Promissory note restructuring

This is breaking that Prof. Honohan will seek leave from the ECB to not repay part of the promissory note worth 3.1 billion due at the end of this month. This is good news in the short run (and something Karl, Brian and I spoke at length about recently at the Oireachtas)

From the piece:

The Minister for Finance Michael Noonan confirmed in the Dáil this evening that negotiations were taking place with the ECB about settling the promissory note by delivery of an Irish government bond.

The concession may facilitate a longer-term effort to cut the cost of Ireland’s banking rescue, which helped tip the nation into an international bailout in 2010.

The immediate questions are:

1. What interest rate(s) will be charged on this(these) bond(s) and at what maturity(ies)?

2. What will fund the asset side of the balance sheet of the IBRC?

3. It looks to me like the promissory notes are going to be funded by the EFSF, or some other funding structure, but specifically what funding structure at the EU level will the bond use?

Update: RTE’s David Murphy reported on Twitter that the government are proposing to pay off the note with a bond which matures in 2025. If ECB says yes, the government gets 13 year delay on the €3bn payment.

Update2: Karl has the text of Minister Noonan’s speech on his blog now.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

94 replies on “Promissory note restructuring”

Is this a zero coupon bond with a face value of €3.1bn? I doubt it.

The deal will only be in our interests if

NPV of the govt bond << principal component of the €3.1bn.

Key question: what will the Government be allowed do with the €3.1bn if it doesn’t have to hand it over?

Jaysus isn’t a week a long time in politics, or was it more than a week ago when An Taoiseach said in relation to negotiations of the PNs

“Is binn beal ina thost”

Once off? … or ditto in 2013, 2014 etc ….?

…. while we await details on nature of ‘ditto’ …

10yr @6.8% today …. cf Karl’s blog on his email with an AAA type recently ….

Still think a 100yrs at 0.001% interest only a pragmatic option


[Karl’s] My correspondent put forward a number of arguments.

1.That Article 18.1 of the statute governing the ECB and Eurosystem says that lending from national central banks must be based on “adequate collateral” and that this applies to all lending, including ELA. They argued that the Eurosystem’s principles of collateral and haircuts should be considered “sacred”.
2.That this means that the yield to maturity on promissory notes must be the same as the yield on marketable Irish government bonds, so any restructuring of the notes to reduce payments now must result in even higher payments later and this cannot help reduce Ireland’s debt burden.
3.That publicly appealing to change the structure of the promissory notes amounted to the Irish government lobbying the ECB Governing Council to change its collateral policy, which undermined the Council’s independence, an issue which its members feel very strongly about.’

6.8% ???

What’s the plan on the ela? Will it remain in place? Come to think of it, was there anything to stop the government changing the PNs for bonds once the ela was in place (besides ecb sabre rattling).

A far, far cry from tearing up those PNs or letting CBI go insolvent at no cost to anybody.

A mere deferment of our debt repayments making it even worse for the future. Ah well, good for anybody planning to die in the next 5 years or so, there are always winners.

@ Stephen

Should we have a separate thread for apologies from people who said it’d never happen?


‘The deal is not done until the money is in the bank’ (sic).

Others and I have said for years the situation as presented and being implemented, is unsustainable in context and therefore undeliverable – apologies should be coming the other way (if I understand you correctly).

They are only doing what should have been done years ago and I wish them every success if they can pull it off and not lose their (with apologies) b***s on the last lap.

DOD & KW have produced some interesting points which are well put and should be driven home to the bureaucrats never mind the politicians.

The Treaty, the contract, the bond and the interest rate are worth nothing if one cannot deliver.

Deliverability is all that matters.

Oh for heavens sake, why would you convert debt to your bookie into debt that can turf you out of the house.

Drip, drip, drip….as anticipated in this piece (below) some weeks back…the prophecy will be complete once we hear a rendition of “our plan is working” over the weekend.
Joking aside its better than nothing but hope it is not going to remove the straw that ought to break the camel’s from Croke Parks back!

“Ireland should not be too optimistic about how far the Troika is willing to go in this regard [on the PN] with some form of restructuring on the term rather than a complete write off of debt (as ought to happen) being the likely upshot. The Troika undoubtedly see that in drip feeding relief initiatives, it can fortify the Irish governments commitment to austerity. Once that commitment is seen to wane, a bone of comfort will be thrown for public consumption and when that happens we are liable to here a refrain of “our plan is working” echoing through the land from a government in a very difficult position”

The pro notes are held by the Irish CB. If the notes are replaced by this bond is it tradeable? If so and it’s held by the CB of Ireland it’s a case of a Euro CB printing money.

I am beginning to think there are less ways to skin a cat than there are to kick the can down the road.


Separate Vichy_Financial System Debt from Genuine Sovereign Debt …


Convert Vichy_Financial System Debt into Sovereign Debt


Vincent Browne tonight worth viewing … also


If we swap this out for a bond maturing in 2025 will we also not pay every 3.1bn(ish) due up to 2022? And instead have a new bond, paying coupon only then a bullet in 25′? I don’t follow how it seems to only place this years payment further out?

@Karl Deeter this is a timing issue and a value issue, nothing more and nothing less. Ultimately the Irish taxpayer has to make good the shortfall in IBRC so the total impact on national debt is the same. The timing of the recognition through the sovereign accounts is all that can be at stake. It is something. It is not nothing. But it is a timing advantage rather than any real reduction in the national debt. Growth, if it comes, may render it an actual benefit. Stagnation, if it comes, may render it a zero sum game. Deflation, if it follows, may render it a disadvantage. Depends on how the whole balance sheet recession plays out.

If only the ordinary small business owner, trader and mortgage holder could do the same.

This exercise, if it comes off and i am skeptical, is more a case of not paying today what you will have to pay tomorrow. And the problem with tomorrow is it always comes around.

Mind you the announcement on the eve of the Mahon Report is puzzling, laughter aside.

Could it be that the need to postpone the payment is driven by concerns that the tribunal bill could swing well north of 250 billion? Of course, I recognize like most sane people that meeting the fee bills of the legal profession takes precedence over any other commitment.

Excuse me while I stable the horses for the night m’lords and ladies…


The suggestion that you make needs to be nipped in the bud and quickly. None of the sceptical comments on this thread, as far as I can recall, but I can only speak for myself, related to the need for some action to ease the repayment of the PNs but to the idea that any of the debt could simply be written off. Indeed, Stephen Kinsella in his most recent piece in the Indo makes this very point.

There is, in fact, one aspect to the discussion which has drawn very little comment and it is that there must be increasing concern regarding the entire concept tof ELA by national CBs in the Euro Area as the debate in Ireland has put a large question mark over the value of “sovereign signatures”. I am prompted in this thinking by wondering what exactly Minister Noonan meant when he referred recently to the ECB itself having doubts about “collateral”. needs to be halted.

Success has many parents, failure is an orphan, as the saying goes. The competition for most successful parent has already opened, not prematurely, it is to be hoped, with Minister Noonan well ahead in the field. As Brian Woods II points out above, no matter how the situation is viewed, the burden of the errors of the current crop of parents – if I may mix my metaphors somewhat – is simply being transferred to future generations.

@David O’Donnell
re your correspondent

“3.That publicly appealing to change the structure of the promissory notes amounted to the Irish government lobbying the ECB Governing Council to change its collateral policy, which undermined the Council’s independence, an issue which its members feel very strongly about.’”

A bit sensitive about their own patch!
But not in the least abashed at sticking private debts onto sovereigns.
An issue that many citizens of sovereign countries,
“feel very strongly about”, not to mention the effect on their pockets.

“It may relieve the short term pain but the principle remains:
Separate Vichy_Financial System Debt from Genuine Sovereign Debt …

Convert Vichy_Financial System Debt into Sovereign Debt
Huh! “

@ Karl Deeter & Aisling

I had not seen your comments when I penned mine. I agree! The growth argument – and the need to show at least one country exiting from the emergency ward – are also powerful factors.

This might, if and when the ECB approve it and that is not assured as it keeps ELA on the run for while, sort out 2012. What about the remaining 27b or so? At bes this is a partial solution to one year. It is by no means a solution to the anglo farrago.
Its amusing to see people such as Brian Woods II, who have mocked and skittered at those who (no matter how implausible) have proposed solutions. Brian and his ilk now realise that things are fubard.


The key underlying problem is that the ESCB has been forced to use a short-term, ill-suited tool, ‘liquidity support’ – and gradually been able to expand the duration of this support over time so that we now have LTRO – to try and compensate for its inability to provide ‘solvency support’ to banks and sovereigns, without having any ability to force bank resolution where required and then being required to sterilise it – QE, nein danke.

In Ireland’s case some of this provided ‘solvency support’ for these potentially solvent and viable Pillar Banks’. The IBRC legacy is the result of Euro Area financial system support. It’s only right that the repayment of this should be restructured, re-profiled and extended. The inter-generational issue is simple. Without some restructuring the patrimony for future generations will be far less. All member-states have reneged to some extent or other on thier ‘sovereign signatures’. The PIGS’s reneging is up in neon, but others have been able to conceal their reneging – but it has been just as damaging to the entire project.

The ‘fiscal compact’ is primarily a renewal, seriously this time, folks, of the ‘marriage vows.

@ Paul Hunt

I would not disagree. My point relates to the conflicting demands now confronting German policymakers, in particular. They clearly consider that the euro may be on the road to perdition unless engines can be reversed. Bearing in mind that Hollande has come out clearly and said that the ECB should be able to act as lender of last resort, a view supported by Minister Noonan, the difficulties that Merkel now faces are multiple, many of her own making (including insistence on an amendment to Art 136 of the TFEU which is not yet fully ratified).


While the details are unclear, it seems that one aspect of the proposed deal is that instead of “repo’ing” PNs to the CBI to get the money, IBRC will now perform real repo with the ECB using regular Irish government bonds to get the money. The ECB can set haircuts (and do margin calls?) and do whatever they do with regular repo operations – they now have real collateral, as against the pseudo-collateral of PNs. Thus the ECB get better collateral – the consequences of defaulting on a tradeable bond are worse than defaulting on a one-of-a-kind non-tradeable one.

And the repo-able nature of the new collateral makes it even clearer that the PNs were not “real” sov debt, so this makes the actual, as opposed to economic/accounting , solvency position worse.

@ Bundesboy

That’s about it! But, hey, 2025 is a long way away and what people don’t know won’t hurt them (especially if they are nor around when it happens).


I am not underestimating the difficulties confronting German policy-makers, but their room for manoeuvre is being excessively contrained by Frau Dr. Merkel’s desire is be re-elected as the dominant force in a coalition with the FDP – or, failing that, with the Greens. A tacit acceptance that a Grand Coalition of the 2005-2009 ilk is more in Germany’s and the EU’s interests as it would remove many of the constraints in the policy-making arena. But I expect the lust for (relatively unconstrained) power will trump all.

@ Aisling

“Growth, if it comes, may render it an actual benefit.”

Yes, that’s the point. I agree. Let’s see what the CSO says later today.

@ Mr Bond

“I was wrong and you were right” – a sentence heard largely in dreams.

I look forward to your take on the details.

@ David O’Donnell

Well, I think the two were already conflated and the prom notes do not exactly equal the burden placed on the people of Ireland for bailing out the bondholders.

So, legalistically, I don’t see why the ‘odious debt’ brigade shouldn’t have a crack.

This would be much clearer if the missing Bank Resolution Framework was in place as noted by me, Bryan G and others.

The household charge or similar might trigger a large ‘can’t pay, won’t pay’ movement, but at the moment I don’t see it.

The FAT tax keeps coming on and off the radar as well.

For now I’m cautiously hopeful, but let’s see how @Stephen Kinsella’s details at the top of the thread work out.

They should call the Irish gOvt bond that will finance this, the “Immature Bond”, its all about maturity, isn’t it ? We’ll get lots of absurdity about kicking the can down the road and canny politicians and self congratulatory economists much ado about nothing.

As the Governing Council came to the Ireland item way down its priority list at its meeting and met with Noonan/Honahan proposal re PN repayments, I’m sure proceedings were interrupted by laughter from some. Laughter aside, we can’t pay the ¢3.06 bn this year, growth down to .05% , no proposals for the next 12 yrs, only this years PN, nod, nod, wink, wink could have been about on the Deutschmarke for Merkozy as the sandwich test on Fr Ted. Its not only the quality of the sandwich on the plate but the pile of sandwiches accompanying it.

Zzzeee treating zeee ECB like fools? Supplicants from the Irish negotiating team should cringe at that.

Alas we don’t have people of the calibre of Grimsson, Rajoy or Papedemus. We do a disservice to Ireland and to Europe with a proposal to kick the can down the road; in failing to confront the ‘odious’ nature of the full cost of PN’s, market confidence can only be eroded further both in Ireland and in the euro.

What we should be negotiating is Ireland’s statement to the world’s media, that Ireland will not repay the ‘odious debt’ represented by the ¢31.06 bn + interest. But the word odious on this is not even making it onto the state media here. No doubt the Irish negotiating team hope eurobonds will set the rest of the PN’s to nil in a future dreamtime 🙂

Bunbury asks “Key question: what will the Government be allowed do with the €3.1bn if it doesn’t have to hand it over?”

This is indeed the key question, not so much for this year as for following years, as this year’s Budget has already been struck.

But what about the fiscal targets? Let’s say the Troika’s target for 2013 is 6% (I can’t remember what it is). 3.1bn is about 2% GDP. So the current target was for 2% to pay PNs and 4% for all the rest. Does it now become 6% for all the rest since we have 2% in the bag from 2012’s postponement of the PNs or does it become 8% if we also include 2013’s postponement – bye, bye austerity. I hope not.

If the underlying austerity targets remain the same then all that happens is that we get a few extra months from the current bail out fund.


I would imagine the government still has to stick to the plan as-is. The benefit is that they don’t need as much market funding access in the coming years, so in theory it’d be easier to “exit” the Troika program on schedule.

@Joseph Ryan

The correspondent is Karl Whelan’s – cf the link

@Gavin Kostick

If the ‘Conflationist Fallacy’ becomes a reality then we are truly ‘serfs’ of the Financial System; non serviam!

Blind Biddy reckons this could be a truly awful ‘one time’ shot at a one time 3.1 billion Euro as a sop to fool most of the people some of the time so that they agree to wearing the Fiscal Corset! Naw … Nah … couldn’t be that dumb …


Surely this is just a complicated version of having taken on the responsibility of paying your ‘friends’ VISA bill (under duress) which is clocking up interest at 8.6% pa and now realising you’re unable to pay it and asking the bank to add it on to your own mortgage – which is already restructured?

Net result – the bill in effect gets bigger because its now mortgage interest on top of credit card interest, in addition you now have an unsecured debt transformed into a secured one and you’re still unable to pay. The bailiffs won’t be coming for a few years, but come they will and now they’ll definately be taking the house and the contents – up until now it was looking like contents only.

Apologies for asking but where’s the upside?


‘… Art 136 of the TFEU


‘.. Ultimately the Irish taxpayer has to make good the shortfall in IBRC so the total impact on national debt is the same.’

You might drop the prescriptive larcenic ‘has to’ ….. and this dodgy game has quite a way to go before we can speak of ‘ultimates’ …

@ Yields or Bust

The bailiffs can repossess your house but, to date at least, no one has succeeded in repossessing a country.


That’s my read.

BTW were you looking at me earlier on? It has been clear for some time that something was going to happen in this space. I have been strident in pointing out that talk of tearing up PNs and letting the CBI go bust being harmless activities which save the Irish taxpayer 31bn is sheer nonsense. I stand by that. I went further and speculated that we weren’t going to be forgiven any of our banking debt any time soon. I still stand by that, though it is a speculation which some future circumstance may render inaccurate.

@DO’D Legally “has to” in order for the ELA to remain.

The slightest whiff that we won’t stand over IBRC’s debts and ELA is illegal and has to be pulled collapsing our banking system (under the treaty, specific rules relating to the CBI only apply IF we promise to repay those debts in full) so I’m happy to stand over my use of the words “has to”, or to caveat the use of those words as follows “if Ireland thinks that there is any benefit to having a banking system outside Ulster Bank then Ireland has to” and since my own account is with BOI I think there’s a benefit to me being able to withdraw cash to buy such luxuries as food, fuel etc

@ Stephen/Phillip

prom note restructuring, Mahon Tribunal report, NAMA vs Treasury, Mckillen case still ongoing – u guys bumped up your bandwith appropriately??


there has been frequent suggestions that we would not even get this relatively token gesture of a delay in the 3.1bn repayment, cos the ECB is into indentured servitude and all that jazz. This ties in with the argument as to why we should vote “No”, as the Merkozy-ECB cabal is really out to screw us. The response from people like myself, your goodself, Paul Hunt etc has been that we should try and work within the system, rather than outside it. I would suggest any thumbs up from the ECB would mean the “inside” policy is working to at least some degree, and that the carrot and stick equation isn’t all about beating people black and blue.


The upside is the postponement of the repayment of the debt. I agree not very significant.


looking at you? No, not at all. You’ve always been on the more sensible side of the aisle (as explained above)

@ Stephen/Phillip

almost forgot – Q4 GDP and national accounts at 11 bells too!!

Is this the best solution to protect our insiders? As our negotiators pay themselves more than any other European officials (because they are worth it), they are in no moral position to demand any write-off so push for a delay instead.

This strategy is from our grey-haired sages who will be well into the most generous defined benefit pensions in Europe by the time this bill needs to be paid.

– Prepare for deafening silence from the “social partners”.

A couple of questions:
1. Will this deal accelerate the huge array of reforms (cough) coming out of the Croke Park agreement?

2. If we are going to propose that the current crop of 8 year olds should begin to repay the 40 bn/whatever on behalf of our long-deceased banks, would it not be good manners to ask them first via referendum?

@ David O’Donnell

yes it could

@ Bond

Re ” the more sensible side of the aisle ”

Wonderful Shakespearean hubris and Stockholm syndrome as you explain the mindset ….. following the way we’ve been screwed already by bailout, some never learn 🙂

It was the case, I believe that the vast majority of the interest on promissory notes was a circular payment with IBRC benefiting from 7% and the ECB 1% of the 8% interest.

Who is to be the beneficiary of the interest on this new bond?
Is it still an agent of the Irish state or will all the interest all go to the ECB?

I have to say though from the sounds of it, it is positive, but I will wait on the details.
As Aisling said growth (and indeed inflation) will help.

Next question is, if it is true, then who do we thank.

I Think the first economist to come out and argue strongly for this type of Idea was Karl Whelan.
In fact I think he came up with the Idea for it last May in his humorous one act play.

This is a small country.
If he hadn’t come up with this idea and argued for it, is it probable somebody else would? I doubt it.

If David Mc Williams hadn’t convinced Brian Lenihan and John Gormley to Guarantee all the assets and liabilities of the banks, would someone else have come up with such a broad and disastrous guarantee? I doubt it.

Karl Whelan has certainly been at the forefront in making the case for extending the payment both on both moral and fairness grounds.

Colm McCarthy has also been unrelenting in his critisism of The ECB’s unparallelled treatment of Ireland.

There were many that said it was a waste of time and that it would not happen and in fact some even argued against it on grounds it be improper??


“I am beginning to think there are less ways to skin a cat than there are to kick the can down the road.”

Worry when they start kicking the cat down the road. Delaying a payment is just a sideshow.

@ Colm

“Stockholm syndrome”

You’re nothing if not a self-repeating cliche Colm…

@Eamonn It comes with the not insignificant risk that this could be seen as simply gaming the national accounts, in which case any benefit would disappear in a poof of smoke since bond market participants could reverse it back out in terms of pricing.

In private practice you think through the accounting implications of a transactions before effecting it so that you never have to admit that there might have been an alternative, less attractive, accounting treatment. Since this is all about accounting treatment, and since the current nasty accounting treatment is in the public domain, changing that to a more reasonable accounting treatment could be seen as “fluffing” the accounts.


100 years at 0.001% is also ‘legal’ …

Have you noticed the influence of ‘Power’ (of various hues, including Dictatorial) on the Social Construction of Law in the EU and EZ in recent years?

That said, today is young yet …

For all the talk about Promissory Note love-ins, the CSO is reporting another fall in GNP.

No surprise for anyone out and about with accountants, small business owners and farmers. Rural businesses (in a place outside Dublin known as ‘the rest of ireland) are in dire shape. Will postponing the PNs and all the reforms promised (quangos abolished, etc.) put the wheels back on the economy? At least one tenth of the ‘saving’ on the PN for this month will go directly to feed the Mahon Tribunal’s bills – and help many unfortunates rebuild their balances sheets and boost property in Dublin 4 and 6 again.

It is just nuts.

@DO’D 100 years at 0.001% is clearly not legal since there is no asset class in which the ECB could invest which would deliver those returns. Best case scenario at the moment would probably be bund rates or ECB base rates adjusted for the time value of money which is a benefit in a growth scenario and a liability in any other.

In relation to the “Influence of Power” quote is that your attempt to replicate Ezra Klein’s famous description of Dick Armey?

JeromeK Says: March 22nd, 2012 at 10:28 am

Is this the best solution to protect our insiders? As our negotiators pay themselves more than any other European officials (because they are worth it), they are in no moral position to demand any write-off so push for a delay instead.

Sums it up perfectly.

Not confined to the public service I hasten to add….. Look at NAMA, the various Tribunals etc … all hugely expensive welfare schemes for the connected classes. All being paid for on borrowed money… and after all the money spent, nothing to show for it.


“100 years at 0.001% is clearly not legal since there is no asset class in which the ECB could invest which would deliver those returns”

Yes,I agree, but a realistic compromise could be 1% over 50 years.

Such a compromise would provide several advantages in that:
A) it is very likely legal (I am not a lawyer),

B)it is a political compromise(I am a Political Scientist),

C) 50 year repayment will serve as a long term reminder of the consequences of casino banking (I am a parent),

d) It i addresses an admitttedly badly considered debt obligation which creditors should also endure ( I have been in business for many years and have seen credit renegotiated numerous times when external/other circumstances necessitate a renegotiation)

e) It would serve as a good reference point by which the other public/banking debt(like almost everyone else I am not satisfied with the way Ireland was railroaded into a “stich up” sorry “bailout” in November 2010)

f)It would remind our European partners that we carrried out a very difficult and questionable bank guarantee in September 2008 on our own(like almost everyone else I also have my own speculations about why Brian Lenihan RIP felt comfortable enough to speak en Francaise to his French counterparts in French on the night in question on what supposedly turned out to be an “isolated” national decision)

G)Ireland needs to clarify what kind of relationship we want with the EU for the next forty years (I am pro European but am undecided about whether we should have the current relationship or a Danish/Swedish type of relationship)

Alternatively we could just “federalize” mot of the debt accumulated since 2008 before we vote on the referendum which , according to Mr Noonan, to allow enough time (June 7th?) for changes to be implemented in July 2012. Thereafter we could “discuss” what happens to the rest of the national debt (relating to pre 2008 ) depending on the result of the referendum.:)

@Mr. Bond,

I expect you do realise that, irrespective of what any of us might suggest here or of anything the ‘powers-that-be’ might do, the ‘naysayers’ here will not be satisfied until the Troika agrees immediately to write off the ELA and to provide a fiscal transfer, without any strings attached, that is sufficiently large to compensate fully for the Exchequer allocations to the banking system, to wind-up NAMA with a profit, to restore the NPRF fully and to elminate all negative equity?

@ Stephen@all

Apologies for dividing my comments in two. However my second comment is slight different tahn the first.

Like many people I am adopting a “wait and see” approch to the forthcoming referendum but am determined not to be swayed by “scaremongering”.

Therefore courtesy of,I believe, Karl Whelan I feel it is important to highlight the following sentence in Minister Noonan`s Dail speech and please note I am not “linking” but retyping what I copied down by hand :

Quote :”The funding approved under the existing Programme of Financial Support for Ireland is not therefore conditional on Ireland ratifying the fiscal compact but, as is currently the case, on Ireland successfully implemnting our programme”. End of quote.

It is also impotant to note that prior to that sentence Minister Noonan stated that Ireland has successfully met all targets and that departure from the programme in 2013 is on track.

IMHO the only way people can consider and vote properly on this referendum is if “scaremongering” (or time wasting partisan politics) is not allowed to rear itś ugly head.

Best…L 🙂

From a quick skim through this threat I suspect it might be worth reminding readers of on or two of the awkward points about ELA and collateral – which may colour the view eventually taken on how far the ECB have shifted.

First, the Pro Notes had to carry an interest rate and a schedule for repayment so that the Irish CB along with the ECB, could ‘value’ and ‘haircut’ them to work out how much cash (ELA) could be advanced under their rules.

Those who have argued that there is no reason the PNs could not just have interest or term changed (down a lot, and up a lot respectively), always seemed to be reluctant to acknowledge the above.

If the Irish CB or ECB through repo, is going to effectively roll-over that portion of ELA that was scheduled to be cancelled when the government raised the cash and paid it to IBRC and the CB, then it seems to me likely it will require a replacement wodge of collateral – probably the Gilt being bandied about. Will this Gilt be given a looser haircut regime than other equivalent bonds? – it seems unlikely.

If my suspicion is correct then the Gilt will have a redemption yield basically similar to that on the portion of the pro note it replaces – give or take some differences for market pricing since the PN was issued.

If so, then the ECB ends up with a partial ‘normalisation’ of ELA lending via collateral to Ireland and the government gets to put a 3.1bn Gilt on to IBRCs balance sheet instead of having to find the cash (so a partial debt roll-over).

Is this best characterised as a ‘re-negotiation of the pro note’, or as a swap of a cash repayment into repayment by Gilts?

Another thing to note is that the fundamentalist wing of the ECB will have noted that the original ELA, based on the PNs was a printing exercise by the Irish CB, that was temporary or time limited by the repayment of the note. If the ‘unprinting’ of 3.1bn is delayed by its transmogrification into a Gilt (bullet or not) then the hard-liners have from their perspective, given some ground.

@ grumpy

My guess is that these will be like NAMA bonds with a rolling ECB based interest.

@ Brian Woods

Not all of the PN count towards the deficit – only the interest which is €1.8 bn next year. If that is reduced it will give the government more leeway on fiscal targets. I won’t expect much if any reduction in the planned fiscal adjustment however which is €3.4 bn for 2013.

@ Carson

Thanks for that correction. But they do draw down from bail out fund, whereas these bonds are additional funding to the bail-out, is that correct? i.e. we have 3.1bn more bail out funds available, which might last another 6 months by end 2013.


correct – interest hits the deficit, and both interest and principal hit the exchequer funding requirement. We need a shade under 40bn in market financing in 2013 + 2014. If we end up getting a deferall in 2012/13/14, thats around 25% of that requirement taken care of. Not nothing, as they say.

@ Aisling

I disagree its not just “accounting treatment”

From Nama Winelake’s back of a cigarette pack calculations.
“That being the case, thenIrelandis getting a “gift” from the ECB in deferring the repayment of IBRC’s debt for 14 years, which at annual inflation of say 2.5%, knocks 30% off the cost of rescuing IBRC in real terms. That’s a huge reduction but not as good as a 100% reduction.”

I think the definition of a pyrrhic victory is appropriate, nothing on the 120% debt/GDP burden, no burden sharing, no fiscal transfer from EFSF to help carry the weight of the banking portion of the above, a ludicrous proposal to defer debt repayments without agreement to restructure debt or writedown.

A Pyrrhic victory is a victory with such a devastating cost to the victor that it carries the implication that another such victory will ultimately cause defeat.

There must be great celebrations at ECB level to achieve a virtual endorsement of our failing bailout situation from the Irish contingent in return for virtually nothing.

Meanwhile the real economy hurries to default:

Percentage changes on GNP corresponding period of last year,
2008 ……….-2.8

Tks alchemist for the link

Could be the only survivors will be the banking sector, the IFSC, the Govt, the rest of the workers left, the real economy left with them…..a compliant media lacking in Daly Shows and Jon Stewarts, a cheer chorus of Ole from cliche driven bondsmen minions filled with hubris as they bow before ECB, masters of a failed bailout that will not work……. count me out of those celebrations, I prefer to keep my critical faculties intact 🙂

Clarity someone please:

Bloomberg is reporting that the Taoiseach is recruiting pensions for some kind of bond deal. Apologies if it sounds garbled.

The dubious benefits of looking after one’s own portfolio is lots of tangential info everyday.

@ Alcho

its the sovereign annuity product, a way of bridging some of the funding gap in a pension fund, or simply making an annuity cheaper to fund, by using some Irish government bonds in the investment mix rather than just Bunds, as is currently the case.

@Eamonn NWL is missing grumpy’s point above. The original notes were designed to have a particular value to the Central Bank. If you lengthen the duration and pare down the coupon you reduce the value of the notes. If the notes don’t have sufficient value to the Central Bank then it cannot continue to lend to IBRC under ELA, or at least it cannot lend as much. Which then leaves IBRC in trouble.

The alternative is that the ECB authorizes the Irish Central Bank to lend against an asset with potentially a lower valuation. I don’t see them doing that so I think it more likely that any renegotiated notes will have to have something which gives them the same value to the Irish Central Bank as the current notes. Hence I think it is an accounting benefit, a cash flow benefit, but I’d be very surprised if the ECB can agree any more than that.

@ Aisling

the coupon at the time had to be similar to the existing IRISH govvie yield, which at the time was 8%+. Assumingly, this being a brand new bond, we could use todays yield of 6.8% anyway. Also, the PN was a non-tradeable government guaranteed note, which would always attract a greater haircut or a lower modelled price than an outright government bond, as is being suggested it be replaced with. So longer duration yes, but better collateral/tradable price, and coupon equal to todays traded rate.

@BEB the coupon is such a red herring though so I’m choosing to ignore it although I take your point about tradeable debt having a higher valuation.

All that matters is a) the value of the collateral the Central Bank requires under existing ELA and b) the accounting treatment in IBRC to ensure it remains solvent.

Once we bear those two in mind there is no reason why we can’t devise an alternative instrument at the lowest possible cost to the State both in terms of cash flow and GGD. But the instrument must be capable of ensuring IBRC remains solvent, and ensuring that the CBI can lend against it.

I can’t see any obvious reason why it would need a coupon at all, especially not one comparable to current Irish debt. All that matters is the valuation of the instrument and that’s what’s being lost in the mire here. If the valuation of the instrument is insufficient, as it would be if you extended the duration and dropped the rate without doing anything else, then IBRC has to say no because it will go insolvent, and the CBI has to say no because it can’t continue to lend to IBRC against such an instrument.

Now improved economic conditions etc and as you note a tradeable instrument might buy us some wiggle room. But it is all about valuation which is what is being missed. Extending the period and dropping the coupon will impact on the NPV which IBRC needs to balance its books. If we then add a GDP warrant or discount or whatever to get the valuation back up then we have to factor that into how much we can potentially save by restructuring the notes. Hence my reiteration of the point that this is an accounting benefit and a cash flow benefit, but there can’t be any substantive “real” benefit to us from doing this.

ECB apparently has said that the restructuring is a matter for IBRC and the Gov but that Noonan’s proposals were too simplistic, and I suspect its because they missed the valuation issue.

The ECB should care, but might give us some wiggle room on the timing of removing the cash from the system. They can’t give us wiggle room on valuation without hitting the prohibition on State Financing.

@ Aisling

“I can’t see any obvious reason why it would need a coupon at all”

Well you either need a coupon (or, as you suggest, a warrant or something else of value), or for it to be sold at a discount (ie at 90 cents, redeemable at par), and the coupon or the discount has to reflect the underlying credit risk, ie the Irish state. That underlying credit risk has improved since the original promissory note was struck, so, everything else unchanged, the promissory note should actually be trading above par, right?

In terms of the actual NPV, the overall (ie State + IBRC) NPV could be improved if the funding mechanism for whatever replaces the PN (ie EFSF?) is cheaper than the ELA facility over the long run.

John Walshe (f Business and Finance) on Twitter has been saying that the ECB have smacked down the proposal.


You are making very thought provoking arguments and perhaps I can take this opportunity to express my (possibly simplistic) perception of this Anglo/IBRC/Promissory shambles.

IMHO it is not really clear whether or not the ECB believes “Noonan`s proposals were too simplistic” because I am not really sure any one (including the ECB)actually knows what the ECB really thinks about anything other than the fact that it “leaks” conflicting opinions on a regualr basis.

At the end of the day this will end up being a “political” and “trust” issue in which “value” will end up somewhere near the back of the pack.

The “political” issue is relevant because the concept that anybody (creditors or debtors) should anticipate any “real” benefit from this shambles is madness and European history demonstrates this. The reason we have an EU/EZ/ECB is because a serious debt burden within Europe after the first world war was not properly dealt with during the 1920`s resulting in the second world war.

The “trust” issue arises if we wish to maintain a system whereby public debts eventually get reconciled (i.e over a long period of time with a notional interest of 1% in an ideal inflationary environment of around 2%) even though both debtors and creditors lose “real” benefit.

The “value” issue is ,IMHO, only relevant for two main reasons :

1) IBRC is just a bankruptcy vehicle for an insolvent business entity which in normal circumstances would only be obliged to hand over existing assets (of which there may be some if they can be realised) to creditors.

2)Repayment over a long time in an inflationary environment results in diminished benefit in the short term for those doing the repayment (on an asset that is not generating sufficient revenue or cash flow) and in the long term for those receiving repayment.The diminished benefit or “value” on both sides is relevant because it highlights that offering and accepting credit (without due care and research) is not risk free.

Sucess in commerce and politics can only be achieved if issues are kept simple. Without “simplicity” and “trust” accounting and legal theory can only,IMHO, postpone but not prevent chaos.



“John Walshe (f Business and Finance) on Twitter has been saying that the ECB have smacked down the proposal.”

I wonder how many more “leaks” we will hear from the ECB before the month is over. 🙂

“Sources have told RTÉ News the key issue is ensuring the that the bonds paid to Anglo would not fall in value below the value of cash. ”

It would seem the ECB are saying that “I want my 3.1bn back in cash, or as an instrument that I deem will not be worth less than 3.1bn in cash”. The scope for savings would appear to be concessional lending by the EFSF/ESM to Ireland, and perhaps some changes to avoid it counting towards the annual deficit ceiling from Eurostat’s point of view, rather than a reduced exposure to the ECB.

@BEB I get that you might want an interest rate but think of the political capital the government could generate from announcing interest free (**whispers**discounted) notes, or actually better GDP growth warrants because if the ECB believes our programme will be successful how could they turn down such instruments?

Agree that the notes have probably appreciated (were there any sort of market for them) so that’s part of our valuation issue dealt with, marketable securities would be another part, so throw in a few warrants and we’re good to go.

Of course, while this trundles on we should get IBRC to agree to change the notes to allow us PIK into short term paper. Gives the ECB no cause for concern about valuation if the paper matures while we’re in programme, allows the Government “act” unilaterally and take control of the situation by “not paying the interest”, but most importantly it allows them to claim some sort of “win” over the ECB which Irish people are baying for right now even though the net effect is practically nil.

If the PN collateral ends up being replaced by tradeable collateral with a market value, does that imply that the ECB will change the quantity of collateral they will demand, for a given level of cash they are providing, on a regular basis – e.g. if the value drops, they can demand more, and trigger the government to issue more bonds, or if the value rises they can return bonds and allow them to be retired?


@ Alcho

Brings me back to my youth and such ‘cru’ as Blue Nun, Mateus Rose, moving onto such true great tipples as Le Piat D’or, etc. 🙂

@Bryan G the CBI has to be repaid the cash it printed. The ECB cannot make a loss lending to Gov owned banks. Nor can it make a loss on any interaction with Member States.

That’s what is required by EU law which is binding on our Government so long as we wish to remain in the EU.

Nothing requires them to reduce collateral requirements but at a minimum they have to be happy that their collateral is sufficient. Common sense suggests that they should agree to reduce haircuts as assets appreciate but there is nothing hard and fast requiring them to do so.


Ireland chasing 107 vs Die Nederlands in Dubai

William Porterfield ‘catch of the tournament’ – a two and a half reverse sommersault …. (thought I spotted Richard Tol toggin out at 9 but early in the morning …

@all at all

‘The ECB wants to reduce IBRC’s reliance on highly risky emergency loans to fund its operations. While the restructuring scheme would achieve that, Bundesbank chief Jens Weidman and German ECB executive member Jörg Asmussen are sceptical.’

Jens must still sore at his little GUBU on the ELA wha! He shudda gone to speksavers or .. er .. read Whelan on the blog. Tuff Sinn! I’m confident that Jörg the pragmatist will come round eventually …

‘THE EUROPEAN Central Bank has asked the Government to refine its plan to avert a €3.06 billion cash payment next week to the former Anglo Irish Bank.

The bank’s request comes amid indications that its chief Mario Draghi is warming to the notion of an initiative to restructure Anglo’s wider debt, now managed by Irish Bank Resolution Corporation.’

Refine! Send for John Teeling – he wants to refine at least 80 billion.

Back to Beesley ….

…. wonder does Richard Tol bowl?

Has anything happened on this yet or is it turning out to be more tilting at windmills? I thought I heard a noise that sounded vaguely like backtracking.

Wake me up when something actually happens please zzzzzzzzz

@PR Guy

Ireland win by 7 wickets.

Beat Namibia tmro mornin and we qualify for Twenty20 World Cup …

On the QT – I hear FF lookin for a PR Guy or Gal …

ECB all out before lunch :LOL: Jens gets his usual duck!

@David O’Donnell

FF gig is probably regarded as toxic! Blind Biddy could probably do a better job of it than most though.

The only duck Jens was having involved his lunch. They eat well over there.

What’s a wicket? Is 7 of them a lot?

….and I hear Noonan was saying this morning that there are ‘technical difficulties’ with this PN thing which is usually code for it ain’t going to happen.

@PR Guy

You are better at PR jargon than I am but after reading the short report on RTE (online) this afternoon posted at 15.00 in which “technical difficulties” is used again I get the very strong impression that Noonan and Co are going to be playing “hard ball” this weekend.

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