlier years?

    also, re DoF’s increase in forecast funding costs – is this not just a realisation of current spreads vs those that existed 6 months ago? ie we expected to pay L+150bps, now we hope/expect to pay L+300bps, issuing 50bn in “new” debt in 2011-2014, therefore increased cost of this is X etc?

  21. Sorry for rushed post – will read Karl’s slides later on but would this (very inelegant) schedule be what a €35bn ( €29.3bn Anglo + €0.3bn EBS + €5.4bn INBS) bailout looks like. And by the bailout is required to pay bondholders and deposits so it is ultimately real money in my book that will need be borrowed. The upshot is that at 5% and on a reducing balance basis the cost of the €35bn is more like €50bn.

    35000 Int@5% Cap Repy
    2011 1750 1810
    2012 1659.5 1885
    2013 1565.25 1960
    2014 1467.25 2035
    2015 1365.5 2110
    2016 1260 2185
    2017 1150.75 2260
    2018 1037.75 2335
    2019 921 2410
    2020 800.5 2485
    2021 676.25 2560
    2022 548.25 2635
    2023 416.5 2710
    2024 281 2785
    2025 141.75 2860

    15041.25 35025

  22. @Ahura
    “the only thing I can think of is that the dof have been instructed to account for future payments relating to these promises even though actual payments might not be made during the year. It wouldn’t be too different to a rating agency-style argument that should a promise be unexpectedly called on, the interest would fall due sooner than expected.”
    Perhaps. the other thing I though of was whether they were accounting for the actual borrowings in each year, but there’s about 25bn in promissories yet to be paid out. Paying over ten years (as was the announced plan) would be 2.5 bn a year.

    Equally, Jagdip’s numbers are higher than 1.5 bn. I don’t see how the figure can be derived in any sensible manner?

    “Was mrs a carpetbagger?”
    No, a yield chaser; we figured this time last year that INBS (and the banking system) would last at least another year. (PS not her money, retirement savings of parent).

  23. On a lighter note, notice Minister Kelleher telling us that the bank bailout was always going to be very expensive, and that anyone who thought otherwise was a fool?

  24. Come on, guys. We have more than 30 comments of speculation. Karl is right at the beginning of his post. The briefing given to the opposition finance teams are the numbers that the EC/ECB wants to see and were presented by the Commission officials who called in to the DoF last week. It’s time for the Government to put them out there, shelve the pretence and say this is what our masters in Brussels and Frankfurt want – or the NTMA won’t have a snowball’s chance in hell of re-entering the market. The Commission is bound by EU law and the deficit must be presented in line with this. Playing the cute hoor by fudging the figures is verboten. The Greeks played silly buggers and made the EC/ECB look stupid. That ain’t gonna happen again. The Government has run out of road. Time to fess up and face the music.

  25. It is difficult to see how the Government can bring the deficit down to -10% in 2011, given Karl’s estimates. A key point is the impact on the GDP of additional fiscal contraction. The ESRI estimated that the Government’s original Government package of €3 billion would reduce GDP by ‘approximately 1%’. Working with their fiscal multipliers, we can estimate the impact of a €7 billion contraction (which is focused on Government consumption and capital spending): it would result in a nominal GDP contraction of approximately 3% – though this may not all be suffered in year 1. The upshot is that the deficit would fall to 10% of GDP. However, when we add in the €1.5 billion in increased interest payments, the deficit increases to -11%. A fiscal contraction package which veered more towards taxation, would improve the underlying deficit, but not so much as to bring the deficit back in line with Government targets. We would fail, again, to hit fiscal targets but we would leave 3% deflation embedded in the economy for years to come. This would further depress future growth (that’s not even considering whether a €7 billion contraction is actually possible). A bit like spinning one’s wheels in a muddy ditch – the faster the wheels spin, the more one gets stuck in the ditch.

  26. So this €1.5bn is interest we are paying to INBS and Anglo?

    What on earth is the reason for this other than to try and secretly sneak them extra cash?

    What about the interest payments the Government will have to pay for actually borrowing this money? i.e. €30bn owed in principle, €1.5bn for whomever we borrowed it off and then another €1.5bn for INBS and Anglo?

  27. Small article in the Times today:

    http://www.irishtimes.com/newspaper/ireland/2010/1020/1224281544148.html

    €700m 2010
    €1.5bn 2011
    €1.4bn 2012
    €1.3bn 2013
    €1.2bn 2014

    The article is a tiny slip, I actually thought it was simply talking about the cost of paying interest on the promissory notes from whomever we borrow the cash from. Then I saw this little slip “interest on the promissory notes to the ‘banks’ will amount to ..”

    Really, I thought this would be a massive story.

  28. Clarification from the DoF on the interest on promissory notes

    “An appropriate market interest rate is included in the terms of each Promissory Note, to enable the bank to value the Note at par on its books, and therefore achieve the capital benefit the bank requires to meet its regulatory capital requirements.

    Currently the interest rate on the various Promissory Notes are fixed according to the ten-year bond yield at the time of issue.

    The principal value of the Note will be paid in instalments over ten years and it is currently expected that the interest will be paid after the principal is paid off.”

  29. Has all the losses been recognised in Anglo?

    If not, then these interest payments/claims could possibly be offset against further recapitalisation needs.

  30. @Dreaded_Estate

    So there’s a €15 billion balloon payment at the end of the term of the note?

  31. @D_E
    Holy spluttering-tea-on-screen batman.

    That’s a terrible deal. Ten year bonds as the benchmark? Effectively zero coupon? Aaargh.

    The bailout cost has just risen by 15 bn. No?

  32. @Karl

    Is it not possible to produce a schedule showing when the promissory notes will need be substituted with hard cash to pay depositors/bondholders and work out a schedule of repayments over say, 10-15 years, with an appropriate interest rate (I suppose 5% might be a start but why wouldn’t you use the 10-year borrowing rate of 6.35%).

    Saying Anglo’s bailout will cost €29.3bn is like saying the cost of the house you’re buying today with a 100% mortgage is €300k. Just like that €300k mortgage will cost you a total of €500k over 25 years, isn’t it the case that the Anglo bailout of €29.3bn will cost us more like €40bn when interest charges are taken into account. And isn’t that €40bn a truer reflection of the actual cost. And that’s just Anglo.

  33. Unless my understanding is incorrect, this means another additional payment to Anglo of €15bn in 2020

  34. Your understanding, based on the quote, seems fine. Did they tell you that over the phone or in an email?

    What was the rate at the time the first not was issued?

    What term are you assuming? 10 or 15 years?

    Again, what would be the interst costs to the state on actually borrowing this money over a 15 year period? Possibly over €15bn if bond yields do not improve?

  35. @D_E
    Well, it will reduce as the promissories are drawn down, but that just converts them into (presumably) ten year bonds with interest due immediately.

    So instead of paying 15 bn at the end, we’ll probably be paying 7.5 bn as we go and 7.5 bn at the end (assuming 5% for ten years all the way through!).

    Year 0 – promissories 30 bn, accrual 1.5 bn, bond interest 0, payment 3 bn
    Year 1 – promissories 27 bn, accrual 2.85, bond interest 150mn, payment 3 bn

    So I make it that the accrued interest will be 8.25 bn and the real interest paid 8.25 (roughly speaking, as there’s a lag between the first year’s accrued interest and the last year’s full interest?). Is this right?

  36. @ DE/Hoggie

    ok, so, roughly speaking, a 10bn promissory note will be paid at 1bn per year over 10yrs in terms of principal, with an accrued interest to also be paid at Yr10, which, discounting and compounding ignored, be worth 10bn x 5% x 10yr = 5bn. However, what happens to that balloon payment? Will, at that stage, the bank essentially have no assets and no liabilities, and so the accrued interest will be owing to the ultimate owner (ie taxpayer)? Or is the accrued interest also factored into Anglo’s capital requirements? ie they need 15bn in capital so we give them a 10bn note plus accrued interest? Still very confused about all of this.

  37. @Eoin
    If Anglo didn’t need the accrued interest at the time wouldn’t they have reduced the initial value of the note and let the interest take care of the balance

  38. @ DE

    well thats kinda what im asking, which way around have they done it? Like is the plan for Anglo to eventually be wound down with a zero NPV, or is it now expected to have a bigger upfront or running cost, but finish with a positive NPV? Does this mean that the promissory notes do not have to be externally funded, ie i had assumed that the promissory notes would add 2bn+ to the yearly funding by the NTMA – does this not now occur? So our external funding req is not affected by the promisorry notes (positive) while we will have to account for cumulative interest on the 30bn on an annual basis (negative)? ie good for funding, bad for deficit (which may feedback to negative for funding of course in terms of deficit sentiment)?

  39. Clarification from the DoF on the interest on promissory notes

    “An appropriate market interest rate is included in the terms of each Promissory Note, to enable the bank to value the Note at par on its books, and therefore achieve the capital benefit the bank requires to meet its regulatory capital requirements.”

    This seems to suggest that some form of fair value accounting had to be applied to the promissory notes. I don’t see why this should have to be the case. Couldn’t the Regulator OK these promissory notes be valued at face value?

    I’d like to see what the CB/Regulator advised regarding this matter.

  40. @Ahura
    I presume from them to be eligible as ECB collateral (even at the Irish NCB) they had to be marketable notes, i.e. interest bearing.

  41. re promissary Note. The govt recapitalised Anglo with an iou (promissary note) not with cash. The IOU sits on Anglo balance sheet as a debt and like all other good debts to them, they would like to get paid interest.

    In so far as I understand the note below taken from Anglo accounts the Govt must pay Anglo interest on its promissary note. Therefore this interest must appear somewhere in govt accounts. The interest is an ongoing cost to the Exchequer.

    Promissory note and Amount due from Shareholder
    On 31 March 2010 the Minister for Finance settled the amount due from Shareholder at 31 December 2009 by providing the Bank with
    a promissory note with a value of €8.3bn. The principal amount of the promissory note was subsequently increased through the receipt
    of a €2.0bn adjustment instrument on 28 May 2010. Both the promissory note and the adjustment instrument pay a fixed coupon at a
    market rate of interest for the term of the assets and accordingly were fair valued at par on initial recognition. The promissory note is
    carried at amortised cost in accordance with IFRS and the Bank does not therefore recognise any gains or losses associated with changes
    to its fair value arising from market rate changes.
    The receipt of the promissory note and adjustment instrument has resulted in the Bank holding €10.3bn of fixed interest rate exposure.
    As part of its capital and interest rate risk management policies the Group has elected to hedge a portion of this exposure.
    The Minister for Finance recapitalised the Bank with a further €8.58bn, effective 30 June 2010. On 23 August 2010 the €8.58bn due
    from the Shareholder was settled via the receipt of a further adjustment instrument to the promissory note. Note 21 to the interim
    financial statements provides further details on the promissory note and adjustment instruments.

  42. @Joseph
    “The IOU sits on Anglo balance sheet as a debt”
    It sits as an asset. Otherwise, well spotted.

    To be fair, the ESRI flagged this in their july report:
    http://www.rte.ie/news/2010/0721/esrireport.pdf
    “We have also assumed that this promissory note will attract a market interest rate, with the resulting interest payments being added to national debt interest”

    It is not clear, however, that Mr. Lenihan understood this:
    ” BL: No, no, listen, listen. This not good for the country and it’s inaccurate. If next year we’re obliged to include the €8bn, the €8bn will not actually be borrowed next year the device of the promissory note means we borrow…

    Ivan Yates: No, I know the promissory note is over ten years. You’re missing the point…

    BL: No you’re missing the point! This is an accounting device! This is not real borrowing! What the markets look at is real borrowing. Not accountancy devices… – April 26 2010.”
    Newstalk… link below.

  43. @ Hoganmahew,

    Nama bonds? They seem to accept these.

    I still don’t see why fair value needed to be applied. It looks to me that it’s a way to transfer more money to banks.

  44. Add: Though this is somewhat zero sum as we own INBS and Anglo. It might make the ‘bail-out’ look a little cheaper. They’re hardly at that?

  45. More information on the exact rates payable on the promissory notes/

    Based on the current 10 year yield of 6.3% the average rate works out very close to 5%.

    DOF
    “8.6 billion issued on 31/3/2010 [rate 4.2%]
    2 billion issued on 28/5/2010 [rate 4.6%]
    8.6 billion issued on 23/8/2010 [rate 5.1 %]
    further 6.4 billion is due to issue.

    I still have several questions outstanding so hopefully we will have more answers tomorrow.

  46. There are 5 things we need to remember.

    1) The 2014 deficit targets of 3% set by the ECB were set before the Greek “crisis” erupted. Even non PIIG countries will find that hard to meet by 2014 .

    2)The “optimistic” growth forecast for 2011 -2014 in Ireland were also made before the Greek crisis erupted. IMHO Cowen and Lenihan have to be given the benefit of the doubt on this one.

    3) A 7bn Euro “adjustment” could conceivably translate into 3.5Bn cuts and 3.5Bn tax hikes in a country with one of the highest GDP per capita and lowest tax burdens in the EU. Fiscal growth (even at the revised pessimistic growth forecasts) could absorb the rest by the middle decade because come 2014 we will not be the only country arguing for a deficit reduction extension out to 2016.

    4)The Scandinavians are still feeling the effects of their banking crisis and real estate collapse 20 years on. Therefore Ireland is rigth to calculate banking bail out costs over a 10-15 year time frame.

    5)Even when all the numbers are “totted”up our National debt (however we calculate it) in 4 years time will still not be as bad as the national debt of certain wealthy western nations.

    We are in a difficult situation emerging from the overpaid “narnia” of a 5 year debt fueled boom but perhaps we should just stop panicking and get on with solving what is essentially solvable.

  47. @Ahura
    “Nama bonds?”
    Exactly.

    To me it is a poor attempt to disguise the full bailout cost. It is really promissories + interest.

  48. Mr. Lenihan, however, appears to have had a different original idea of the cost:
    http://debates.oireachtas.ie/Xml/30/DAL20100428.PDF
    28 April 2010
    “As the Deputy is aware, the additional capital of €10.9 billion is being made available by way of promissory notes, payable over a ten to 15-year period. This will increase the general Government debt by the full amount in 2010. However, as regards the actual borrowing that needs to be raised arising from this, it is likely that an additional Exchequer borrowing requirement of approximately €1 billion will now be required in 2011 for Anglo Irish Bank and INBS. A likely indication of the interest
    costs associated with this additional borrowing would be in the region of €55 million per annum and, in the context of the overall budgetary numbers, this is manageable.”

    This is subject, of course to the usual mangling. Interest of 55 million on 1,000 million is 5.5% No mention is made of interest on the other 9,900 million, one could argue and no doubt, it is manageable “so far”.

    It does appear the plan was changed at some point. NAMA-style bonds with low interest payments appear to have been the initial plan, hence the repeated claims that “the use of Promissory Notes means that the institution’s capital requirements are met in a way which spreads the cash payments over a number of years and thereby reduces the funding
    burden on the Exchequer that would otherwise arise in the current year.”
    (repeated in many places in the Dail record).

    Instead we see that there is no reduction in the burden on the Exchequer.

  49. @ Hoggie

    im still trying to figure out how this all works (is it not, eventually, all zero sum? or has the accrued interest always been part of the capital base of Anglo/IRNW?), but the one “positive” impact of the promissory note is that the funding does not have to be done externally (right?), so its not entirely a pointless exercise.

  50. @ hogan,

    Ignoring our ownership, there is something perverse in paying 5+% interest for the honour of recapitalising them in the future. So the taxpaying capital providers have to pay interest whereas depositors get paid 3+%.

    As an aside, I reckon anglo arb would need to produce actual interest income (as distinct from rollie up) for anglo funding bank. producing sufficient income might be a challenge.

  51. @Eoin
    “has the accrued interest always been part of the capital base of Anglo/IRNW?”
    No, because we are being told that the cost is 31 bn, not 38.5 bn. See Mr. Whelan’s post on the Dail exchange between Ms. Burton and Mr. Lenihan.

    “the funding does not have to be done externally (right?)”
    Erm, not really. We need to convert about 3.1 bn a year (depending on whether it is over 10 years or not). This will have to be funded externally. i.e. the promissory note is converted to real cash over ten years as the capital requirements deem it due.

    Of course, if the bank were to bust tomorrow, we would have to pony up 31 billion plus any accrued interest (currently 700 million). Any future government is totally hamstrung in trying to impose losses on INBS or Anglo. In a worst case scenario, every other bank in the country would have to be let fail so that these two could survive, because the money has, effectively, already been given to them.

    Terms and conditions apply. The value of your investment in the banks may go down a lot aswell as just down…

  52. Ahura
    “As an aside, I reckon anglo arb would need to produce actual interest income (as distinct from rollie up) for anglo funding bank. producing sufficient income might be a challenge.”
    I agree.

  53. Ok, Anglo tender just announced: 20 cents on Euro (vs 30 cent current market price), and if enough people agree to it (not sure if its 50%, 66%, or 75%), Anglo basically gets to wipe out the outstanding holders (ie the ones that didnt accept) for 1 cent in every €1,000. Pretty ingenious, no default-event, and much much tougher response from the current Anglo Mgt/Irish govt then previous tender. Game theory just went into overdrive, and even if you figure not enough will accept it as is, legislation is also a potential to come further down the line…

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