Promissory note news roundup

We have no deal yet on the 3.1 billion euro payment due on March 31st, but the government remains as hopeful as it was before the weekend that a deal will be struck. A legal challenge is being considered to the promissory notes by New Beginning founder David Hall, who is taking this case as an individual, not as a member of New Beginning. Finally, I’m a bit worried about the can-kicking plan’s lack of nuance.

Update: Governor Honohan expects we won’t have to pay the 3.1 billion at the end of the month.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

75 replies on “Promissory note news roundup”

““They are two distinct issues and they are not linked in the mind of the Government nor will they be,” she said”

Is that what is meant by “group-think”?

Which makes me believe that either our masters in the troika aren’t nearly as smart as I think they are — or they have something else in mind as a more permanent, nuanced, and elegant solution.

There is of course another explaination for the Troika’s actions

They’re just not that into you… they dont really care… its working well enough for the moment… no payment has been missed yet… and when push comes to shove, the local elite will do anything to keep their payments coming in.

@ grumpy, I recall that Creighton, idiotic comment that has become a standard bearer for FG policy and has also been echoed by Enda Kenny on many occasions; debt even odious debt is a matter of honour and will be paid back by this Govt. We’re not talking about poor negotiating tactics here, this is blatant, gombeen
betrayal of the state

Couple of posts previous Cowen Op Ed stating concern re current negotiations and danger of switchover from PN’s to long term government bond. Plenty of contingency room there in the small print if a deferment bond deal is done to have it done subject to commitment to a binding agreement on a larger bond deal, so we could be sold down the swanee there as well.

” Mr Hall, College Grove, Castleknock, Dublin – a founder member of the New Beginnings group of business people and lawyers – said he has, for some time, had “grave reservations about the manner and way the public finances of the country have been run”. The benefit of the promissory notes scheme or “trick”, done with the alleged connivance of the Central Bank and perhaps the European Central Bank, was that bondholders got paid and no European bank reneged on its debts, he said in an affidavit. ”

“The Irish people, having never been consulted about this and in circumstances where its representatives were bypassed, were being asked to honour a deal made in flagrant breach of the Constitution, with no democratic legitimacy and in breach of the Treaty on the Functioning of the EU, he said.”

Leaving aside our compliance and subservience and incompetence and our odious acceptance of the IBRC debt, Cowen does make a good point re the PN’s current negotiators should take note of, especially in the light of current discussion re switching debt out of PN’s into some type of sovereign bond issue:

“Second, promissory notes are a form of debt that can be restructured at some future date without running the risk of triggering default clauses in other types of government debt”

Lets just restructure that debt now, refuse to pay the ¢31 bn subject to determination by the International Court for Banking Settlement. To make the case we need a proper inquiry into Anglo: 10 of those ghost estates, 50 detectives, public, video evidence in open court, call all the witnesses from the bank lenders and the crony developers, canaries will sing.”

‘New Beginning’ could be a future political alternative to BéalToastFGFFLB 🙂

I caught End Kenny’s enthusiastic assertions that Ireland was in recovery and steaming ahead, etc, on the web last night.

If I can track this down, Rehn andthe Troika misstep certainly can.

I ask the same uncofortable question I have asked several times about the PN repayment.

If everything is so marvellous, why do the current repayment arrangements need to be amended?

The government is speaking out of two sides of its mouth.

March 27 (Bloomberg) — Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said he sees “good reasons” for easing the burden on Ireland.
“There are good reasons for easing the burden, which has been put on Ireland, as far as the debt service,” Juncker said today at an event in Brussels.

This is shaping up as the greatest non event since Y2K. What started out as a macho cry to tear up the PNs, write off the ELA, let the CBI go bust etc. etc. will finish up as a loan deferral.

This government since it came to office has been fairly careful to reverse the populist line it took in the election campaign (remember “Frankfurt’s way or Labour’s way”?) But they were lulled into a mistake on this one as they thought its espousal by a very high ranking economic academic made it plausible.

The name of the game is now to somehow give the appearance of some win for the government without any substantial concession. I wouldn’t be looking for nuances.

So, is there a growing feeling that the interest rate does matter?

Assumption A: Anglo relies on the the 8% or so currently.

Assumption B: Any reduction in this rate will leave Anglo needing additional cash from the State?

Seems to be the message from Indo’s LN:

“The problem is, the interest rate payable on the pro note is completely irrelevant. It is paid from the state coffers to Anglo — another arm of the state.


“IBRC has also factored in the regular interest (at 8.6pc) into its business plan. If the interest goes down, IBRC’s profits fall, or IBRC swings to a loss. IBRC is state-owned — its profits and losses are ours. If we cut the interest rate and IBRC loses money, that loss is borne by the taxpayer.”

In the same article.

@ Rob S

My understanding is that the 8.5% was so that PNs could be valued at par. Thus the market demanded a premium for sovereign default risk and that premium is in the 8.5%. If the government does not default then the premium falls to IBRC as a surplus and of course ultimately back to the government.

Put another way, IBRCs assets earn an 8.5% coupon whilst its liabilities (mainly to ECB/CBI) cost 1%-2% so inherently IBRC is making windfall profits.


Sure, but there seems to be a growing feeling that the Anglo capital requirement isn’t actually just 30bn but is actually 30bn plus “some portion” of that 17bn interest – the removal of which would need to replaced by taxpayers’ funds.

Basically, the fear that some of this profit which you mentioned is actually being eaten into.

The primary ammunition I would have for this argument is the following:
Cite me one Government official who has mentioned the interest rate on the PNs does not matter? I find it highly suspicious that the Government wouldn’t be jumping at the chance to tell the nation that the 17bn in interest, referred to in the parliamentary’s questions all those months ago, would actually be coming back to the State.

China to the rescue…


@ Stephen, BWII, Rob

I think BWII’s analysis is correct: the interest on the promissory note does not really matter.

Indeed the interest that the IBRC pays to the Central bank doesn’t matter. The key question is the interest that the Central Bank “burns” the ELA. This has received hardly any attention.

My understanding from Karl Whelan’s paper to the Oireachtas is that the CB burns the ELA it receives from the IBRC. The CB reduces its accounting liabilities to the ECB and there is a charge of 1% imposed by the ECB on the CB. But the CB (a state institution) can keep the profit. This will be the 2.5% (according to Karl’s estimate) the CB charges the IBRC less the 1% imposed by the ECB.

The key interest rate is that imposed on the CB by the ECB under the terms of the ELA. This is the real finance cost to the State. There has been very little debate about this. It seems to be a closely guarded secret. As I said Karl Whelan thinks it is 1%. BWII thinks between 1 and 2%. I have heard other higher figures elsewhere. It would be good if there was some kind of consensus on what is the exact figure.

Of course if the PNs can be replaced by some nuance or other with lower yielding government bonds it does rather suggest that a line in the sand is being drawn. As it stands the PNs are capable of making up for even more losses on the loan book. If these are replaced by low yielding bonds then the option is open to not put any further capital into IBRC in the event of further losses.

@ Rob

Missed your earlier post whilst writing that last one. You seem to have reached the same place.


Just re-reading your last post. You may (I’m not sure) be conflating two transactions.

There is:

1) the payment of interest by the IBRC to the CB and

2) the interest rate that is imposed on our CB by the ECB under the terms of the ELA.

No 1) doesn’t really matter; no 2) does.

@ John Martin

If the government injected 3.1bn cash into IBRC. IBRC would pay down its ELA and the CBI in turn would pay down its Target2 debit at the ECB. Target2 costs the ECB rate of 1%.

I think.

Are MOUs fairly routine for this kind of thing?
Would an MOU lay out what would happen if there was a default? Would an MOU look at things like collateral? Or is it just concerned with the nuts and bolts of buying the bonds? Thanks

@ John Martin

I wasn’t aware that the ECB made an additional levy on the CBI for running an ELA. I join your request for someone who really, really knows what is going on to please clarify the matter.

@ Eureka

dont think its just bonds they have in mind. I imagine its a broader bonds/real estate/infrastructure investment agreement. The MOU would simply state what the Chinese are looking for, what the Irish have to offer, and the next steps in facilitating deeper discussion, ie CIC probably sending a few guys over for a prolonged period, and the NTMA making sure that all the relevant people are made available to show them around.


My summary of the situation is that we have a very good deal: a 1% interest on the ELA (that’s all that matters from the state’s view).

However, the EU wants us to gradually replace the cheap loan of 1% with a more expensive IMF/EU loan. This will be done over a period of 20 years.

The Govt wants to delay the replacement of the cheap ELA. But if the bond that they issue to postpone the promissory note payment is at roughly the same interest as the IMF/EU funding the benefit is purely cosmetic.

@ Rob

Agree the capital requirement of IBRC is not just 30bn and the 17bn in interest will make its way back to the public coffers. The PN makes up just 44% of IBRC’s assets, the remainder is made up of impaired loans. If those loans don’t perform then it seems inevitable that much of the 17bn in interest (a large proportion of which is supposed to circular) will have to be used to compensate for those non-performing loans…..that is why you don’t hear the government making the case that all this money is going to make its way back to the exchequer.

@ John Martin

That’s my read. However, the bond is unlikely to have either as high a coupon or as aggressive a principle repayment schedule as the PNs. I don’t know what the arcane rules are but NAMA bonds only pay 50bp over ECB and this may be the model. I think it works because technically NAMA bonds are short term but they automatically roll over.

I am not sure that this all started as a ruse to hold on to ELA 1% financing as long as possible. I think there was a genuine feeling that they could in some way “tear up” the PNs but they have now arrived at a situation where the whole issue has become one of immense credibility for the government and Noonan in particular. They want a deal, any deal.


Our posts are crossing… regarding the “additional levy”.

The CB charges the IBRC about 2.5% (per Karl Whelan’s paper). In my view this doesn’t matter: the cost to the IBRC is profit to the CB. The key issue is the interest rate imposed on the CB by the ECB, which I think is indeed 1%.

I have been told by someone that Fortis had to be pay 5% plus Libor for ELA. However, from the Belgian point of view the relevant point is how much its Central Bank paid in interest for the ELA authorised by the ECB. I assume it was also 1%.

@Eoin, the NTMA spokesperson says the MoU itself “isn’t available”.

Shame, I would have enjoyed something with “WHEREAS, the Chinese being a great bunch of lads on the one part, and the Irish without a pot to pee in on the other part hereby etc etc”

@ John Martin

We seem to be in agreement. Your probing had made be read again Karl’s paper. I must say that it is an excellent source on this whole subject. What a great pity that his use of metaphor has been wildly misinterpreted by the likes of Peter Matthews and Fintan O’Toole and possibly by those in the higher reaches of government and the DOF.

Bringing forward my “lost” post from last night, but also adding the subsequent exchanges with BEB and BW II below.

Why not? (shoot this down)

@ John McHale, Karl Whelan, All

Not on the correct thread, but here are my simple “bubble up” thoughts re the PN restructuring…..My understanding is as follows:-

The Irish Central Bank (CB) wrote a loan (created a funded asset), representing CB printed funding euros on the liability side of its balance sheet, to the IBRC (Anglo and Irish Nationwide) on a back-to-back basis with the Govt PNs given to the IBRC (essentially unfunded IBRC loans to the Govt). The PNs were legally pledged by the IBRC as collateral for the CB loan to it. The Govt must now service principal and interest repayments on the PNs by paying Euro 3.1bn odd pa to the IBRC which in turn pays the CB.

Under EU rules, the CB cannot make loans without sufficient collateral, and there is a Q-mark over the PNs in this regard. So, the making of the loan by the CB to the IBRC is a bit of a problem in the first instance.

Question – Instead of receiving PN repayments from the Govt. via the IBRC (which causes liquidity strains and demands on the taxpayer), is there any reason why the CB couldn’t make a “capital contribution” of its loan asset (PV of principal and interest…circa Euro 31bn I believe) to the IBRC ? i.e. convert its loan asset into a capital holding in the IBRC? Such a “capital contribution” mechanism is not uncommon (debt-to-equity is quite topical nowadays!). The CB loan to the IBRC then becomes capital not debt for its accounting purposes….so the CB debt PN collateral issue falls away.

It then begs the question as to how the CB services its liability. At present, the annual Euro 3.1bn is apparently “burnt” i.e. there is simply a write-off versus that (notional) accounting liability (again, principal and interest). It seems to me that it should be possible to net the PN collateral against the CB liability, via a netting arrangement (it is afterall on the one consolidated balance sheet) e.g. in return for the capital contribution, the CB liability is assumed by the IBRC and extinguished against its Govt PN asset.

So, classic debt-into-equity restructuring (for a banker). Any thoughts? Do you know whether the Govt has thought about alternatives other than the present attempt at debt-to-debt restructuring (with all its interest-matching, risk transfer, etc. limitations)?

If this or some similar version is workable, all steps are within Irish control. Importantly, the cash issued to the IBRC remains in place (no external refinancing of that aspect required).

What am I missing?

BEB @ Paul W
the equity the CB has is worth how much, exactly? Zero? Any chance this exercise would make the CBI insolvent?

Paul W @BEB Credit enhancement for the IBRC can always be considered e.g. unfunded Govt guarantee. The idea is that not much changes except the E 3.1bn annual cashflow, and the fact that the CB loan is now capital.

BW II @ Paul W
You have been watching too many Karl Whelan movies. That 3.1bn would not be “burnt”. It would be used to pay down Target2 liabilities to the ECB. These are real liabilities of the CBI not entries in an internal ledger to be written down or bits of paper to be burnt.

Paul W @ BW II: The set off /netting of the PNs against the CB liability would do the same.

@ Paul W

to get the fair value of the equity stake, given that it has no dividend´, and no prospect of re-sale, you’d have to NPV it against the expected redemption date, which it appears you have left as “blank”. Ergo is has an NPV of close to zero.

@ BEB Don’t agree. It is not a bond, it is an equity investment in a Govt backed entity.

@ Paul

you admitted that the true equity value was relatively low, and that the equity augmentation would have to occur via a government guarantee.

So i ask you this: your 3.1bn equity investment – how much do you hope to get back at a later date, will there be any dividends on it, and what is the likely resale or redemption date on the equity investment?

@ BEB As you know, not an exact science (still). Also, I am not an accountant so will not attempt to give you a definitive answer…Agreed this is a complex area. However, there is flexibility. It also depends on how the equity investment is organised e.g. debt-to-equity can be different to a capital contribution to reserves. So, there is some structural flexibility also, particularly given that the IBRC is not a publicly listed entity. The point is however that the risk nature of the existing debt is not unlike the risk nature of the “capital” (albeit capital is subordinated).

I haven’t looked at how the Govt equity investments in AIB, etc. are dealt with. Perhaps you can clarify?

@ Paul W

i’ll put it this way – if someone offered you the chance to put 100 quid into a venture, with no chance of either resale or dividends on it, and a likely repayment date of 15yrs+ (if at all, as there is some credit risk given market pricing on Irish securities), at which point all i would give you back is your original stake, what value would you put on that 100 euro? 50 euro? 25 euro? Zero?

Even if it was the Bundesbank you were putting capital into, the discounting back for inflation or opportunity cost would destroy most, if not all, of the underlying equity value.

@ Paul

“I haven’t looked at how the Govt equity investments in AIB, etc. are dealt with. Perhaps you can clarify?”

eh, AIB may actually be worth something in 5yrs time?

@ BEB Without far more factual detail, it is not possible to give you a definitive answer. Neither can you answer definitively. However, again, in principle, under the scenario I set out above the risk valuation of the capital doesn’t look hugely different to that of the existing loan i.e. without more, I think that one cannot assume a huge disparity of result under IFRS (bar I do accept that the lack of capital dividend expectation could be a wrinkle in that statement).

With a Govt unfunded guarantee support, the value of the IBRC in 5 years time is not relevant…..Fair value looks at the likely 3rd party market valuation now. Speculation re AIB’s valuation in 5 years time is in any event just that: speculation…even a pure guess.

@ Paul W

Capital with no coupon and no chance of “profit” MUST be worth less tomorrow than it is worth today. This is a fact, not speculation.

Speculation re AIB is simple – it actually could be worth a lot of money, hence the equity has real value. I think we can all agree that IBRC has little or no chance of being worth anything more than a nominal sum (especially after this restructure of the PN).

@ BEB I should add that, even in relation to the (lack of) dividend expectation, one cannot look at that in isolation from the reduction of interest cost on the CB’s liability side as I suggest (by way of the set off /netting). Listenening to Patrick Honohan live, there is still it appears secrecy surrounding the CB liability side, albeit we know that the existing external funding rate is far lower that the PN coupon rate.

Still, I just wonder whether the focus of the Govt parties on clearing out the trackers from the banks has distracted them from looking at alternatives to the present debt-to-debt restructuring approach on the funding end.

@ BEB “Capital with no coupon and no chance of “profit” MUST be worth less tomorrow than it is worth today. This is a fact, not speculation.”
Too black and white in what is one of the most “grey” areas of accounting. A.O. you are ignoring the Govt guarantee, the fact that profit is transferred to the IBRC (via capitalisation), the interest liability offset, etc.

Put it a different way, where (in principle…I accept that exact detail is not possible here) do you see the valuation differences versus the existing CB loan to the IBRC?

@ Paul

the existing CB loans pays 1-2% annually, are senior liabilities, and are being paid down every year….you are suggesting replacing them with long term equity, which is the ultimate risk capital, with no dividend, and no reasonable chance of profit (ie any profit above the 3.1bn in capitalisation you’re putting in). My point is simple – if you put in 3.1bn, get no interest, and then are more or less guaranteed to get back no more than 3.1bn back at a later date, your equity is worth less than 3.1bn today. This isnt an accounting issue – its finance 101.

@ BEB We won’t resolve the detailed technicality here, obviously….it is a fact based exercise afterall and we do not have the detailed facts upon which the valuation accounting for the particular entities rely.

My overall point in return is that nothing much has changed on National consolidation, and the capital leg now deletes the 3.1bn cash requirement. In the middle of all that, there are factual complications and technicalities. However, in principle, I don’t see some huge “hole” being created.

The end result that I suggest is possible (potentially) allows for a better result than (A) the Govt’s current deferral restructuring…seems to be limited liquidity management only, and (B) partial default /debt resolution. The fact that it is a potential solution within Irish control is also a significant advantage.

Honohan says ‘deal likely’ over Anglo promissory notes

‘Mr Honohan said that the settlement of the €3.1 billion payment on March 31st with a long-term Government bond instead of cash, expected within days, was a “very considerable step forward” and “a very definite gain” on the ability of the State to repay its debts.

‘”It puts off for a long number of years the actual need to refinance those payments,” he said, but relative to the bigger amount due on the €31 billion promissory notes was “a considerable improvement”.

‘The cost would be at “quite a low valuation” to other sources of funding available and lower than the interest paid on the bailout loans advanced by the troika, he said.

‘Mr Honohan said that there would be “no net cash outlay” to the State under the terms of the deal being worked for the March 31st payment to settle the €3.06 billion instalment by issuing a Government bond instead of paying in cash.

‘The Government planned to issue debt to IBRC on an existing bond rather than issuing a new Government bond to cover the next instalment due this Saturday.

@ GK
“The cost would be at “quite a low valuation” to other sources of funding available and lower than the interest paid on the bailout loans advanced by the troika, he said.”

That is a bit peculiar. He seems to reference the “cost at….quite a low valuation” bit to the Euro 3.1bn end March payment only…..i.e. a higher interest rate on this small sum is relatively immaterial in the overall context…without factoring in the larger amounts due in the future. I didn’t quite understand that….

Neither did I understand how that quotation squares with the “no net cash outlay” statement.

@ Gavin/Paul

i was listening to it, and i though he said “net cost” (ie as the “profit” is retained by Anglo)



He agreed that interest rate would be in the region of 6.8%, but said the economic value was in reality much lower because the bond would be passing between State-owned institutions.

“There would be no net cash payment as the money would circle back to the exchequer,” he said

At the very least he is the first person in any position of power I have heard say that the interest does not matter. Now hopefully that means every single cent we give to IBRC in Bond Interest over the next 15 years is recovered but I doubt it.

Do we yet know what the proposed deal is with the €3.1bn prom note payment.

(1) Govt pays Anglo €3.1bn
(2) Anglo buys Govt bond – is this a new issue or does Anglo go to the market and buy extant 2025 bonds? There’s 8bn of them so a €3.1bn purchase would be market moving no? Or does the Govt issue additional debt and if so, how is it priced. As a single buyer and given we own Anglo, presumably we dictate the price
(3) What happens to the €30bn of ELA with the Central Bank. Doesn’t that get redeemed now? And if so, how does Anglo get the cash? Does it exchange the newly issued Govt bond with the ECB and pay 1% per annum on that lending?
I saw the 60 mins of presentation and questioning at the Committee but I still didn’t understand what was intended, even though Governor Honohan has raised my expectations that a deal will be done by this weekend.

@ Jagdip

new tranche of the 25s, priced at current market – 88.25 cents, and 6.8% yield. Unsure if they keep using ELA, or go direct to ECB. Suspect ELA may be maintained until the “big solution” comes about in a few months.


As always thanks!

It does make a difference what happens with the ELA does it not? If Anglo borrows €3.1bn from the ECB at 1% then that is €31m per annum (or 1/5th of a household charge!) that goes out of the country, no?

@ Paul W
“Paul W @ BW II: The set off /netting of the PNs against the CB liability would do the same.”

Paul what do you mean net a liability? So I owe the bank 100 euro and I tell the bank I am netting my collection of stamps against it. Will the bank be impressed?

Will the ECB be impressed when the CBI tells it that it is netting its stake in IBRC against the liablility?

@ Jaqdip Singh

If IBRC borrows from ECB at 1% and then pays off its ELA, the CBI will then pay down its Target2 debit account with the ECB thus saving itself 1% interest. So Ireland Inc. is neutral on this transaction and it is no different from IBRC simply replacing the PNs with the bond as collateral for ELA.

@Brian Woods II,

That being the case, then Ireland wins on this transaction by deferring the payment of €3.1bn in 2025, which when you take 2.5% compound inflation into account means we get a real reduction in debt of about 28%.

Would that be a fair characterisation?

@ Jaqdip

Re “Would that be a fair characterisation?”

Only if you accept you are liable for that debt in the first place, otherwise you get screwed with a liability you don’t owe at 78% which is 28% less than a higher liability at 100% that makes you foolishly think you are onto a bargain 🙂


May 31 is a foolish date ….. it ignores developments in other parts of the EZ

The Debate in the Bundestag is ongoing – and no way will the Bundestag have voted on this by May 31 …

See: Anglela’ Korset, The SPD/GP forced compromise, the debate on the Korset including measure for growth etc …. & [Hi Olly!] the superior Wisdom of Festina Lente in this case:

Der Spiegel International Today ….

Separately, the main opposition parties on Tuesday rejected plans by Merkel’s government to push a European pact on budget discipline, the so-called fiscal pact, through parliament by June, saying more time was needed to complement it with measures to boost growth.,1518,824104,00.html

It seems to me that this issue relates to when the government gives money to the CB to destroy it. The obvious solution for me, a naive individual, is to link this to the supply of money. If there is a lot of money, e.g. growth, inflation in Ireland etc, then you destroy some. At present there is not. So take 2050 GDP and divide it up so that some of notes fall due in good years along the way. This would in effect be an Ireland specific mechanism, exactly what we need in a currency union.

@ Jagdip

Not sure about the inflation angle. But netting everything out it seems that what is happening is that Ireland Inc. is replacing long term ESF funding with short term ELA/ECB funding. In terms of interest rates that currently looks like a win but over 13 years what will ECB funding rates average out at? Possibly not much different from current long term ESF rates.

Another gain, it seems to me, is that we have in effect extended the bail out fund. Originally the bail out fund was calculated so as to make these PN repayments. Now we are allowed to meet the PN repayments with other non-ESF loans, thus increasing the bail out facility by the back door.

@Colm, just trying to understand the deal at this stage, not judging 🙂

Why 2025 though, why not 2125?

In fact why is this even a negotiation. We own 100% of Anglo.

If we want to issue €67.5bn in bonds tomorrow redeemable in 2025 which Anglo can exchange at the ECB for 1% then we could pay back the 3.5% €67.5bn bailout from the IMF/EU/ECB, and have €67.5bn at 1% and no conditionality. We would have “reclaimed our economic sovereignty”

As I say, just tying to understand what is being proposed at this stage.

@ David O Donnell

Why can’t these dates be on a Sunday?

From yor link:

“”I’m pleased that the coalition now supports the SPD’s proposals on strengthening the rights of parliament concerning the euro bailout fund,” said SPD parliamentary manager Thomas Oppermann. He welcomed that “as a rule the whole Bundestag will decide on providing billions for the rescue of the euro.” The measures would become “more transparent and easier to understand for people,” he said.””

Why not disband the Dáil and allow the German parliament to dictate to us the terms of rescue, the full financial oversight required and the detail required to give it effect?

Re Honahan

As discussed earlier, “no net cash outlay” The disingenuousness of it all.

Suddenly the bond appears hours before a court injunction on the PN’s, does the injunction also cover the bond as well ?

Court to decide tomorrow morning

Would FF/FG/LB all troop back into the Dáil to vote in favour of the PN’s?

@ Brian Woods II

“Of course if the PNs can be replaced by some nuance or other with lower yielding government bonds it does rather suggest that a line in the sand is being drawn. As it stands the PNs are capable of making up for even more losses on the loan book. If these are replaced by low yielding bonds then the option is open to not put any further capital into IBRC in the event of further losses.”

Is IBRC forecasting a €17 Billion profit at wind up?

@ Blucher

More a case of it being wound up early, thus saving on future PN payments. Not as big as 17bn because the interest costs of ELA need to be met but yes if current valuations are correct there will be a substantial saving in terms of foregone PN payments. Put another way, if current valuations are accurate, no way do we need 48bn to wind down IBRC.

@Brian Woods II

I think the interest rate payable on the bond issued to Anglo isn’t really that important the same way the interest rate on the promissory note wasn’t.

To me the external payments to reduce ELA/ECB repo and the interest rate on those that matter the most.

You should also include the external interest payments that would have to be made if we borrowed the money now from the IMF/EU at 3.5% to make the cash payment to Anglo now.

In total I calculate the real value of the payments is 49% lower under the deferral of the payments at and inflation rate of 2.5%.

Not sure nominal GNP growth is a more suitable deflater for sovereign debt dynamics. With 2% real growth the real value of the payments is reduced by 59%

Not the Irish government will want to shout this too loudly but under the new arrangement would we be effectively borrowing from the ECB at the repo rate?

@ Brian Woods II

“if current valuations are accurate, no way do we need 48bn to wind down IBRC.”

Current valuations of property?

I’m all in favour of winding up IBRC now.

Can’t see why we are paying for all the running costs.

If the plan is that ECB roll over 3.1bn of ELA/repo – when will they finally get their money back, and on what terms. Is it

(a) 3.1bn in 2012 – i.e. this is an interim deal until all the PNs are redeemed later in the year with a loan from the EFSF. At that time all the ELA will be paid off, including this newly rolled over tranche, and replaced with a loan from the EFSF. ECB are out of the picture.

(b) 3.1bn in 2025. The March 31, 2012 tranche remains separate from whatever deal is done with the rest of the PNs. This arrangement would be equivalent to VVLTRO at the ECB repo rate. Not bad. However doesn’t square with Honohan’s “Funding such flows is not something that a central bank will normally do for any longer than is necessary” comment, or the “beyond criticism of Articles 123 and 124” one.

(c) 4.0bn approx in 2025. ECB get the same amount of money in 2025 as 3.1bn today invested in German Bunds, or an inflation-indexed bond. Since sovereign bonds owned by or pledged to the ECB are de facto super-senior to any other sovereign bonds, no country-specific risk premium is considered. Could well be argued as “fair value”.

(d) 7.3bn approx in 2025. ECB get the same amount of money in 2025 as 3.1bn today invested in Irish bonds at the current market rate, or those of a country with similar risk profile to Ireland.

(e) none of the above

@ Dreaded

I think your spreadsheets are not correct. In the current situation the 3.1bn does not represent a cashflow today. That is because we are borrowing the money. So the current cashflow arrangement is a 3.1bn loan from the EFSF at 3.5% lets say for 7 years. Discounting at 4.5% gives a figure slightly less than 3.1bn.

The new arrangement is more difficult to quantify. Again no cashflow today but we have replaced EFSF medium term funding with ECB short term funding, to be constantly rolled over. This does not really lend itself to a spreadsheet calculation for we don’t know what the course of ECB rates will be over the next 13 years.

Theorists would posit that we have “swapped” 3.5% Fixed 7 Year for ECB Floating. Maybe BEB can help here but I am not at all sure who benefits from that swap. If 7 year swap rates are below 3.5% then in theory we are better off and vice versa.

Either way it is very marginal. The main win is that we have put the payback beyond the normal term of market funding and so the markets can ignore it, thus increasing the possibility of re-entry. In addition we have got an extra few months out of the current bail-out fund by the back door.

In any event, I don’t see any significant NPV win here.

On another point, clearly with only a marginal drop in the effective coupon rate, we haven’t really reduced our exposure to further horrors at IBRC.


I would therefore argue that we benefit from this situation: 7yr IRS vs 1mth (ie as close as you’re gonna get to an “ECB rate projection”, although somewhat messed up in short term due to LTRO effect) is 1.61% at the moment.

13yr swap vs 1mth is around 2.35%, fwiw (ie vs the 2025 bond redemption)


Thanks. So we can have a stab at the market assessment of the NPV pick-up. It is about 2% p.a. for 7 years. Let’s say 10% overall.


I think I recall you drawing attention to the irony of us not being able to access LTRO because our banks have already been recapitalised. Access to 3yr LTRO 1% also highlighted here:'s-ela-118447

@Brian Woods 11

Look forward to analysis of NPV swap components of the giveaway they decide this weekend.

The Irish zombie economy looks doomed from whichever vantage point you pick.

“ECB-eligible collateral” just wondering how this collateral is defined and determined?

Link above should be:’s-ela-118447

If you look at the list of elegible collateral, you see

“Debt instruments issued by Central Banks”

Can’t see why the PN’s under the above criteria cannot qualify. If so, why cant we get the 3 yr LTRO other EZ banks have access to ?

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