TASC on Promissory Notes

TASC’s Progressive Economy blog has an interesting post by Tom McDonnell, Michael Burke and Michael Taft on restructuring promissory notes. I think it is important that there be more public discussion of this issue. With payments of €3.1 billion a year stretching into the middle of the next decade, these notes are going to impose a far greater burden on the Irish people than the remaining unsecured Anglo bonds which receive a lot more attention.

107 thoughts on “TASC on Promissory Notes”

  1. This is a key issue. As well as the options outlined by the authors there is also the possibility of changing the interest rate charged on the Promissory Notes. The final tranche of €9.1 billion was provided at an annual coupon rate of 8.6%.

    However as Anglo is nationalised it is hard to see how this would generate a real saving – it’s just less money moving from one pocket to another. Mike Anynsley has said that we might even get some of this back. To generate real saving we need either the final capital bill for Anglo to be much lower (unlikely) or for someone else to absorb part of the loss.

    The discussion on “Renegotiating the Promissory Note” with the ICB is interesting in this regard but it is still unclear how this might work in practice. Involving the remaining bondholders would be helpful but as Karl rightfully points out their relative size is small in comparison to the remaining Promissory Notes.

  2. @McDonnell, Burke & Taft

    ‘The starting point should be a Government announcement this autumn that it does not intend to continue with the current promissory note payment schedule and will enter into renegotiation with the affected parties.’

    100% Agree

    @Karl Whelan

    On your previous work in this area – +1

    @All Sane Pragmatists Left, Right, & Centre

    As Genghis Khan once put it – Only a fool goes into a battle that he[she] knows he cannot win! This battle must be won.

  3. The article draws attention to an important matter, but it baldly claims the Anglo/INBS debt top be ‘unjust’ without explaining why.

    The irony is that the only winners of the property bubble were those who benefited from the massively increased fiscal spending…including woolly headed quangos like Tasc.

  4. @ Desmond Brennan

    Readers can a take a look at the analysis in the above blog post and make up their own minds as to whether it is “woolly”.

    However, please note that TASC is not a ‘quango’ – we are a wholly independent research institute with charitable status. We do not receive state funding, and certainly did not benefit from the property bubble!

    Nat O’Connor
    Director, TASC

  5. I don’t get it – if we simply write down the promissory note won’t we be defaulting on a debt to our central bank – and, unless it is holding a lot of capital above the minimum that it is required to, will the state not be under an obligation to re capitalise the central bank? how does that change anything?

    In terms of restructuring the note – if it reduces the NPV of the note will this not also imply that we need to re cap the central bank?

    if it doesn’t reduce the NPV of the note then – well i suppose that could shift the timing of the funding – but is there room for a real benefit this way?

    Am i missing something?

  6. @Seamus

    “The final tranche of €9.1 billion was provided at an annual coupon rate of 8.6%.”

    In what sense do you mean tranche of €9.1 billion given the payments are €3.1bn per year?

    Also, http://www.finance.gov.ie/documents/publications/reports/2010/noteprommissory2010.pdf

    Why are we paying 3.1bn for 15 years in that link (3.1bn X 15 = €46.5bn) rather than 10 (ignoring the interest).

    Surely the principal repayament should only take 10 years if we are sticking to 3.1bn per year? Looking forward to this Government’s update on this at budget time.

  7. Also, I did not know this

    “Bondholder debt makes up only a small part of Anglo/INBS liabilities – less than 10 percent. The major liabilities are made up of loans from central banks (€40.8 billion) of which the promissory note (€23.8 billion) makes up over half. ”

    Now I understand how the monetary authorities can actually help us out with the rate – I was scratching my head at the prospect of us pleading with the Eurozone to reduce the interest on bondholder debt .

  8. Goodness, but TASC are good at spouting bullsh*t that contradicts their own previous bullsh*t.

    Their article/post leads with concern for responsibility and for the productive economy.

    Ehm? Don’t they normally say that we’re all in “society” together and must be made to pay? Aren’t they normally the ones advocating high taxes? Either there’s a worthwhile discussion on individual responsibility, or there isn’t. Either the government, as the people who force “society” upon us, are entitled to make people pay other people’s bills or they’re not. Which is it?

    TASC is a classic group who like to have their cake and eat it.

  9. @Nat/Karl
    Apologies for my mistake re Tasc’s funding source

    That said, my point that the flipside of the money we pour into the disgusting Anglo blackhole…is in fact the windfall taxes of the bubble years, still stands.

  10. How then should I point out that a FFTT’s current opinion requires fundamental contradiction with their previous opinions without giving rise to a suspicion that I think the FFTT is predominantly full of it?

  11. @ Christy

    “In terms of restructuring the note – if it reduces the NPV of the note will this not also imply that we need to re cap the central bank?

    if it doesn’t reduce the NPV of the note then – well i suppose that could shift the timing of the funding – but is there room for a real benefit this way?

    Am i missing something?”

    These are all good points — and I’m planning to take some time to write some posts on this stuff.

    For now, let’s just say that there a lot of different options that could produce a better outcome than the current one, e.g. EFSF could loan Anglo the money to pay off the ELA, getting the CBI out of it, and then Anglo could repay EFSF very slowly the NPV of Anglo’s liabilities. This could allow the promissory notes to be restructured.

  12. @ Hugh

    Do you actually have a comment on the idea of rescheduling the promissory note or do you just want to register that you don’t like TASC?

    If it’s the latter, you’ve made your point.

  13. So the liabilities of Anglo consist of bonds, CB debt and ECB debt?

    The assets consist of Promissory notes and “other stuff”?

    Is the “other stuff” pledged as collateral to the ECB and the promissory note pledged to the CB with a bit left over, un-pledged, to the seniors (and an equity buffer)?

    If so, how do we save money by paying less to our central bank – do we not just have to recap any losses there?

  14. @ Christy

    “Is the “other stuff” pledged as collateral to the ECB”

    Yep, although I believe the NAMA bonds went over to AIB with the deposits (perhaps replaced as ECB collateral by own-use bonds — anyone? Eoin?)

    “If so, how do we save money by paying less to our central bank – do we not just have to recap any losses there?”

    Well one way is to get EFSF to loan the money to pay off the CBI.

    Alternatively, I suspect that the actual CBI ELA “asset” is valued at the full nominal amount, irrespective of how long Anglo plan to take to pay it back. There’s an issue about the valuation of the collateral for the ELA if the promissory note is rescheduled but I suspect that’s not such a big deal. After all, CBI also has the famous comfort letters.

  15. Try to read this later, but this assertion in the second sentence might cause a problem when not preaching to the converted:

    ” The Anglo/INBS debt-burden is an unjust and unwarranted charge which the Irish people ought have no responsibility for”

    Does the word “ought” suffice?

  16. @ Rob S,

    The tranches have nothing to do with the annual payments. The Promissory Notes were not provided to Anglo/INBS in one go but were spread over four tranches. The details of them can be seen in this table.

    By the time the final tranche was transferrred in January (€6.42 billion to Anglo and €2.70 billion to INBS) the ten-year bond yield had shot up, hence the 8.6% annual coupon.

    We are paying over 15 years (or longer maybe) because Anglo and INBS are entitled to interest on the outstanding amounts of the Notes. They would not be allowed to value them at par on their balance sheet unless there was some interest earned on the outstanding amount.

    The DoF document you link was published in November 2010. As the 8.6% tranche was not provided until January it is hard to know if such a high interest rate was allowed for in the calculations. However, with recent changes to our EU interest rates we should be able to borrow money to repay the Notes at a lower rate than the assumed 4.7%, at least until the EU/IMF programme expires.

  17. Just quickly, on the options. Don’t forget that ELA blurs the boundaries of “When is a Euro not a Euro” viz. Who stands behind it.

    You can take the view that these are not proper Euros at all.

    That implies option e).

  18. @ Tasc

    “Bondholder debt makes up only a small part of Anglo/INBS liabilities – less than 10 percent. The major liabilities are made up of loans from central banks (€40.8 billion) of which the promissory note (€23.8 billion) makes up over half.”

    This isn’t actually correct. Its not quite a deposit selling moment, but you need to clean this up. The promissory note, itself, is actually an asset on the banks’ balance sheet, it is a pledge of capital from the government, which now takes the form of tier one equity capital in the capital reserve on the balance sheet. This promissory note is then used as collateral to take liquidity from the CBI. The PN is an asset, and the liquidity/loan from the CBI is the liability, with the PN acting as the collateral underpinning that liquidity.

    @ Christy

    per above, i concur with you about writing down the value of the promissory note – it is an asset on Anglo’s, and writing it down would require either a loss at the CBI requiring recapitalisation, or there would have to be an equal writing down of some of Anglo’s other liabilities. The only other liabilities are the dwindling amount of bonds and deposits (there are some left apparently, possibly as security?), as well as some miscellaneous debts like staff pensions, tax, trade creditors etc.

  19. Christy and Karl both raise interesting points. As Karl says he will post on these later, I’ll wait to see what he has to say. But I think he is already pointing in the right direction, there’s more than oner way to skin this rabbit.

    Christy, the central bank would indeed be left with the losses on the write-down. As part of the ECSB, the ultimate liabilities would seem to lie jointly and severally with the ECB. Just as there is no mechanism for removing a country from the Euro Area, there is no mechanism for removing a national CB from the ESCB.

    It would be the ECB’s problem as much as the CBoI’s, with the former having the means to resolve it. As with the current purchase of of EU govt bonds, which had previously been foresworn because it would undermine the ECBs balance sheet (ditto its acceptance of lowly-rated EU sovereign debt, or haircuts for bondholders) all have now happened and the heavens haven’t fallen in.

    Just as the US Fed cannot go bust, neither will the ECB. Therefore, it seems all that is required is some innovative thinking and goodwill on the part of the ECB. The current crisis may help to concentrate minds.

  20. @ Grumpy

    “Don’t forget that ELA blurs the boundaries of “When is a Euro not a Euro” viz. Who stands behind it.

    You can take the view that these are not proper Euros at all.”

    Trust me, they were proper Euros — they bondholders and depositors that got paid off all have proper Euros in their accounts.

  21. @ Eoin

    I agree that

    “The major liabilities are made up of loans from central banks (€40.8 billion) of which the promissory note (€23.8 billion) makes up over half.”

    isn’t a good sentence. I think they mean that the promissory note provides the assets to pay off more than half the liabilities. I agree with the recommendation to re-write the sentence.

  22. @ Karl

    My point is far more than “I don’t like TASC”.

    My point is that their basis for arguing that these promissory notes should not be repaid contradicts bases on which they have argued many other points they have chosen to make. They cannot use contradictory arguments for things and hope to be taken seriously as a think-tank, foreign funded or not.

    For instance, either the normal taxpayer of Ireland does not have a responsibility to repay these debts, e.g. (i) the normal taxpayer/citizen/resident of Ireland has some property rights which cannot be overruled because the govt finds it expedient, and (ii) contracts made in the past do not have to be honored by the taxpayer when the state is in such extreme financial condition, or the taxpayer/citizen/resident of Ireland has no such rights in either of these cases (or others which I leave out for brevity).

    Similarly, either loading the “productive economy” up with debt in our current situation is a bad thing or it is a good thing.

    TASC has previously argued on many occasions for things like highly progressive taxation, which expropriates money from some people to give to others on no more basis than that the government finds it expedient. In the same way, the government found it expedient to construct these odd Anglo repayments and to accept the debt in the first place. One could argue that the need for expedience was clearer (and more awful) in the Anglo case than elsewhere.

    Similarly, TASC has often argued that the state should be loaded up with more debt in an attempt to stimulate the economy yet they make no bones about their repugnance for this particular debt. Have we now got a TASC scale of debt repudiatability? What about the 100 billion Euro plus of unfunded public sector pension debt? That dwarves the Anglo debt, yet they make no attempt to address that. How about the ongoing borrowings to maintain the Croke Park agreement? What about that debt?

    As for the specifics of the note, there are a number of possibilities raised on how to lower the interest cost of the debt. These should all be explored. The issue of repudiating the debt and the impact of that on the CBI is surrounded by lots of words and no specific proposals at all. In that way the note is also a TASC classic.

    My point, Karl, is that TASC puts itself forward as a think tank yet its thoughts – or at least the published version of its thoughts – are inconsistent and self-contradictory. If I thought that this was a deliberate approach I’d call it hypocritical.

    This note, written in a blog comment window, probably doesn’t achieve the clarity or intellectual consistency I’d like or which this blog deserves. TASC has had plenty of time and plenty of funding and editorial support, yet the quality of its output remains dire.

  23. @ Christy/Karl

    per Anglo’s half year statement:

    of the 40.7bn in Central Bank depo’s, 38.4bn is from the CBI. This is comprised of PN (23.8bn) and the entire loan book of 22.3bn (i’m reasonably sure).

    The 2.4bn with the ECB (or other CB’s) is probably a collateral mix of government and bank bonds, with some of that Irish government no doubt. Don’t think very much of it is self held (if you look at the NTMA site, Anglo did not take part in the early ’11 practise of self issuing).

  24. I’m hoping that Noonan got a nod and a wink about the PNs while over begging to our masters last week. ‘Stop annoying us about Senior bondholders and we’ll work some magic down the line when French/German banks need a helping hand too’.

  25. @Karl

    We all know the depositors got Euros in their accounts.

    Revisit the stuff from the thick end of a year ago, Buiter was quite interesting on this, and it is part of the reason themore cautious holders of those “Euros” fled the state.

  26. HS: …TASC puts itself forward as a think tank yet its thoughts – or at least the published version of its thoughts – are inconsistent and self-contradictory.

    TASC: All views expressed are those of the individual authors.

  27. @Hugh

    You start by complaining that TASC is “inconsistent and self-contradictory” and now you switch to complaining that they won’t plug your views? Keep moving them goal-posts, it’s great exercise.

  28. Anyway Hugh, since their aim is to provide “a forum for progressive economists and others commenting on the Irish economy” maybe they will publish your views if you ask them nicely. But if you’re a reactionary non-economist I wouldn’t count on it, despite the reference to “others”.

  29. It is difficult to see how the ECB could go bust in the eventuality of a write down on the promissory notes as central banks avail of write-down provisions. This, however, misses the larger point of monetary operations within the ECSB which can effectively avoid formal insolvency. And this forms the larger basis for the post which Karl has kindly linked here.

    We attempt to construct concrete proposals to remove this invidious debt, going beyond the ‘unilateralist’ vs. ‘fatalist’ divide which dominates much of the debate. Therefore, we proposed a multi-lateral approach based on renegotiation. As well, while the Finance Minister’s attempt to renegotiate the unguaranteed bondholder debt was worthy of support, this was always going to come up against limitations as there was only one narrow issue on the table.

    Therefore, we suggest that all issues should be put forward for renegotiation as to allow maximum flexibility for all parties. For there are reasons to believe the ECB would respond positively to a series of face-saving give-and-take negotiations– reasons which go beyond Irish issues. At present, there are any number of proposals being seriously debated in the Eurozone regarding new roles the ECB could play in resolving the current crisis – ECB-issued bonds being one of them. These are all thinking outside the box. In this mix, the new Presidency may well be open to strategies to undo or mitigate debt which is an obstacle to crisis resolution; and this may be an opportune time to proceed with this.

    Even if that fails or to achieve the desired results (which is a total write down of this debt) it can open the door in multi-issue renegotiations to other methods that can at least reduce the burden in the medium-term. For how can siphoning off half of our projected growth in GDP by 2015 to repay dead-bank debt be anything other than a burden – especially for an economy mired in a domestic-demand recession.

    Mostly we wanted to get this debate rolling. If there are better approaches to remove or reduce this debt they deserve all our considered attention. Hopefully our post assists in that collective exercise.

  30. It seems to me that the interest rate charged on the promissory note is irrelevant, from the point of view of a taxpayer wondering how much of their money in the future will be needed for its repayment, since it is only an accounting construct between two parts of the State (DoF and Anglo).

    Supposing all Anglo staff upped sticks and moved into Government Buildings – could anyone outside Government Buildings then tell what the PN interest rate was – and would they care? The observable transactions seen from outside would be (a) Money borrowed from the EFSF at a certain interest rate and (b) collateral repo’d with the CBI at a certain interest rate (which is much lower than the PN interest rate). The PN interest is money paid from one arm of the State to another in the years 2021-2025.

    It is possible I’m missing something here, but before getting lost in the details of the existing or a new PN interest repayment schedule, it seems important to understand its significance in the first place.

  31. @Kevin
    I do complain that TASC is logically inconsistent and self-contradictory, but they are that way in pursuit of a unified editorial policy. That’s why I don’t believe that the disclaimer you quote about all views being those of the individual authors has any real meaning. The fact that you so readily agree that they are unlikely to publish my views (or views anything like mine) is indicative.

    Also, TASC’s own website calls it a think tank, so I don’t know why you should object to that description.

    Then, I believe that TASC and I would disagree rather significantly on the meaning of the words “progressive” and “reactionary”.

    Finally, on the subject of TASC being an organisation for progressive economists, please tell me which of those three authors is an economist, and why you describe them so.

  32. B_Eoin_B is right that the promissory note are assets.

    And these assets increased interest income in H1 2011 by 644m. That’s a nice return on these assets and reduced Anglo’s 6month losses to a mere 100m. (was there something that the coupon was going to be deferred on these?)

    I’m not clear what TASC is suggesting. AI has a bunch of creditors (mostly CBs). You can negotiate with these, but this has bugger all to do with the promissory notes.

  33. surely, the issue is not, per se, the writing down or off of the nominal amount but the issue surely is that this is a massive drain on the irish taxpayer. Asset to Anglo, Liability to the state (the taxpayer). So….Id love to see Eoin come up with a solution that would
    a) preserve the balance sheet of Anglo (why…)
    b) reduce the drain on the taxpayer.
    TASC have made some forays into this and as usual here we have the hurlers on the ditch flinging snide remarks. Lets see them suggest new rules of play.

  34. The EFSF does appear to be willing to lend at somewhat concessionary rates at this point and the state is paying 8 % on the promissory note to Anglo, (a State to State loan).

    But, Anglo is using the promissory note as collateral for low interest loans from the CBI.

    Unless the EFSF was willing to lend at rates or on terms more concessionary than the CBI is willing to I can’t see how we can get savings from this. No matter which way you arrange it there must be a source of funding and an associated rate of interest. And at the minute as far as i understand it the CBI funding is pretty cheap (don’t know exactly – is it about 1% above the ECB rate?)

    But clearly that’s just my two cents and i think it’s a very good idea for people to look very closely at whether we can make any savings here – even if it is some dodgy accounting (“hold to maturity” / “hold’ till becomes an antique”) fudge that switches risk to the EFSF. even if was just a reduction in roll over risk by smoothing out or changing the profile of debt repayments it could be useful.

    How much capital does are central bank have? Could we use an accounting trick to pretend we haven’t taken the capital from it but really do precisely that? Have we in effect already done that ten times over with the dodgy collateral we use for ELA?

  35. @ Nat O’Connor

    not only is TASC not a quango, but it has contributed outstanding and important documents to the discussion that were totally neglected by the mainstream media mouth pieces, documents that did not receive the public attention they would have deserved.

    http://www.tascnet.ie/upload/file/MtGC%20ISSU.pdf

    I can not begin to tell you to how many people I circulated this, and I take the opportunity to thank you personally for the work put into ‘Mapping The Golden Circle’.

    Best
    Georg

  36. P.S.

    I hope Sheila’s work does not suffer the same fate, it is too important. It would seem that there is a tendency now to avoid the O-Word, ODIOUS DEBTS that is.

  37. @Georg

    …. mapping it is one thing [neat work +1] – the map is not the territory – the golden upper-echelons of this society remain in situ, and in power.

  38. There are really two issues:

    1. The possibility of reneging on the promissory notes which would ipso facto involve burning bondholders. The chances of doing this are extremely low at this point. Barring of course an EZ collapse. At which point all banks bondholders will be visited with a vengence similar to that visited on a rackets debt collector that has just lost the protection of his mafia clan.

    2. Reduce the cost of funds borrowed to fund the PN. It seems logical that any funds borrowed to fund bust banks should now come from from the ESM/EFSF. The EFSF has said that it will loan out funds at its borrowing cost. Approx ? 2-3%. The very first docket on the desk of the EFSF should be the Anglo bailout out docket.

    @Bryan G
    I think your point is valid. The PN rates charged to Anglo, as they are intra-State loans) seem somewhat irrelevant. It is the cost to the State of borrowing these funds that is the real issue. [Well other than the real, real issue. i.e We should never have given the PNs in the first place]

  39. @ Phillip II

    this isn’t hurling from the ditch. I think the suggestion of rescheduling the PN is entirely sensible if a funding/discounting mechanism can be found that delays (rather than reduces) the cost of it over a much longer period. To be honest, i’m not against your suggestion of a 100 year PN – if we’re going to use an accounting fudge (and its pretty clever) to fill a capital hole, why not max it up?

    What is not a reasonable idea, in terms of having any ability to actually work, is the idea of writing it down. As previously noted, if you write down the asset for Anglo, you have to write down the liability side too, and, assuming we’re going to at least approach this from the basis that senior debt isn’t going to be taking the hit (please, lets just count that as an assumption for now, cos otherwise this isn’t really a debate about the PN, is it?), all they have are central bank deposits, with the PN itself being used as collateral for the ELA at the CBI, so any loss there will have to be bourne by the State, so we’re back to square one.

    In terms of how to lengthen the period for the PN and also reduce the discounting/interest rate, the problem here is obviously Eurostat. I would imagine the only way to reduce the effective discount rate is to somehow get the EFSF involved as a guarantor or issuer instead. Its not a bizarre idea, although the nominal involved would mean that we’re adding another 30bn to the 67.5bn international support package, which optically at least will be unpleasant. Maybe keeping it off balance sheet so to speak could be the route to go?

  40. @ EB

    “the PN itself being used as collateral for the ELA at the CBI, so any loss there will have to be bourne by the State, so we’re back to square one.”

    I’ll repeat what I wrote above

    “I suspect that the actual CBI ELA “asset” is valued at the full nominal amount, irrespective of how long Anglo plan to take to pay it back. There’s an issue about the valuation of the collateral for the ELA if the promissory note is rescheduled but I suspect that’s not such a big deal. After all, CBI also has the famous comfort letters.”

    In other words, you could take away the collateral altogether — as long as the MoF guarantees that the ELA would be paid back eventually, then that can be enough for CBI to hold the ELA at full nominal value on the balance sheet.

    I’d also note (slightly tongue in cheek) that the ESCB staute
    http://www.ecb.int/ecb/legal/1341/1343/html/index.en.html

    doesn’t actually say that a national country central bank with a capital deficiency has to be recapitalised by the state.

    Article 27 merely says

    “The accounts of the ECB and national central banks shall be audited by independent external auditors recommended by the Governing Council and approved by the Council. The auditors shall have full power to examine all books and accounts of the ECB and national central banks and obtain full information about their transactions.”

    It doesn’t say what happens if the auditors and GC don’t like what they find.

  41. @phillip2

    “TASC have made some forays into this and as usual here we have the hurlers on the ditch flinging snide remarks. Lets see them suggest new rules of play.”

    Urbandictionary:
    “hurler in the ditch” – Giving advice to people who are actually doing the work and judging them for the work they are doing.

    What do you mean? What makes you think that tasc are doing the work any more than anyone else who makes the effort to comment here? What would be the point of their suggestions being posted here if comments were not actively being sought?

    @Eoin

    “As previously noted, if you write down the asset for Anglo, you have to write down the liability side too, and, assuming we’re going to at least approach this from the basis that senior debt isn’t going to be taking the hit (please, lets just count that as an assumption for now, cos otherwise this isn’t really a debate about the PN, is it?)”

    Spot on. This is more than a debate about the PNs – whether the Efsf is involved or not (the guarantors have interests they would be obliged to defend), nor should it be.

    The senior bank bond market is an ex-market. It is not pining for the fjords. The “protect unsecured seniors at all costs (even the solvency of states) strategy” has failed miserably and the covereds issuance that took over has hollowed out the capital. If you buy a senior bond today you are putting capital at risk – same as you were 5 years ago – but without the fallacy that you were not.

    The game was to throw whatever was necessary into stopping people questioning the solvency of banks. The risk was you raise questions over the solvency of states and the banks they were standing behind. There was a time when you thought about what bank you put deposits with or bought bonds in. That was the right way to do things. We should stop pretending that you draw a line above prefs and subbies and say that is where risk stops.

  42. What accounting principles does the ICB use?

    Could the ELA asset be restructured so that Anglo repays the full amount in 30 years, with an interest holiday for the first 10 years rolled up at 2% put with a full government guarantee. Could this be valued at par?

    Would that allow us to restructure the PN to the same terms?

  43. Potential spanner in the works alert — I’d note that none of us have seen the wording the Governing Council decision to allow ELA. Hundred year repayment periods might run counter to that decision, leaving us back into the usual “ECB threatening to ruin us and take the Euro down with them” territory.

  44. @ Karl

    Well, just so we’re clear on this, we’re gonna need the ECB’s ok on this, i don’t think thats really under question. Noonan claims he mentioned the issue to Trichet last week and that Trichet said he would look into it (non committal). Its not beyond the bounds of possibility that the ECB could be brought onside in terms of a restructure, so long as those Eurostat number crunchers give it the thumbs up, and so long as no one turns either the ELA or PN into an optical montrosity for all to see. One of the reasons the ELA and the PN have worked (alongside the self-held own-issuance, they are quasi forms of QE are they not? They are definitely not what was intended from the ECB’s standard collateral framework system) is that they are extremely opaque and not really easy to chat about around the water cooler in the morning. To be honest, i’m not against such fudges at times of crisis, albeit they have to have to have some sort of end-game or unwind/maturity scenario figured out from the beginning.

  45. @ Karl

    “In other words, you could take away the collateral altogether — as long as the MoF guarantees that the ELA would be paid back eventually, then that can be enough for CBI to hold the ELA at full nominal value on the balance sheet.”

    So the government would really be self-issuing to itself just like the banks self-issued to themselves, purely on the back of a guarantee? We really are in QE territory, de facto, are we not?

  46. @Karl

    If PH accepts PNs, Formal or Informal Comforts, or even old shoes as collateral, to the chagrin of JCT (QE-local if you like), would you regard the credits created as Euros? Would you accept payment with them? This is a potential if not likely, means of satisfying obligations to creditors.

  47. @Joseph Ryan

    I agree that since the government has to find €3.1 each year for the next 14 years or so to pay off the PNs, it would make sense to borrow this from the EFSF for as long as possible, since EFSF funding should now always be cheaper than any funding done directly by the State.

    @Dreaded_Estate et al.

    If a 2 year interest rate holiday and a 15 year payment schedule is OK, then it begs the question why not a 4 year holiday / 20 year schedule or as you suggest a 10 year holiday / 30 year schedule, or even longer. Anyone know if there are are any accounting/banking ‘rules’ that apply here, or are Eurostat/ECB etc. just making it up as they go along, with arbitrary limits being imposed?

  48. @ grumps

    “If PH accepts PNs, Formal or Informal Comforts, or even old shoes as collateral, to the chagrin of JCT (QE-local if you like), would you regard the credits created as Euros? Would you accept payment with them? This is a potential if not likely, means of satisfying obligations to creditors.”

    Honestly grumps, I don’t see why you find this so complicated.

    The credits handed out by the Irish Central Bank in its ELA operations are credits to bank reserve accounts exactly as occurs during normal open market operations. From these reserve accounts, a bank can call up and request Euros — shiny notes with pictures of nonexistent buildings — to fill their ATM machines.

    People might not like ELA but the idea that the credits handed out during this process are not euros is just wrong.

    As for what PH is allowed accept — he can’t issue ELA without approval of the majority of the Governing Council, so there’s no point mentioning JCT’s chagrin. He approved this operation.

    And the key thing the GC demanded was a government guarantee that the ELA would be repaid. Not that the loans be collateralised by a piece of government paper but that DoF write to the Bank and guarantee the ELA would be repaid. They did so but the letters don’t provide a timeline for repayment.

  49. @ Bryan G

    “Anyone know if there are are any accounting/banking ‘rules’ that apply here, or are Eurostat/ECB etc. just making it up as they go along, with arbitrary limits being imposed?”

    No I don’t know, but my take on things is that rules, regulations, treaties etc are taken as being solemn and binding until such time as they are overwhelmed by events, when suddenly they are found to be contingent.

    So, for example, the bit where the ECB suspended its rules on minimum credit rating requirement for Portugese collateral in July.

    Of course, it can’t be put as a clean break, so some other set of rules, agreements, treaties or whatever are brought forward to trump the last one.

    http://www.portugaldailyview.com/01-whats-new/collateral-bce-suspended-the-minimum-credit-rating-threshold-on-portuguese-debt

  50. I do hope that TASC’s ability to analyse economic statistics has improved since September 2009, when, based on mobile phone data, they estimated that the population had fallen by 200,000 in the previous year. A thread was opened on the matter on this site, in which I dismissed their estimate as rubbish.

  51. @Karl

    No, keep going – into tail risk teritory. Think “Hunt for Red October” type rough money missile-toting Pogue Ma Honohan.

    Not a central scenario – more like Greece now plus more discord and falling out with Europe.

    I am suggesting that you can, in the case of a real dispute, maybe, have loss of control over local printing. A more nebulous alternative to re-introducing the old currency.

  52. Coming late to this surreal debate. I agree fully with Chris.

    Anglo owes a few bob to Bondholders and a lot more to the Eurosystem. The only way to save money is to either reduce the interest rate or default on these obligations. The interest rate on the bonds is contractually set and that on the official loans is pretty low anyway. So that leaves default.

    TASC calls for a removal of these unjust obligations i.e. default. Fair enough, but tampering with PNs has nothing to do with it. It reminds me of the Aprés Match skit. Is the suggestion that we put the promises on such a long finger that maybe they will be forgotten?

    There’s an idea. The British Governmentt funded WWII with War Loans. These were perpetuals. There’s a solution to the sovereign debt crisis. Make all debt perpetual with commercially based coupons. There is no write down for the holder and yet there is no obligation to pay for the borrower. Sorry, but this debate about restructuring PNs led me to this fantasy thought piece. I look forward to Karl’s suggestions on how it might work.

  53. This article is probably the most important contribution to the debate on Irelands debt crisis to date. I hope it receive wide coverage.

    Getting rid of bad Anglo debt can clearly be achieved. We have choices. All it requires is political will.

    Does the FG/Lab government have the political courage to pursue one of the options laid out in this article? Unfortunately, I dont think so.

    But, they might if it becomes politicised. This can only happen if the electorate begin to realise that they dont have to carry the entire burden (unemployment or emigration) of a casino speculative bank.

    However, there are a lot of vested financial, media and political interests who want to ensure that popular opinion remains in the mindset of ‘we have no choice’. The authors of this article should be congratulated for fighting this untruth.

  54. @Karl

    Am I right in saying then that if we re scheduled the promissory note by extending the repayment period, this may not have any immediate effect on the central bank’s balance sheet as the promise to repay the money by the state is sufficient collateral for the ELA?

    If so, then what about Anglo’s balance sheet? Could we just use dodgy accounting assumptions there? Would we end up with a “bank” that had no assets save the promissory note and no liabilities save debts to our local central bank (because the other assets would have been used to repay other creditors)?

  55. @ Aidan

    you clearly live in a parrallel universe. Some people no doubt believe, with some merit, that this article is ‘helpful’. But to call it “probably the most important contribution to the debate on Irelands debt crisis to date”, when it doesn’t even offer any tangible method of actually writing down the value of the PN (it just says we should try to!), is borderline delusional.

  56. @ Philip II,

    Set aside the taxpayers. The issue is to get Anglo’s creditors to agree to terms that would not see them not having access to their money. This is why I say it’s got little to do with the promissory notes.

  57. @ Christy

    Yes.

    “Am I right in saying then that if we re scheduled the promissory note by extending the repayment period, this may not have any immediate effect on the central bank’s balance sheet as the promise to repay the money by the state is sufficient collateral for the ELA?”

    Yep. As Eoin has helpfully pointed out, Anglo’s ELA jumped from €28.1 billion at the end of last year to €38.4 billion at mid-year. See page 53 of this PDF

    http://www.angloirishbank.com/About-Us/Reports/Interim_Report_2011/Interim_Results_2011.pdf

    How did this happen? Anglo’s NAMA bonds, which had been collateral for ECB loans, were moved over to AIB to back up the moved deposits (no jeering about deposit selling down the back please…)

    While AIB are now able to use the NAMA bonds as collateral (and have presumably reduced their ELA loans), Anglo would have had to pay back the ECB the loans that were previously secured by NAMA bonds. I said above wasn’t sure whether Anglo had printed off new “own-use” bonds for repo at ECB or whether something else had happened – now I know that Anglo increased its ELA to pay back the ECB.

    What allows the CBI to this lending? It appears to be related what Anglo call a Facility Deed agreement from the Central Bank of Ireland.

    The CBI’s annual report refers to “Facility Deeds providing a Government Guarantee.”

    So a government guarantee is enough for CBI to carry the ELA loans on its balance sheet at full value. CBI also have noted “the Bank received formal comfort from the Minister for Finance such that any shortfall on the liquidation of collateral is made good”

    My conclusion is that the potential market value of the collateral doesn’t necessarily matter.

  58. @ Chris et al

    I think the CBI is a bit of a red herring here. The CBI is in effect a branch of the ECB but the rules allow it to accept more dodgy collateral than the ECB directly. If the CBI lends Anglo 40Bn then it has in effect borrowed that 40Bn from the ECB. That’s why I refer to the combined CBI/ECB as the Eurosystem. I could have that entirely wrong of course in which case Philip II will no doubt correct me.

    You are right that all this talk of extending the promissories will lead to a situation where Anglo has outgrown its natural economic lifespan, with all its “real assets” worked out and all bondholders happily repaid. That would leave a situation where the balance sheet of Anglo would be loans from the Eurosystem on the liability side and loans(promissorioes) to the State on the assets side. It would be a patently unreal situation where the ELA has long passed its purpose of providing liquidity support to a bank and it would simply be seen as backdoor funding by the ECB of the Irish State.

    There is no silver bullet in this PN thing. Noonan has flown another kite which kicks his political can down the road and gives great fodder for economists and economy blogs to wallow in yet another self important but futile discussion.

  59. “There is no silver bullet in this PN thing. Noonan has flown another kite which kicks his political can down the road….”

    Heavens. Did he hit the fascist octopus just as it was reaching the top note of its swan-song?

  60. @ Bond

    “it does not offer a tanglible method to write down the value of PN”

    Did you read it?

    The article is about the context and choices available to make this possible. It highlights various and realistic strategies to negotiate. This is more important than any technical discussion on PN as it speaks directly to those with the capacity to act – the political system. This is why it is arguably the important contribution to the debate. It is as much about the politics as it is the economics of ridding Ireland of the Anglo/INBS disease.

  61. @ BW2

    Suppose Noonan managed to arrange for EFSF to provide the funds to Anglo to pay off the ELA allowing Anglo to repay EFSF via a very long term (say 30 years) and low interest loan. This could see the promissory note restructured to be an annual interest-only payment (far lower than the 31 billion a year we’re plannng to pay) to cover interest on EFSF loans and a final bullet payment in 2041.

    Do you think this would be futile? Or do you just think we’re not going to ever get such a deal?

  62. @ Karl

    You will appreciate that I had to draw a few diagrams.

    I ask you to picture, in reverse counterfactual mode as it were, what it would look like when Anglo reaches the end of its natural economic lifespan, let’s say in 10 years. The current plan would see a final burial of that rotten carcass and, all being well, a couple of billion left in the will to the Irish taxpayer.

    Under your plan we would see instead a shell arrangement which has 30 year liabilities to the EFSF backed by 30 year promissories from the taxpayer, let us presume evenly matched by coupon and maturity.

    I can’t see what you have achieved other than secure a further slug of EFSF funding. I don’t see how you have reduced the “unjust” obligations which Anglo has imposed on the Irish taxpayer as demanded by TASC either in interest or capital repayment terms.

    Of course, as Chris queries, maybe the Eurostat accounting treatment might be more friendly under your suggestion but frankly that doesn’t cut much ice with me.

  63. @ Karl

    You may or may not know that I am an actuary by trade. Economics is not our long suit but NPV is like a screwdriver to an electrician.

    I am genuinely trying to understand your proposal, honest, pity we can’t do diagrams here.

    If NPV is the driving rationale it must be that you think that the interest rate on EFSF funding is less than the discount rate and therefore the longer you can extend the EFSF the greater the NPV gain. Note that EFSF interest rates are not, so far as I am aware, less than the ELA rates so this is all about extending the official assistance on what you perecive to be subsidised terms albeit less subsidised than on the ELA.

    Fair enough, but I don’t see what it has to do with PNs or how it in any way reduces the requirement of the Irish taxpayer to pay back the “unjust” obligations of Anglo. In fact I don’t see why you are complicating this request with the Anglo issue at all. What you are saying is that these EFSF loans are a gimme in NPV terms so let’s fill our boots with them.

    Big question. What discount rate are you using to infer that EFSF funding is a steal, though I do probably agree with you.

  64. @Karl

    OK so now i think i see what you’re saying – The EFSF would simply pay the money owed by Anglo to the CBI and step into the shoes of the CBI on Anglo’s balance sheet.

    Anglo’s balance sheet would then be;

    liabilities; Seniors + ECB + EFSF

    Assets; Promissory note and “other stuff” (with “other stuff” pledged to ECB)

    When we re negotiate the promissory note we could, as per your example, pay interest only (perhaps with some principle to pay any debts that the “other stuff” doesn’t cover) with a bullet payment in 2041.

    Assuming I’m right, does the question of whether this substitution of creditors is a good idea then boil down to whether we would prefer to renegotiate the repayment of the promissory note with the CBI (probably needing ECB approval) or renegotiate the repayment schedule of the PN with the EFSF?

  65. @ BW2

    A couple of points.

    1. EFSF loan payments are based on the underlying bonds that are issued. So they involve a single large payment when the bond matures with interest-only payments in the meantime. In contrast, the current promissory note repayment scheme involves principal and interest being paid all along. Given the likely future marginal cost of funding for the Irish state, deferring the principal payments alone would represent a large reduction in the NPV of the debt.

    2. The interest rate on EFSF is very low. We know that the margin over the AAA-rated EFSM cost of funds is zero; the same may be true for EFSF. The EFSF uses swap rates as its benchmark, so you’d be looking at something like 2.8 percent.

    http://markets.ft.com/RESEARCH/markets/DataArchiveFetchReport?Category=BR&Type=ICAP&Date=09/20/2011

    3. You point out that the interest rate on the ELA is low. That’s true but we don’t know whether the Governing Council might demand at some point that we pay it all back.

    4. The current arrangement in which we are also paying in high market-based interest rates on the promissory notes (so they can “marked-to-market” to keep Anglo solvent according to financial accounting standards) is a costly one. If there is no default, it will leave Anglo at some point in the future with a surplus (because the interest on the notes exceeds the interest on the ELA) but that’s damn all use to us now.

    I would recommend paying off Anglo’s remaining ECB loans, taking its banking license away and freeing it from financial accounting standards. This could leave it as a shell company in which the government shoves in the money to service the EFSF loan every year and Anglo shoves it out the other side. I’m sure we can find an accountant to say this is fine.

    At current and projected borrowing costs, €38 billion in ELA converted to an EFSF thirty-year loan would represent a very large reduction in the debt burden of the state.

    This is not at all the same thing as saying that we can get this deal. But you won’t get anything if you don’t ask.

  66. @ Chris & Karl

    I really see this PN thing as a complete distraction. Regard Anglo/taxpayers as an internal system. Payments within an IS are totally neutral even in NPV terms.

    All that matters are the external cashlows from and to the IS. We presume the external cashflows to the IS are unaffected by the internal arrangements and consist of the work out of the real assets (loans).

    So what is at stake are the external outflows form the IS. TASC is insisting that these outflows are unjust so they are on a different page. Karl is suggesting restructuring the external outflows as you suggest, replacing cheap short term ELA outflows with long term albeit slightly more expensive EFSF loans. If the discount rate is greater than either of these interest rates then that would give rise to a NPV win.

    However, as I said above, why not simply ask for extra EFSF assistance directly. Let us not pretend as Noonan has done that there is a silver bullet to be moulded from these PNs. Either we are going to pay Anglo’s existing obligations or we are not.

  67. @ Aidan

    “Did you read it?

    Eh, yeah, did you?

    “The article is about the context and choices available to make this possible. It highlights various and realistic strategies to negotiate. This is more important than any technical discussion on PN as it speaks directly to those with the capacity to act – the political system.”

    First off, on renegotiating the PN, it admits (though it gets the numbers horribly wrong – almost all assets are now at the CBI, the ECB has only a tiny direct exposure) that the negotiation is with the Irish CB itself. By the Irish govt! This is a bit like saying that a husband must negotiate with his wife about a financial settlement caused by the husband crashing the family car. It all ridiculously circular! The CBI is not some completely stand alone entity hoarding its own mountain of capital or capable of printing its own cash. Its the same larger Irish state that both are part of. If the CBI loses money, the Irish state must pick up the tab. No one has been able to offer any way around this other than via a senior bond default/writedown route, which as you well know, has been a well worn and ultimately futile proposal.

    Secondly, on renegotiating – again, the Tasc suggestion seems terribly confused. It says we must negotiate the schedule of the PN with the CBI, but the CBI neither cares about nor is a party to the actual PN itself, it merely holds it as collateral. The CBI couldn’t care less how the PN is scheduled (so long as a reschedule does not dilute its value, which Karl reckons doesn’t matter anyway), it only cares that it is paid interest on the ELA funding and gets it back at some point in the future. In terms of rescheduling via the EFSF, well this is the only rational and possible proposal contained within the Tasc posting, but seeing as it is one that Noonan himself has already spoken about with Trichet, i fail to see how Tasc’s bandwagoning of the subject makes this the “most important contribution” on the subject of Irish bank debt/losses.

    Thirdly – bondholder debt:

    (a) its not 6bn, its about 3.5bn.
    (b) relatively sure we’ve been down this route 45 times in the last year alone. Again, Tasc are a bit late to the party, and don’t really bring anything new with their arrival.

    Fourthly

    Political context of Ireland taking a huge burden for the rest of the EZ. John Bruton has made this point numerous times in the past 6 months. Colm McCarthy had a piece about it in the Sindo at the weekend. Others have done so similarly in the past. Again, nothing new.

    Like i said, a useful piece at times, simply wrong at others, but its not a bad piece overall. But the only reason you could think this the most important contribution is if you’d failed to read all the other ones that went before it though.

  68. @ Karl

    Don’t disagree that EFSF is very cheap funding and we should fill our boots with it and for as long as we can using whatever ruse is at our disposal.

    But this has nothing to do with the high coupons on PNs. PNs are a transfer within the internally closed system that is Anglo+State. Definitely no NPV gains to be got from that one though possibly big optical gains on the GGD.

  69. @ BW2

    Two points.

    First, on “replacing cheap short term ELA outflows with long term albeit slightly more expensive EFSF loans” — No, EFSF is cheaper.

    The FT tells us that

    http://ftalphaville.ft.com/blog/2011/02/08/482281/irelands-secret-liquidity-is-unbelievably-cheap/

    “The rate is based on the ECB’s marginal lending facility of 1.75pc, plus a “penalty” reflecting the emergency nature of the aid.”

    That means its 1.75 + 1.5 + something = 3.25 plus something. And it will be higher in future years if\when the Euro area economy ever recovers properly.

    I estimate a 30-year EFSF loan to be 2.8 percent fixed. So EFSF is cheaper.

    Second, you’ve completely ignored the point about a long deferral of principal payments.

    You can write “silver bullet” as many times as you want. There are genuine gains to be obtained from such an arrangement however many times you dismiss it.

  70. @ Karl

    re EFSF 38bn loan.

    Optically i do not see this as at all possible. The ELA is far murkier and opaque. Its confusing enough to be ignored by a lot of people, just like the PN. The EFSF loan could be understood by pretty much everyone. Good suggestion in theory, impossible in practice. I prefer the notion of the EFSF being used as a guarantor of the PN, for a small fee, but thus allowing the discount rate to be reduced to EFSF funding rates. Keeps it all off balance sheet.

  71. @ BW2

    “But this has nothing to do with the high coupons on PNs. PNs are a transfer within the internally closed system that is Anglo+State.”

    Think of it this way — it’s like we’re borrowing at a high rate and sticking high-rate interest payments into Anglo while it pays off low rate loans.

    At some point, if everything works out, there will be extra money inside Anglo. But, given our current condition, the idea of borrowing now to save up funds for later inside Anglo isn’t a very good one.

  72. @ Karl

    ELA is far cheaper than that (plus your figures are off (the Alphaville article is old): ECB base is 1.50%, ECB marginal is 2.25%).

    I believe the ELA is being provided at ECB base rate plus 50-60 bps, which at the moment would be 1.50+0.50 = 2%.

  73. @ KW

    “Why would that be any more feasible?”

    Cos then its not a loan. You’ll note that Noonan has asked for EFSF to be used as a guarantor on Irish govvie bonds instead of loaning physical cash. As i’m sure you would agree, its easier to sell a bit potential guarantee to both citizens and markets than it is to sell an actual loan. In essence, the EFSF would be guaranteeing that the ELA does not become an actual exercise in QE.

  74. @ Karl

    I put this constant tension between us on many aspects of this situation down to my terrible communication skills.

    30 year fixed at 2.8%. Let me now confirm that this IS a silver bullet. Get as much of that as you may dare ask for through whatever ruse that is at our disposal.

    But the PN dimension to this is being badly confused, though possibly not by yourself. Anglo will pay its bondholders off on schedule. If the PN are very aggressive i.e. short maturities and high coupons then the effect is to increase official State lending at 2.8% whilst reducing Anglo borrowing from ELA/EFSF. Whilst Anglo is economically still extant that seems to be just a question of where does the taxpayer get its cheap funding, is it from Anglo through ELA/EFSF or directly by the State through the EFSF.

    You seem to be suggesting a much less aggressive PN programme thus reducing direct State EFSF borrowing whilst increasing Anglo’s requirement to access ELA/EFSF even to the point that when all loans have expired and all bondholders have been paid Anglo/State are left with a large residual dollop of cheap official funding. Very nice ploy if you can pull it off, I agree.

    I suggest that many on this blog will think (erroneously) that you are suggesting replacing an onerous 8.5% servicing requirement with a 2.8% one.

  75. @ BW2

    Ok, we seem to basically agree now. As for “many on this blog will think (erroneously) that you are suggesting replacing an onerous 8.5% servicing requirement with a 2.8% one.” I agree that’s not the point I’m trying to make (I’d wonder how many readers there are left to be misled at this point in the thread).

    @ Eoin

    Thanks for the ELA rate correction. Unless I’m mistaken this hasn’t been made publicly available so I’ve gone on what I read in de paper.

    I don’t think EFSF insurance of the notes is going to be worth a whole lot on its own. Without getting principal deferred, there’s not much to be gained.

  76. @ BWII/Karl

    Btw, looks like EFSF/EFSM pricing is going up on the back of recent market tensions. 15yr EFSM bond just mandated, for use for Ireland, pricing at mid-swaps plus “low 40’s bps”, which is around 25-30bps more expensive than previous issues (which were, in fairness, slightly shorter dated). But on this basis a 30yr would cost around ms+50bps (2.70+0.50=3.2).

  77. @ Karl

    sorry, my suggestion was that the PN gets a longer duration (which is what you mean by deferred principal), and a lower discount rate, guaranteed by the EFSF. As it would then be a AAA guarantee then the NPV could remain at par, could it not? The EFSF has an icreased exposure, but not the more transperent loan, and similar for Ireland.

    On the ELA rate, thats just what someone in the know told me. We both agreed it was kinda funny (or stupid) that the CBI/govt was either unwilling or unable to explain just how cheap this financing route was and so the benefits to be accrued from it.

  78. @AidanR
    “However, there are a lot of vested financial, media and political interests who want to ensure that popular opinion remains in the mindset of ‘we have no choice’”

    Too true….

    “The public must be put in its place… so that each of us may live free of the trampling bewildered herd.” – Lippman, The Phantom Public.

  79. @Karl, Eoin

    Am I missing something here. Efsf is inadequate and could end up being increased eventually to 2-3 trln by hook or by talf. My first reaction to the July 21st deal was a) political obstacles and b) likely risk premia increasing in core sovs. 440 is a bit of a water-pistol to shoot at Italy – which is where the game is now, nobody outside of Ireland gives a monkey’s about it currently as long as it doesn’t cause trouble.

    Gives that efsf is so short of ammo, it it realistic to envisage a big chunk going to Anglo?

    @Aidan r

    “Getting rid of bad Anglo debt can clearly be achieved. We have choices. All it requires is political will. ”

    Have you been standing too close to Joe Peepol?

  80. So I looked at the anglo interim results thing posted by Bond/Karl. These passages may be of interest to some;

    “Borrowings from the Central Bank of Ireland under special
    funding facilities increased to €38.4bn (31 December 2010:
    €28.1bn). The facilities utilised were a Special Master
    Repurchase Agreement (‘SMRA’), a Master Loan Repurchase
    Agreement (‘MLRA’) and a Facility Deed from the Central Bank
    of Ireland. The majority of the funds were advanced under the
    SMRA, involving the sale and repurchase of the promissory
    note. Collateral assigned under the MLRA is derived from the
    Bank’s customer lending assets. The interest rate on these
    facilities is set by the Central Bank of Ireland and advised at
    each rollover and is currently linked to the ECB marginal
    lending facility rate.

    Borrowings under open market operations decreased to
    €2.4bn (31 December 2010: €16.9bn). This decline is mainly
    due to the transfer of NAMA senior bonds to AIB pursuant to
    the AIB Transfer Order which were eligible collateral for open
    market operations funding.

    The total amount of loan assets assigned as collateral under
    rated securitisation programmes and secured central bank
    borrowings at 30 June 2011 was €5.9bn (31 December 2010:
    €13.5bn). This fall is mainly due to certain programmes no
    longer qualifying as eligible collateral under open market
    operations.

    […]

    The Minister for Finance, as the Bank’s sole shareholder, has
    provided the Bank with a promissory note to the value of
    €25.3bn comprising four tranches. The promissory note pays
    10% of the initial principal amount of each tranche annually.
    On 31 March 2011, the Bank received the first instalment of
    €2.53bn resulting in the promissory note having a revised
    principal amount of €23.6bn from 31 March 2011.

    The promissory note has resulted in the Group having
    significant interest rate risk as it is a fixed rate instrument. The
    Bank has hedged a total of €4.3bn of the nominal amount
    using amortising interest rate swaps. A further €5.7bn of
    economic hedges exist in the form of the Group’s capital and
    fixed rate debt issuance. However significant fixed interest rate
    exposure remains with limited capacity to hedge further
    amounts with market counterparties.

    The promissory note is currently pledged as collateral for
    funding under the SMRA with the Central Bank of Ireland.”

    So basically as bond said way up the thread the ECB has little interest in Anglo directly any more.

    I’m trying to get my head around this hedging thing – (seems strange that one arm of the state hedges a a zero sum risk of interest rate movements – or am i not getting that?)

    Also, it seems that the facility that is collateralised by the PN is the SMRA – the rest seems to be done with other assets

    It seems that the amount of other assets that are used as collateral has fallen form 13.5 bn to 5.9 bn as a result of rules changes on collateral for main refinancing operations

    But presumably this no longer eligible stuff has now being given as collateral to the CBI under the MLRA?

    I note that it says the fall is in assets “assigned” (i.e. repo’ed?) as collateral vs a fall in the amount “pledged” (i.e secured loans?) to the CBI.
    In other words it looks like Anglo “pledges” to the CBI and “assigns” (repo’s) to the ECB.

  81. @bw2

    “@ Karl

    I put this constant tension between us on many aspects of this situation down to my terrible communication skills.”

    Just shorten this to “its not you, its me …” 😉

  82. `@christy

    “It seems that the amount of other assets that are used as collateral has fallen form 13.5 bn to 5.9 bn as a result of rules changes on collateral for main refinancing operations 2

    As a BTW, note ECB collateral limit tightening today on “connected” assets.

  83. @all

    2_of_Seven on the VB show tonight in all his sartorial, if “confidential” splendour – and not a mention of those Promissory Notes …. not even a Letter of Comfort – Contracts for Difference did get a mention ..

    Great thread: any complexity theorists in the house to distill the insights into a one pager? A LEGO pastiche even? Or did I just spot an article in The Journal of Odious, if Preventable, Economic, Social & Psychological Disasters by Bond, Whelan & Bond?

    McDonnell, Burke & Taft’s ‘Declaration of Intent’ if delivered by Minister Noonan is sound.

    @Dreaded_Estate

    C’mon – Irish gougers did not do calculus! Ponzi rip_off plain and simple – guaranteed by PeeD_Fianna Fail – and dumped on plain vanilla citizenry.

    Interesting nevertheless – and combined with ECB finessed [h/t LBS/DOCM/LBS2] a fair bit of legalistic tweaking going on in prep for the New Age of Lucretius …

  84. @D_E
    I think that would be a disastrous move.

    Supposing you had a derivatives contract unsecured by collateral where you were in the money and the contract allowed you the option of cash collateral being exchanged daily if required. What would you do?

    Lowering the priority of payments to ISDA counterparties and subjecting collateral to haircuts, now that would be more interesting, if equally disastrous, but probably only to new contracts…

  85. The subject of promissory notes as proposed in this blog accepts and tolerates the outrageous notion that Irish taxpayers should continue to bear the brunt of the bank bailout. I would propose a different, more practical and more sane alternative, grounded in sound economics, which would have the effect of removing this burden off the backs of Irish taxpayers, while simultaneously providing strong stimulus and impetus for economic growth ; growth which would facilitate the repayment of debts over an extended period of time and the financial recovery of asset values and the confidence which underlies them. My proposals are below.

    The continuing turmoil on the markets, and inability of Irish and European government austerity measures to deal with the crisis shows the utter futility of the present course of action and mindset. There is a desperate need to move away from the current economic paradigm, so beloved of our government ministers and civil servants. I have created a series of alternative proposals to the government policies and bank bailout mechanisms. They are practical and innovative and would remove the private banking debt burden off the backs of Irish taxpayers and the unemployed and disabled and onto the backs of the private bankers and central bankers. You can view the alternative proposals at http://www.goodwillbank.com.
    Have a read and see what you think.
    “Dominus Illuminatio Mea”

  86. The subject of promissory notes as proposed in this blog accepts and tolerates the outrageous notion that Irish taxpayers should continue to bear the brunt of the bank bailout. I would propose a different, more practical and more sane alternative, grounded in sound economics, which would have the effect of removing this burden off the backs of Irish taxpayers, while simultaneously providing strong stimulus and impetus for economic growth ; growth which would facilitate the repayment of debts over an extended period of time and the financial recovery of asset values and the confidence which underlies them. My proposals are below.

    The continuing turmoil on the markets, and inability of Irish and European government austerity measures to deal with the crisis shows the utter futility of the present course of action and mindset. There is a desperate need to move away from the current economic paradigm, so beloved of our government ministers and civil servants. I have created a series of alternative proposals to the government policies and bank bailout mechanisms. They are practical and innovative and would remove the private banking debt burden off the backs of Irish taxpayers and the unemployed and disabled and onto the backs of the private bankers and central bankers. You can view the alternative proposals at http://www.goodwillbank.com.
    Have a read and see what you think.
    “Dominus Illuminatio Mea”

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