Low-cost funding

Minister Noonan’s comments today, as reported by the Irish Times, are worth noting:

Mr Noonan has indicated he may ultimately seek to use the euro zone’s bailout fund to refinance the cost of bailing out Anglo.

“The ECB would favour that because it would improve their collateral significantly,” Mr Noonan said. “But that would be of little use to Ireland unless we got the commitment to ongoing medium term low-cost funding from the ECB.”

I think this is very important (although I would say eurosystem rather than ECB in the last sentence).   Whatever you think of the Anglo/INBS bailout’s, as a financing mechanism the promissory notes/ELA are an excellent deal (with an ultimate interest rate to the State estimated at 1 percent after factoring in CBI profits that go to the Exchequer).   The problem is that we have to pay them down relatively quickly (creating large near-term funding needs as well as giving up a low interest rate), so we want to restructure to lengthen the term.   The ECB sees the arrangement as too close to monetary financing for comfort to begin with. 

There is a danager that restucturing — of whatever kind is on offer — becomes a political imperative.   One wrinkle is that the commitment to keep the ELA in place in a way that is consistent with even the current promissory note repayment schedule might be a bit shaky.  There might be a role for the EFSF/ESM to shore things up.   But any such restructuring must not lose sight of the extremely low interest rate we currently have.

143 thoughts on “Low-cost funding”

  1. Excellent post John, think the Noonan comments this morning got lost in the general promissory note deal scepticism today. Yesterday’s deal was about maintaining cashflow, but bigger deal will have to have equal emphasis on long term funding costs (which, in fairness, even the EU guys have indicated an understanding of so far)

  2. In moving on to the next ‘renegotiation’ in the news cycle, would it be possible for people to note

    a) the size of the efsf and esm
    b) the attitude of the Germans and other core contributors
    c) the size of Spain
    d) the size of Italy
    e) the size of Portugal
    f) the speculation Greece is going to restructure again
    g) Ireland is marketing itself as a successful; bailout country about to return to the markets.

  3. “One wrinkle is that the commitment to keep the ELA in place in a way that is consistent with even the current promissory note repayment schedule might be a bit shaky.”

    I would say it is extremely shaky. Six months of negotiating for zilch. The ECB statement says it all…we note what your doing and will turn a blind eye this time…but you better stick to the schedule on the PNs.

    As Eoin notes on the other thread..what will happen when BOI want their dosh back in a year from now? And another 3.1 b will be due.
    I wonder how the chief risk officer in BOI assessed this exposure. The risks of external shocks are many….the possibility of a no vote in the referendum is but one. I think Grumpy covered the bases above. Greece is a near certainty for a third bailout. The new bonds are worse than the old ones
    We live in interesting times…..

  4. What a load of codology rubbish. Re “promissory notes/ELA are an excellent deal ” ¢47 bn of odious debt excellence with no restructuring, ‘excellent’… Re “The problem is that we have to pay them down relatively quickly…”

    Nope, the problem is we have to pay them at all. For an Irish economist to suggest it can be repaid, I’d like to see the budgetary data you have to base this false assumption on.

    Re ” There is a danager that restucturing — of whatever kind is on offer — becomes a political imperative. ” What a deluded notion? Do ye hear that, Enda, don’t be making waves in support of any demands to restructure Ireland’s debt, binn béal i do thost.

    Where are you Morgan Kelly?

    The above deluded, to use Bond’s favorite cliché, Stockholm Syndrome, needs me to invent a neologism, vassalism. This is a term denoting economic vandalism and hooliganism that will destroy the economy.

    Ahh, tis worth a good laugh 🙂

  5. @Colm

    I don’t want to get into an argument. But I did make it clear that I was talking about the financing mechanism not the decision to take on the bank debt in the first place. I appreciate that you have strong views, but could you tone it down a bit?

  6. Thanks for another thoughtful post, John.

    The Irish Times article sums up the government approach which I think is reasonable; it relates to financing costs/deferral rather than write off.

    Regarding the current deal, there is no postponement of cash outflow. The government owes money. If the 3.06 billion is not paid it is not borrowing from the source that it originally planned, but the issue of the bond means that it is borrowing from somewhere else (ultimately Bank of Ireland).

    The real question is: has the State’s financing cost been reduced. Has the new financing method reduced the cost of borrowing?

    Leaving aside the transaction with NAMA which is temporary, the relevant questions are:

    1) what are the interests costs the State pays to Bank of Ireland.
    2) what interest costs was it going to pay to finance the 3.06 billion in the absence of the Bank of Ireland loan.
    3) assuming that Bank of Ireland borrows (using the govt bond as collateral) at 1% the profit is the revenue it makes from the State less the 1%. Of course, the State is entitled to 15% of Bank of Ireland, so the cost to the State is reduced by 15% of Bank of Ireland’s profits.

    If my understanding is correct it would be good to have an answer to these questions.

  7. @John Martin

    Good questions:

    My understanding:

    1) The interest rate being paid to BoI is 2.35 percent.
    2) The cash transfer to IBRC would have been financed by drawing down on the bailout funds, which have an average interest rate of 3.5 percent.
    3) What you say sounds reasonable, but there also is the thorny issue of risk.

    You might be interested in this comment that I made on Philip’s thread on the subject last night:

    Still trying to get my head around it.

    I think it is useful to stand back and think about what was hoped — or at least I hoped — would happen.

    Just looking at this year’s PN payment, the simplest case is that it would have been deferred for a significant period of time and relatedly the ELA to IBRC extended. This would have been welcome on two fronts: (i) it would have improved the State’s funding profile; and (ii) the ultimate cost of the ELA to the State is low (Karl Whelan has estimated that it is 1 percent after factoring in CBI profits). It always seemed a stretch that the ECB would agree to something like this, but hopes were raised.

    As best I can understand it, the current deal only defers the cash call for one year. Since we are funded until the end of 2013, this does not seem to help the funding profile much. Relative to status quo of making the payment on the PN, the Government could build up cash balances for a year (earning some low rate of return) or delay drawdowns from the bailout fund (saving on interest costs). On the cost side, the interest rate cost is the 2.35 percent that will be paid to BoI, which is higer than the ultimate interest rate cost on the ELA that will be paid down.

    So compared to the simple scenario hoped for above, the announcement today strikes me as something of a disappointment. Of course, we can still hope that it is only an interim measure and negotiations will continue. But it also seems the ECB is taking quite a hard line on extending ELA beyond what was agreed with the PN repayment schedule.

  8. @ John McHale

    Noonan has stated that this “deal” will add €90mln to the state’s deficit.

    Would you please kindly provide a very rough estimate of the actual TOTAL cost to the state of this “excellent deal” over the next 12 months? I.e. cost if the transaction, value of the bond in 12 months etc?

  9. @John

    “….(although I would say eurosystem rather than ECB in the last sentence). ”

    IMHO that subtle distinction is very important and I think Minister Noonan had that in mind when he made his statement last week (during which he also clarified that the result of the forthcoming referendum would not effect our ability to access funds under the current programme) to the Dail.

    I do not “do links” but Minister Noonanś statement to the Dail last week is on one of the recent threads here with accompanying comments.

    After reading Minister Noonans speech last week to the Dail and reading the comments I speculated then that Noonan and Co had decided to play “hard ball” with the ECB last weekend when the minister emphasised, in last weeks statement to the Dail, that Ireland has “friends” throughout the EU.

    It would not surprise if that is what Noonan and Co (as well as others in Ireland , thoughout Europe and most probably elsewhere) have done.

    Since the referendum is nine weeks away I doubt this particular episode will have much impact on voters eventual decisions. However I would guess the 31st March deadline was looming larger in most peoples minds than the May 31st referendum.

    Obviously Ministers have to be diplomatic but IMHO there are a lot straightforward “clues” from Ministers Noonan`s statement to the Dail last week, his statement to the Dail yesterday and his responses today to various questions including ones about the ECB response to the latest developments.

    I believe Stephen Kinsella has expressed sympathy (on the previous thread) for journalists who are trying to understand all of this and communicate it to the general public. 🙂

  10. @Tim

    To add to the complications, we have the difference between accrual and cash accounting and also the narrower general government balance and some broader consolidated State balance sheet (that would include IBRC).

    My understanding is that the €90 million refers is the addition to the 2012 General Government deficit (which is mesaured on an accrual basis). The cash payment to IBRC under the terms of the promissory note would have been funded by drawing down from the bailout funds at an average interest rate of 3.5 percent. My understanding is that the interest rate on the new replacement bond is 6.8 percent. So there is a higher cost in General Government deficit terms, with the difference in interest payments over the remaining 9 months of 2012 being approximately €90 million.

    Not surprisingly, complexities arise when we take a broader, consolidated view of the State. For example, the “ultimate” cheapness of the financing arrangement because of the low interest rate on the ELA does not show up in terms of the General Government Balance. So it is important not to over interpret the impact on this balance. My response to John Martin above attempts to get at the impact from the more consolidated viewpoint.

  11. @John McHale

    Is the additional 410m in bonds that have to be issued not a cost to the State?

  12. @ John

    If the cost of the bond is 2.35% and the bailout funds cost 3.5%, then the saving from the cheaper finance are 1.15% x 3.06 billion. (I’m assuming the Bank of Ireland bond is redeemable on 31/3/13).

    Since we own 15% of Bank of Ireland we also gain from the profit that Bank of Ireland makes on the transaction. This is (2.35% – 1%) x 15% x 3.06 bn.

    This gives a total savings of interest of 76.5 million. Very small in overall terms, but not nothing.

    I’m not sure that I understand the point about risk costs.

  13. @Ceterisparibus

    I hope I am answering the right question, but I think you are referring to the necessary increase in face value of the bond required (given the coupon) to achieve the 6.8 percent yield. I don’t see any additonal source of cost for the GGB beyond the 6.8 percent factored in above. Sorry if I have misinterpreted your question.

  14. Totally off topic, so feel free to delte john if you feel it out of order:

    I had a dream that a group of Irish Economists set up the ‘Punt Nua’. There were even bank branches, which were more like credit union offices. They issued it on a 2 (loans) to one (deposits) basis and eventually raised to 3 to 1 once confidence developed.

    The country got behind the whole thing, it was kept along side the euro, there was a wave of national togetherness around it, a similar feeling swept the country to the one that grabs it during a soccer world cup. Local shop keepers loved it. There was a fixed exchange with the euro but few really exchanged it once confidence built up.

    One issue, is anyone aware of the legal issues surrounding the state and/or a group of individuals setting up another currency?

  15. @ CeterisParibus

    I think technically it does add to GGB. Of course since IBRC is in State ownership it is merely an internal debt between two arms of the State. But if IBRC were to sell to a third party that would make the debt real.

  16. @John Mc Hale
    Thank for reply.
    I am still perplexed. If we have to increase government debt by 410m (the necessary increase in face value) it adds to the debt pile. In my simplistic way,
    We had 3.06 b face value of a PN due 31.3.12…. Now we have a government bond with a face value of 3.47b due 2025.
    That bond will pay interest of 5.4% for 13 years.
    Or have I got it wrong?

  17. Was it the Bard who coined “full of sound and fury signifying nothing”? What we have found from this fiasco which has ended in a contorted arrangement which keeps all the totems in place is that there is no grand win available here. Talk of simply tearing up those PNs seem so far removed form reality now.

  18. Excellent post – wish I could understand it..!

    So IBRC owes €x to a variety of people. It must pay €x Isnt the straightforward way to do this is for the Irish govt to pay off the x itself borrowing from the EFSF. Problem solved. Instead we have a ridiculously convoluted system – why?
    I think that if they couldn’t come up with the easy solution now they’ll never do it. The idea is to involve as many banks as possible so that they can all profit on interest. So Mario will continue to plumb for the complex route because it involves private banks lending to sovereigns who are bound to pay.
    That’s my take on it and might be way off the mark.
    All in all this isn’t great

  19. @ John McH I think that those expecting “restucturing — of whatever kind is on offer” will continue to be disappointed….This is nothing and will be nothing “on offer”, without more.

    There was nothing of significance achieved on the PN, not even a significant liquity advantage. Full stop. It’s just another slap down from Europe.

    However, could you please clarify the following statement for me: “The ECB would favour that [use of the EZ’s bailout fund] because it would improve their collateral significantly”. Any collateral will likely be Govt bonds or similar and that wouldn’t improve anything much in a collateral, credit risk context..? Or is the collateral here a potential ref to the trackers?

    The trackers and getting them off the banks’ BS seems to have been totally dropped……If now out of the picture, that is another major “disappointment”.

  20. All the hype about this restructuring being a success is a bit like the spin they are trying trying to put on the household charge thing..a million households to go and the Minister is predicting success.

  21. Whatever about the BS from the politicians, Patrick Honohan’s performance on the PN restructuring of the other day is deserving of derision.

  22. @Paul
    M.Noonan.
    “He said the promissory notes arrangement was complicated because it was “of their nature.”

    It would make you cry. The simplest financial instrument ever. It only get complicated when you don’t want to pay it.

    Unadulterated BS.

  23. @Ceterisparibus

    “a million households to go and the Minister is predicting success.”

    I’m told that the story to be pumped out tonight and in the papers tomorrow is one of everyone will be doing it at the last minute (plus spell out consequences of not doing so and big it up a bit).

    That’s one hot interweb server at propertytax.ie tomorrow 🙂

  24. @kevin d

    “The idea is that a country like Ireland or Greece could issue bonds which, in the event of default, could be used to pay taxes in the issuing country. This means that if Greece issued a 10,000 euro bond, and suddenly found itself unable to meet an interest payment, the holder of the bond could then sell it to a person or corporation who owed Greece taxes. It would be worth 10,000 euros as a tax payment, so the holder of the bond would then presumably be able to sell it for pretty close to 10,000 euros.”

    Some of us have tried to get interest in this sort of thing going before (I’ve pointed out that satisfying an Irish tax bill by tendering Irish government bonds at par has been done in the past) – but it doesn’t seem to gain traction. Possibly at least in part because a parallel currency, in a country with high domestic costs and payroll in which no one will ‘adjust’ further, is could pull the rug right out from under the Croke Park Agreement.

    It would be complicated (unlike, say, promissory notes), could undermine TD’s pay years before it would happen under Plan A, so it is best ignored.

  25. @Ceterisuparibus

    My answer above only focued on the impact on the GGB. You are right, I think, when you note that the higher bond value (relative to the promissory note payment) adds to the General Government Debt. But in a way this shows the limitations of a point-time value of the General Government Debt as a meaure of the burden of debt. It does not take into account the average interest rate on the outstanding debt. The evolution of the debt path over time will be affected by this average interest rate, however. In terms of the true (present) value of a given bond liability, a higher face value with a lower coupon rate can have the same value as a lower face value with a higher coupon rate. So the additional €410 million in face value given the below market yield on the bond, while increasing the face value of outstanding debt, does not, as far as I can see, increase the real burden of that bond compared to issuing €3.1 billion at the current market yield of 6.8 percent. So I don’t see the additional €410 million as a first order cause for concern.

    My colleague Aidan Kane is an expert on the Government accounts. Maybe Aidan you could weigh in if you see this.

  26. @ Kevin Donoghue

    Even simpler than a ‘dual currency’ sounds too good to be implementable.

  27. @ J McH

    I agree. But optics seem to matter here. 100 GGD at 4% might be seen to be worse than 50 a6 8% even though they are equal. (Highly stylised example of course, which I could make more precise)

  28. So much hyperventilating over a non issue. They only way we will get agreement from EZ for restructuring us if we cut public service pay and rations by a big % to below that of our peers. We also have to make the average household pay the full economic costs of the services it receives.
    Failing that, we go unilateral & end up at same point.

  29. @Paul W

    ‘However, could you please clarify the following statement for me: “The ECB would favour that [use of the EZ’s bailout fund] because it would improve their collateral significantly”. Any collateral will likely be Govt bonds or similar and that wouldn’t improve anything much in a collateral, credit risk context..? Or is the collateral here a potential ref to the trackers?’

    This is an interesting one. I don’t think that the ECB’s concern with promissory note collateral is one of risk. It is because these are Government paper issued expressly to tap the ELA. While banks use Government paper to tap central bank funding all the time, I think the ECB sees this arrangement as too close to monetary financing for comfort. That is why they want the ELA paid off as scheduled — and unfortunately maybe even faster than implied by the current promissory note payment schedule.

    Of course, that is the ECB perspective (or at least my perception of it). From Ireland’s point of view the promissory note/ELA arrangement is a very cheap source of funding. That is why many of us hoped that the term could be extended (that and the high value of liquidity given the challenges of returning to the market with a still large deficit and significant rollover requirements). Yesterday’s annoucement was a disappoint in that regard. The point of the post is to stress that we should be wary of accelerating the ELA repayment schedule that we have. That, in turn, is why I am wary of refinancing the promissory notes and paying down the ELA with a loan from the EFSF/ESM. While the funding costs on the bailout funds are low, they are not 1 percent. Yes, the ECB would be delighted to eliminate the “suspect” promissory note collateral, but we should, at least, strive to hold onto the low-cost funding that we have.

    I again stress the wrinkle that the ELA repayment schedule is not secure; the ECB could demand a much faster repayment schedule, though they do not seem to be in a strong position to demand this given the likely consequences. So I can see from a Government perspective the trade-off in the security of more secure funding — and indeed the advanages of significantly improving the funding profile with a long-term loan from the EFSF/ESM — but, on the other side, the advantage of the low-cost funding should not be forgotten (and the quote from the Minister suggests that it is not being forgotten). The reason for the post is that with all the complexities involved the ultimate cheapness of the promissory note/ELA arrangement can get obscured. Some time ago I used the analogy of the advice given to the holders of tracker mortgages — think hard before ever giving up a tracker.

  30. But are we agreed that the bond that the govt bond issued to IBRC is largely irrelevant (aside from accounting presentation purposes).

    In real terms what has happened is that the IBRC has paid for the 3.06 billion in ELA by borrowing from Bank of Ireland.

    The Bank of Ireland has borrowed ELA to pay IBRC.

    The final outcome (once the NAMA transactions are sorted out) is that the ELA that was owed by IBRC is now owed by Bank of Ireland.

    My conclusion is that it’s not a bad deal for the Irish State, but not a game changer.

  31. John,
    Is it not better than that. ELA down 3bn for which the Irish CB is on the hook (=us), Normal Repo up 3bn – EZ jointly liable. Have we not laid off some of the bet.

  32. Thanks for that Tull.

    I’m assuming that Bank of Ireland is borrowing from the ECB at 1%. The normal repo rate is the same as the ELA rate.

  33. @John Martin

    Sorry, I didn’t get a chance to respond to your earlier question.

    In assessing what was done yesterday, the counterfactual is important. Compared to simply extending this year’s promissory note (and the ELA that it would have paid down) for a significant term, the annoucement was disappointing. But you are right that compared to simply making the promissory note payment by drawing down from the bailout fund there is some saving.

    In terms of how the annoucement affects our funding profile, I think it is even more disappointing. Given that we funded until the end of 2013, just getting this loan from BoI that we repay in a year does not help. Now it is possible that it could be repeated; it is an option to tap captive banks for funding on a repeated basis, though not necessarily a good idea. Having said that, this seems to be partly what lies behind the ECB’s own thinking for introducing the massive LTRO, even if this is not stated explicitly.

  34. @John McHale
    Thanks for the clarification.
    We are essentially in agreement.

    @Tull
    Good point…that’s why they are mega peed off.
    They only agreed when faced with a default. I wondered what MN was up to on Wednesday when he interrupted the Dail with his announcement.
    Maybe I didn’t give him enough credit.

  35. @Tull

    That is a valid point. But I would see the short-term (within a year) default risk on either the ELA or the bond now held by BoI as very low. So maybe just a smidgen better.

  36. @ J McH

    There is no requirement whatsover for the government to cough up 3.1Bn in a years time. There is a requirement for IBRC to refinance its government bond. That should not be a problem.

  37. @ J McH. Thanks for that. Yes, it does appear that the ECB wants the existing arrangement rolled into the mainstream EFSF/ESM fund. MN does appear to be cognisant of the need to retain the cheaper funding. Mr Noonan said. “But that would be of little use to Ireland unless we got the commitment to ongoing medium term low-cost funding from the ECB.” Glad to see that.

    @ BW II The refinancing risk is not necessarily inconsequential /a slam dunk. Anything /much can happen of course in the meantime to make that into a real issue. My understanding is that the Govt has guaranteed everone’s counterparty obligations, including the IBRC…so it may yet become a direct Govt. liquidity issue.

  38. Brian I think you are only a bit right. Financing is dependent really on BOI agreeing as another likely candidate is not immediately apparent, and continued accommodative ECB policy – which seems likely – assuming the 2/3rds of the GC don’t want ELA being used.

    It is an interesting question as to the market price effect of this. You have extra supply of gilts as a result, but you have a similar reduction in issuance likely in 2014 – that is if you believe there will be any, rather than ESM funding.

  39. Does anybody else find these 4 year debates absurd ?
    Its been 4 years now FOUR

    The problem with our politicians me thinks is a distinct lack of gravitas.

    Although Charlie boy got us into this mess he did have that quality at least.

    “He thought me a great deal ….. do nothing do absolutely nothing.”

    No Guts no Glory
    No Liathordi no Loans (interest free)

    I waiting for a leader that just does not care what other people think of him.
    It will be a while I guess.
    http://www.youtube.com/watch?v=ImUIMCFx–w

  40. And just to make things more difficult the Bundesbank weighs in….

    “In this context, the Bundesbank has become the first of the eurozone’s 17 central banks to refuse these countries’ bonds as collateral, according to a report in Friday’s Frankfurter Allgemeine Zeitung. This means that as of May, the German central bank will cease to lend to commercial banks that use Greek, Irish or Portuguese bonds as collateral.

    The German daily adds that the Bundesbank has just under 500 million euros invested in Greek, Irish and Portuguese bonds.”

    That ECB ruling allowing national CBs to refuse bonds was thought to be of little consequence…but it now appears otherwise.

  41. We should forget all the who pays who nonsense.
    New Irish Govt bond costs 6.8% (yield)
    BOI cost to fund it 2.35%
    Total 9.15%

    This to replace ELA of 1%, a cost that all European banks are borrowing at. This is nuts.
    Both Noonan and Honohan should be asked to resign.

    All this so that we get another year to pay it 3.06 billion for a dead bank that the State never owned.
    This is not a joke.
    Ireland is being pummelled by Europe.

    @Ceteris
    re Bundesbank not lending to any bank that has Irish, Greek or Portuguese bonds. Where does this info come from?
    This is crazy stuff.
    The Bundebank is clearly at war with the peripherals.
    The only way out is for Ireland to force back all foreign financial assets.
    This is a war and we are losing every battle.

  42. Not sure if the man is buried in North Cork……… if so we can splice and dice his bones with a certain Corsican Genoese family and see what comes out the other end……
    A leader perhaps ?
    http://www.youtube.com/watch?v=I1BASXIpJPg
    or at least Captain Billy Bones played as a Glaswegian thug

    Freedom is just another word for nothing left to lose.

  43. @ Joseph Ryan

    Dude seriously, you have the maths all wrong. Net cost additional cost to the state is 1.35% vs promissory note.

    Irish government pays 6.8% to Anglo
    Of this 6.8%, Anglo gives 2.35% of it to BOI
    Of this 2.35%, BOI gives 1% to ECB

    I don’t know where the confusion is.

  44. @Bond
    Do you ever get tired of it , I mean you know your stuff and all but do you ever really get tired of it ?
    This is not a branch of economics we are talking about here – this is a very advanced crypt of criminology.
    Maybe we should do Cranial examinations of central bankers or something – to see if there is a underlying cause & pattern to this manic criminal behaviour.
    The remaining Physical & human capital(theres not much remaining anyhow) will be destroyed to sustain a stock of metaphysical capital.
    Something is rotten in this state of chassis don’t you think ?

  45. Don’t you just love it….Maybe it’ll be the Germans that blink first (I’m losing faith in any ability of the Irish to learn or play poker properly):

    http://www.zerohedge.com/news/european-bailout-stigma-shifts-banks-sovereigns-bundesbank-refuses-pig-collateral

    @CP (….actually, All) Thinking Out Of The Box: Change of strategy….Instead of selective default (with medium-term strategy), perhaps Ireland should go for “first mover” advantage, grab as much EFSF/ESM funding as possible before it all falls apart…soonest….get as much liquidity through the door and hold on for dear life! If we’re voting for continuing EU “super-welfare”, may as well go all in…! Play to Irish talents and all that.

  46. @Paul W
    Noticed the Lisbon to Madrid high speed line has been cancelled to save money but not kerosene which is now officially a metaphysical liquid according to the ECBs Cardinals.
    From the railway gazette

    PORTUGAL: The Ministry of Economy & Employment announced on March 21 that the country’s high speed programme had been ‘definitively abandoned’.

    This followed a ruling by the Court of Auditors that the concession awarded to the ELOS consortium to build the eastern section of the Lisboa – Madrid route between Poceirão and Caia should be rescinded.

    According to the ministry, the court had found the contract to contain ‘illegal clauses’, citing ‘irregularities’ in both the concession and the process by which it had been awarded by the previous administration. From the government’s perspective, the ruling puts an end to the controversy over high speed in Portugal, and it would examine the judgement in detail to determine the legal and financial consequences in terms of ‘defending the public interest and that of Portuguese taxpayers’”

    This follows from RWE & EONs spectacular defection from UK nuclear.
    We are now dealing with a onrushing physical breakdown crisis of immense size & scope as nearly all resourses were given to a mountain of useless bond credit grot which by itself did not effect immediate demand.

  47. Seriously, if the collapse (or at least dysfunction) of the EFSF/ESM fund becomes (more) likely, is it in Ireland’s best interests to lay off the liability (as Tull alludes to) soonest rather than stay in the ELA /PN arrangement? While cheaper, the ELA /PN arrangement puts all the risk on our own doorstep…which (in a shadlow market context) is why perhaps it is (inadvertently) “cheaper”? Is it worth the reduced cof to have the ELA /PN risk firmly and directly on Ireland’s balance sheet? Or should we be “smart”like the Germans and diversify the risk asap? (John, I know /sense you’re enoying this one!)

    J McH says “we should be wary of accelerating the ELA repayment schedule that we have.” We should be wary /thoughtful on this, yes…..but the risk /reward analysis here is not as simple as it seems….

  48. @Paul W

    “From Bloomberg: “Germany’s Bundesbank is the first of the 17 euro-area central banks to refuse to accept as collateral bank bonds guaranteed by member states receiving aid from the European Union and the International Monetary Fund, Frankfurter Allgemeine Zeitung reported.” And where Buba goes, everyone else is soon to follow. ”

    Worrying!

  49. I have a few problems with all this repositioning. For the most part nothing has changed. There has been a quick paint job and a new logo stamped on things but beyond that ?.
    As to that sonking great 2/3 of a trillion. This might have helped had it formed when Obama was enchanting dollars a few years ago, but all this has done is provide a pot for the next dip in the US economy and will vanish onto the balance sheets of US banks never to be seen again, leaving only debts on this side of the Atlantic. It was bad enough that Europe made real the Federal Reserves print run a few years ago with an insane unwillingness to recognize that inflation is only bad when you don’t control it. But to compound it with this crazed lunacy. Has anyone at the ECB asked where the cash will end up beyond filling bank reserves.

  50. @Paul W/Vincent

    It looks like Weidmann is battening down the hatches and is intent on restricting money supply ( LTRO) from infecting the German economy. At least that is what the gurus over at the Telegraph are saying. That coupled with the latest news regarding restricting banks (German) from dumping their dodgy bonds on the Bundesbank appears to suggest that Weidmann doesn’t give a rats as long as Germany is protected.

  51. Bond. Eoin Bond
    re
    “Dude seriously, you have the maths all wrong….”

    With respect @Bond. Eoin Bond, I do not have the maths wrong.
    I said nothing about the additional cost to the State.
    The cost to the State of these new funds is as above.

    New Irish Govt bond costs 6.8% (yield)
    BOI cost to fund cash bond 2.35%
    Total 9.15%

    That is why Minister Noonan and Prof Honohan should resign.
    My humble opinion is that the NTMA could have got one year funds for a lot less.
    The Troika money to fund the bond would have cost ~5%.

  52. @The Dork of Cork

    “Maybe we should do Cranial examinations of central bankers or something ”

    I would like to see a comparison with soccer stars. I’m convinced both would be in jail/criminals if it weren’t for the saving grace of their ‘work’ being able to channel them into something else.

  53. @ Dork
    ‘The remaining Physical & human capital (there’s not much remaining anyhow) will be destroyed to sustain a stock of metaphysical capital’

    I don’t think the material/metaphysical distinction is quite the right one. What we are looking at here is the limits of a Smithian commodity economy, where some of the most valuable commodities are intellectual rather than physical.

    We are also seeing the crumbling of the economic and existential barriers between the developed and developing worlds, which is liable to be unnecessarily chaotic if it’s not recognized for the advance that it is.

    Centralised state socialism turned out to be a dead end, and a savage one in many cases, so it’s anyone’s guess where we go next. The credit bubble is liable to lead us back to the forms of debt peonage which are so brilliantly described by David Graber in ‘Debt: the first 500 years’.

    The orthodox analyses of the finance sector will accordingly make less and less ‘sense’ as the crisis progresses. This PN debate is probably unintelligible to most citizens. I suspect that the solutions, if any will come from a reintegration of sociology and economics.

    As an illustration, the Soviets and the US have utilized the most sophisticated technology in Afghanistan, but their level of sociopolitical intervention has been pathetic. Many of the individual occupiers were well aware of that, but had no voice to influence the policy. When we ask whose interests are served by a manifestly inadequate policy/ideology, we are starting to focus on the right place. This is war as theatre, with Wall St producers, as much as a theatre of war.

    As you tirelessly point out, financial sector vested interests are not the same as the interests of the society. The dominance of sectoral interests over government is the very definition of tyranny, a fact which operatives in the financial sector really ought to consider. Goldman Sachs is nothing without its counterparties.

    I don’t want to burden the post with a very lengthy reference, but we need to find less toxic, destructive ways to order our obligations to each other. Albert Hirschman argued in ‘The passions and the interests’ that rational economic calculation was welcomed as an advance on warfare and debts of honour. When that process leads eventually to the sort of blind alley which you describe, methinks it’s time to get off the bus. That is, in a confused way, what the 60s were all about.

    ‘An important notion in Mauss’ conceptualisation of gift exchange is what Gregory (1982, 1997) refers to as “inalienability”. In a commodity economy there is a strong distinction between objects and persons through the notion of private property. Objects are sold, meaning that the ownership rights are fully transferred to the new owner. The object has thereby become “alienated” from its original owner.
    In a gift economy, however, the objects that are given are inalienated from the givers; they are “loaned rather than sold and ceded”. It is the fact that the identity of the giver is invariably bound up with the object given that causes the gift to have a power which compels the recipient to reciprocate. Because gifts are inalienable they must be returned; the act of giving creates a gift-debt that has to be repaid. Because of this, the notion of an expected return of the gift creates a relationship over time between two individuals. In other words, through gift-giving a social bond evolves that is assumed to continue through space and time until the future moment of exchange.
    Gift exchange therefore leads to a mutual interdependence between giver and receiver. According to Mauss, the “free” gift that is not returned is a contradiction because it cannot create social ties. Following the Durkheimian quest for understanding social cohesion through the concept of solidarity, Mauss’s argument is that solidarity is achieved through the social bonds created by gift exchange’

    http://en.wikipedia.org/wiki/Marcel_Mauss

  54. @ PR Guy

    I would like to see a comparison with soccer stars.

    There is a small Emirate most people will not ever have heard about, it is called Ras al-Chaima. It’s ruler Saud Bin Sakr al-Kazimi, and the President of Real Madrid Florentino Perez, announced in a press conference, the project of the Real Madrid resort Island, cost estimated at around 1 billion USD, opening projected for 2015.

    An artificial Island on 50 hectare equipped with everything that money can buy shall attract over a million visitors per year, the Emirate itself has 300,000 citizens. Of course the main company to manage the project, the RAK Marjan Island Football Investment fund, was established in Luxembourg.

  55. @ Tullmacadoo

    So much hyperventilating over a non issue…

    Stephen Collins says in The Irish Times today: ‘Some easing of the terms of the bank debt would certainly be helpful, but it is not going to be written down or written off.’

    Shouldn’t the focus be on what should be done domestically when the likelihood of no real growth for several years is in prospect?

    Keeping the fingers crossed seems to be the default mode rather than seriously culling the sacred cows.

    The German Chamber of Commerce and Industry, or DIHK, this month called for Chancellor Angela Merkel’s pay to be raised to €500,000 from €194,000.

    According to The Irish Independent this month, the head of the Rehab charity is on a basic of €234,000 plus bonus, pension etc. Charity begins at home!

    The Rehab chairman told the minister of health that the CEO’s remuneration was “not a matter in which you have a role” as her salary was funded from money raised from other commercial sources rather than out of the €36m the charity received from the State last year.

    Remember when RTÉ used to display teh same arrogance and argue that it was advertising income that was used to pay big salaries?

    The outlook for triple-A rated Netherlands illustrates how scary the current situation is.

    CPB, its leading economics institute, says the economy will shrink 0.75% in 2012. A slight recovery is forecast for the following years: a growth in GDP of 1.25% in 2013, and of 1.5% in both 2014 and 2015.

    “With two recessions in a short period of time, the economy will not exceed the first quarter of 2008 level until 2014. This means that on balance, the Dutch economy will not have grown for six years. With the exception of World War II, this has not happened since the global crisis during the 1930’s. At the time, it was not until 1936 that the GDP volume exceeded the 1929 level.”

  56. Talking about dodgy maths.

    My calculation of yesterday (4.19pm) is wrong.

    The total figure is a savings of 41.4 million.

  57. @ Paul Quigley

    financial sector vested interests are not the same as the interests of the society.

    When in 2009 politicos in Europe and the US took to the stage and mumbled their mantra to a shell shocked audience, over and over again, “Too big to fail shall never happen again!”, they injected some hope.

    Unreasonable hope as the reality in 2012 has turned out to be a very different one.

    What we witnessed instead was power grabbing authoritarian politics, unelected and unaccountable central bankers forcing politics and unelected technocratic puppet governments took over. The architects of this “silent Coup d’État” as Juergen Habermas described it righteously had gang raped the very essence of democracy.

    What we witness is an engineered process and nothing less.

    I think you are very right to point out the ethics of solidarity.

    Habermas put it this way:
    Under the pragmatic presuppositions of an inclusive and noncoercive rational discourse among free and equal participants, everyone is required to take the perspective of everyone else, and thus project herself into the understandings of self and world of all others; from this interlocking of perspectives there emerges an ideally extended we-perspective from which all can test in common whether they wish to make a controversial norm the basis of their shared practice; and this should include mutual criticism of the appropriateness of the languages in terms of which situations and needs are interpreted. In the course of successfully taken abstractions, the core of generalizable interests can then emerge step by step.

    Take one good long look to Greece.

    What an unethical and preposterous disgrace these architects have caused!

  58. @ Joseph

    You seem to be ignoring the entire income stream accruing to Anglo, and yet still counting all their costs. Any chance a net cost would be a tad more accurate and useful?

  59. @Paul Q.
    As you know the UK was first out of the blocks with the decapitalisation of wealth with its destruction of its boffin culture.
    The continent was not that far behind in the 1980s.

    Witness the UKs sad Nuclear position – it now has no more levers to pull as it destroyed them all.
    It must now rely on EDF which is a sad shadow of itself since it became a limited liability corporation.
    It is struggling to build 2 nuclear stations in a decade when in its prime it was making 2+ a year.
    The Banks will seek to save metaphysical money by cancelling high speed rail………..skills will be lost …………the price of jet kerosene will rise and Madrid and Lisbon will drift further apart.

    The capital recycling loop was cut many years ago to service interest on overvalued fiat……..it now looks like basic life support is next on the chopping block – the banks will then claim there is no demand so why invest in capital ? and so on until there will be nothing remaining but a mountain of paper claims on non existent capital.

  60. @Bond. Eoin Bond.

    The cost to the State of the new funds is 9.15%.
    Ireland entered a bailout program because the Troika determined that borrowing in excess of 7% was unsustainable. Troika funds were available to fund this PN payment at ?~<5% or alternatively the State could have run down its cash reserves (not a good idea).

    But the three card trick cannot disguise the true cost of the new funds to the State, 9.15%.
    That 9.15% is to me the most relevant figure in this whole debacle.
    You may differ. Such is life.

  61. Why is everybody so worried. We don’t have the money anyway. We’re broke.
    We won’t default until there’s nothing left to save. In the words of Minister Shatter – get a life – its only a few million anyway.
    I’m emigrating to Iceland.

  62. @ Joseph

    You’re comparing apples and oranges. The net cost is all that matters. The headline coupon, as Karl Whelan as explained in immense detail, is fairly meaningless. The 135bps is the only new input here. By your logic, the PN’s cost around 11%…(ie 8.9% + 2%)

  63. @JohnMcHale@John Martin

    “1) The interest rate being paid to BoI is 2.35 percent.”

    So if the government owns 15% of BoI does this mean that Ireland has in reality just “sold” a short term (1 year) bond of 3 Billion Euro for 2% while everyone tries to figure figure a way out of this Anglo/IBRC shambles?

  64. @JohnMcHale@JohnMartin again

    “So if the government owns 15% of BoI does this mean that Ireland has in reality just “sold” a short term (1 year) bond of 3 Billion Euro for 2%…..”

    And if NAMA money is being used for 1-2 months ,lets say 5weeks, would that mean that the interest being paid to BoI on the “short term bond” maturing on 31 March 2013 (before the 2025 bond “kicks in” if it ever does become our sole responsibility) is not actually 2% but 1.8%?

    In light of all this confusion I wonder if “perplexing” is too modest a description 🙂

  65. @michael hennigan

    Internal reform cannot happen in Ireland.

    There is little transparency about how much money the state massages into its own organs and very little by way of outcome data. Opposition to the home tax is at least partly driven by frustration with the lack of transparency.

    Inconvenient news that cuts across official fairytales is ignored. Notice that when the bad news came out about university rankings aka the Smart Economy engine, the story vanished overnight.

    Retail jobs lost are ploughed under by the heels of the new Sino-Irish cadres of knowledge economy recovery blather.

    Likewise and mch more significant was the near invisibility of the Central Bank’s macro review – probably one of the most important pieces of analysis produced in recent times by Irish minds.

    The much promised quango cull was itself culled.

    The most recent survey out of the Business Barometer showed that the number of new company registrations 14500 was matched by the number of company closures 14500 or thereabouts. I won’t mention the difficulty of getting paid for goods.

    The indigenous sector is in dire trouble but all the debate and energy is devoted to big ticket items far removed from the needs of the butcher, the baker and the candlestick maker. Four years into a deepening slump and still no meaningful workfare program.

    The joke at the race track: If I had the money, I’d go bankrupt in the UK.

  66. @Alchemist
    Internal reform………… what does that mean ?
    The Butcher , the baker and the candlestick maker have been using a non optimum currency since 1979 – you would think economic externalties would build up over the 30+ time period – which they have to the most extreme level imaginable.
    (just look at the settlement pattern since then – that was facilitated by far too cheap oil for a sustainable domestic economy)
    How can you have a workfare program when the state stops even new Garda training in Templemore to save money !! – its is a extremely absurd debate withen that context.

    Evidence is already available from N.I. that good & service substitution is taking place while we live in some sort of monetory coccon to peserve metaphysical savings.
    Enough already.
    If you want jobs you need to eject from the Euro and therefore write off most of our “capital” stock

  67. @Bond. Eoin Bond.
    re : “You’re comparing apples and oranges…”.

    No, I am not comparing anything. I am simply stating that the cost of the new funds to the State is 9.15%.
    My understanding is as follows:
    1. The ECB or CBI get back 3.1 billion ELA, in full, on time.
    2. The PN payment due to IBRC of 3.1 in 2012, is now torn up.
    3. The PN has been replaced by a govt bond yielding 6.8% (your figures) given to IBRC.
    4. In order for IBRC to get cash for this govt bond, IBRC will have to pay BOI 2.35% (your figures) .[Where BOI gets the cash is (hopefully) irrelevant to the State, though lets not bet on that one, as BOI lending may be squeezed further].

    Summary.
    The PN for 2012 of 3.1 billion has been torn up and replaced by a bond that will cost the State 6.8% and cost IBRC (also the State) 2.35% in order to get the cash for the bond paper.
    Therefore the total cost of new funds 9.15% to State organizations.

    [I do not know what the old PN cost, nor does it any bearing whatsoever on this deal. The old PN was due to be paid on March 31st. It was not paid. It was torn up and replaced by new funding costing as outlined.]

    I believe i understood the points Karl Whelan was making about the circularity of the interest payments under the old system.
    But cash has now been paid by the State and the State had to fund that cash as above.
    To continue with the Karl Whelan analogy, the 3.1billion will be burned on Monday in Frankfurt or the CBI.
    There will be a big toast in the Bierkeller in Frankfurt.
    The IMF however will surely despair at this transaction.

  68. @ Joseph

    By your logic the old agreement cost 10.9% or so. That is the comparable cost per your maths. And the circularity of payments remains under the new system with the exception of the 135bps BOI takes from the transaction. While the CBI is burning the 3.1bn in ELA, the ECB will shortly be recreating it via financing to BOI.

  69. I’m a bit puzzled by some of the commentary on this, so I set out my understanding of what is going on. I’d appreciate any corrections or clarifications.

    Gov gives a bond to IBRC in lieu of €3.06bn cash. Nama, which is simply a pawnshop for purposes of this transaction, takes this bond as security and lends IBRC the cash which it uses to pay CBI. It is proposed that Nama will transfer both the asset (its loan to IBRC) and the collateral (the bond) to BoI if and when BoI shareholders agree.

    The loan to IBRC is for one year. The net effect is exactly the same as if Gov borrowed for one year from BoI and paid CBI directly on IBRC’s behalf.

    Is that it? If I have it right, the tenor of the bond seems to be irrelevant, since the loan is for one year only. The bond plays exactly the same role as a gold watch in a pawnbroker’s shop. Gov can get it back when it repays the loan in 2013, or replace it with some other security.

  70. @Bond. Eoin Bond.

    re By your logic the old agreement cost 10.9% or so…

    The old PN agreement is dead and gone. My simple proposition (and question to you ) is what is the true cost to the State (State and IBRC) of IBRC receiving cash of this 3.1 billion. 3.1 billion that IBRC has now handed over to be ‘burned’.

    I contend that the true cost is the yield on the new govt bond issued (6.8%) plus IBRC’s cost of converting that bond into cash which is 2.35%. Total 9.15%.

    If the govt could have / should have borrowed CASH on the market for less than 9.15% , then any such deal would have been better financially that the one that has just been completed.

    Clearly we will not agree on this.

    I am also of the opinion, given the terseness and I would venture racist nature of the ECB statement, that this deal did not have ECB support and may have been done following the refusal of the ECB to budge one inch on the repayment of ELA.

    [At the moment I am taking a short rest from using a large sledge hammer to break concrete blocks into small drainage stones (recycling). Your task in convincing me that I am wrong on this issue will be a little more difficult. But if you succeed I will compliment you appropriately.]

  71. Now we know who is calling the shots…from the Guardian

    “When asked if the ECB could be flexible about rescheduling the promissory note payments, Bundesbank chief Jens Weidmann – a hardline ECB policymaker – said on Saturday “the impression cannot arise that the ban on monetary financing can be circumvented here.”
    “If this is a normal, reasonable market process, then I have no problem with it. Otherwise, it looks difficult to me.”

  72. A question…

    Would a long/medium term loan from the EFSF/ESM be regarded as monetary financing which Herr Weidmann is so opposed to?

  73. @kevin d

    It is a long term bond, however the fact that the price may change during the twelve months before BOI (maybe) refinance it, means that it would have to be topped up if that happens to obtain the same cash ammount. So it might as well be a 1 year bond with another re-issued at the market price next year.

  74. @ Joseph

    How much, in approximate % terms, is the new deal better or worse than the old one? I can’t make it simpler than that.

  75. @Bond. Eoin Bond.

    That is not the point. The old deal had to finish March 31st with a payment in cash to the CBI/ECB. The ‘old deal’ was always going to finish on March 31st, unless ELA was not to be paid back.

    How that payment was funded is the issue. And what is the true cost to the State of IBRC getting the cash to pay down the ELA?

    The old deal is dead and gone.
    The ‘new deal’ costs 9.15%.

  76. @ Joseph

    I give up. Most people generally accept that the ELA is an exceptionally cheap structure to fund, and that’s why they didn’t want it to end. You seem to think its hideously expensive. I’ll leave you to it.

  77. @ BEB Do you also need to adjust (reduce) your net cost by a deposit rate on the cash not paid out for 1 yr?

  78. @Joseph

    I hate to get in the way of a good bilateral row, but since Eoin has given up . . .

    The bit you seem to be ignoring is that the interest payment on the bond goes from the Exchequer to IBRC, so the same “circularity” that you understand from Karl applies. So this part is not a net cost to the consolidated Exchequer/IBRC.

  79. @ John McH

    *passes baton*

    @ Paul W

    Good point in terms of the full, broader flows involved here. The money will get some return between 0.25%-3.50%, depending what exactly they do with the funds.

  80. @ BEB “depending what exactly they do with the funds.” That’s a key point – if they are not allowed to do anything with the cash (e.g. say they are required to deposit it back with the ECB at 1%), the whole exercise becomes a “fictional” accounting exercise in reality. Window dressing. BS.

  81. @John McHale

    IMHO, the ‘circularity that Karl Whelan referred to was lost the moment the ELA was paid back. The money left the circus at that point!
    On the remaining issue of inter state transfer, IBRC do not hoard the interest payment received from the State and pay it back. They use it to pay operating expenses. i.e The money goes out of the State through IBRC.

    I see where @Bond. Eoin Bond is coming from by comparing the old to the new, and IBRC will have (?) to be funded anyway. But that is not the point.

    My simple question is what is the cost of new funds to the State (State + IBRC) to put cash in the hands of IBRC to pay back the ELA?
    It is a simple question but is being needlessly complicated by the comparisons with the old PN arrangement and of course completely complicated by the convoluted interim arrangements for payment.

    I don’t mean to waste people’s time on this but I am still failing to see where I am wrong.
    I am assuming of course that the State pay 5.4% coupon (yield 6.8% and that the BOI ‘cut’ of 2.35% to cash the bond for IBRC is on top of that.

    The State will pay 6.8% on the bond, IBRC will pay a further 2.35%. Total 9.15%.

    [I have ignored, the fact that the State owns 15% of BOI, and thereby gets a cut of the 2.35% some time ? in the future].

    Back to breaking concrete blocks!

  82. @ JR Let me try. You are double accounting:-

    “the ‘circularity that Karl Whelan referred to was lost the moment the ELA was paid back. The money left the circus at that point!” No money left. The cash payable by the Govt to the IBRC under the PN was replaced by the new bond which was the consideration for that leg. The bond is “cash equivalent”.

    “IBRC do not hoard the interest payment received from the State and pay it back. They use it to pay operating expenses. i.e The money goes out of the State through IBRC.” The operating costs would be payable anyway i.e. there is no increase in such costs. There is a simple substitution of cash from elsewhere.

  83. @Joseph Ryan

    It might be best to compare what was done with a simpler alternative. As Karl Whelan says, the state could simply have taken out a one-year loan for EUR3.06bn. I’m not sure what interest rate it would have to pay. There’s a bond maturing in 2013 which seems to have a redemption yield of about 4.1%. Maybe that’s the alternative one should look at, assuming that’s a fair indication of the cost of one-year money to the state.

  84. @ Joseph

    I’ll have one last stab at this before I retire to the pub…

    Which is cheaper to the overall Irish state, the deal announced this week, or simply paying off the PN/ELA with an EFSF loan at 3.5%? Here’s a clue – we’d need to fund ourselves in the market/EFSF at a rate of c.2% or less to make it overall cheaper. Fact.

  85. @grumpy
    What you say seems to square with my own understanding; the tenor of the bond is irrelevant. For all practical purposes this is a one-year loan.

  86. @Grumpy/KD
    When then use the 2025 series bonds?
    There must be some logical reason….or

  87. … best contribution here from Bond – time for The Shannon Bar at Thomond Park!

    … tmoro … tbc

  88. @Ceterisparibus
    I can’t give a [financially] logical reason, the best I can do is tell you how it looks to me. (Alternative accounts are welcome.) I think the Gov was chasing a more favourable deal, the ECB said no, we ended up with a ‘bonzer wheeze’ ((c)Colm McCarthy) which incorporated a long-term bond playing the same role as the gold watch in the pawnshop. We could just as easily have hocked Government Buildings. It’s just security for a one-year loan. See Karl Whelan’s take here:

    http://karlwhelan.com/blog/?p=254

  89. Borrowing short (short duration liability) to fund long (asset). The former to be refinanced in 1 yr.

  90. @ Paul W

    Correct. The interest rate(s) are meaningless and negligible. The tenor and rollover issue is the only (and a real one) flaw.

  91. @ BEB DO’D Presumably refinancing risk is limited i.e. the cash (not paid now; available in 1 yr) is the offset (but there is mtm on the bond)? Right now, that might be ok, but what happens if say there is a no vote (or WW III)?

  92. @ JR Just in case you are not following that: cash was not paid on the PN, the “cash equivalent” bond was. However, not being cash (being a form of loan obligation of the Govt), the bond has to be financed….so new borrowing. The short term funding of this (1 yr) is low cost funding (essentially ELA 1% I understand). The Govt bond (debt obligation) is an IBRC asset and earns 6.8% but again that’s Govt money flowing back to itself…circularity. The only thing that matters therefore is the net cost /outflow (as per above) plus the refinancing of the short term liability. Ok?

  93. @John McHale and all

    Apologies for going slightly off topic but readers may find this informative:

    Apparently the Youth wing of the Irish Labour Party (according to a tweet over an hour ago by @Labour Youth) have decided to take no position on the fiscal compact and will not be campaigning for either side .

    The Labuour Youth tweet is probably genuine enough but, IMHO ,any interested readers should probably check out the tweet for themselves.:)

  94. Very irking is the image of Prof. Honohan’s spinning the PN restructure as a highly positive result for the country. Sorry, but what BS (I haven’t used that so often as in the last couple of weeks, in my living memory). What does John McH and economist colleagues think of Prof. H’s position on this? Of course, an unfair (uncomfortable rather) Q. However, by agreeing that the PN restructure is “disappointing” (a non event), John & co. are implicitly agreeing with such a criticism of the Prof. (who continues to validate Morgan Kelly’s assessment of his performance last year).

    Time for a pint or two.

  95. @Paul W
    If Karl Whelan’s take is correct (see above link) the ECB rejected the “highly +ve” deal PH was hoping for. Maybe they heard him!

  96. Kevin,
    I think you and Karl are on to something. The militant wing of the ECB aka the BUBA said nein to a more substantive deal. If you are looking for a historical precedent it is either I) Munich 1938 with PH as NC or ii) Thatcher Out out out comment to GF. Both were humiliation for the good guys but at least the latter was salvaged as MT was reasonable.

  97. @PaulW@all

    “Very irking is the image of Prof. Honohan’s spinning the PN restructure as a highly positive result for the country. Sorry, but what BS (I haven’t used that so often as in the last couple of weeks, in my living memory).”

    Declan Lynch wrote a short article about “BS” in last weeks Sunday Independent which I really enjoyed reading.

    The article was mainly about “visitators” but Professor Honohan (and his “highly positive result” message) gets a mention which also explores a few memorable recent examples of the venerable art of “BS”.

    Sorry I do not “do” links but readers who take the time to search for the article will hopefully find the time was well spent. 🙂

  98. @ KW

    Sorry, hadn’t seen your insertion of Karl’s post. Good on him…..”I can only assume that the “assuming this arrangement works out” element of Honohan’s reply to Michael McGrath didn’t actually work out. And the likely reason for this failure was that the ECB insisted, as it appears they had all along, that a €3.1 billion ELA repayment be made, something which required a cash payment. That this cash has been temporarily sourced from NAMA and then Bank of Ireland doesn’t at all change the fact that this deal is not what had been flagged and does not have nearly the benefits of that deal.
    Optimistic ministerial talk of “movement from the European authorities” seems highly misplaced.”

    The inability or unwillingness of Official Ireland to see the trees from the wood and to call a spade a spade is most disheartening. Time for a different strategy – repeating what I said on another thread:

    “Regardless of whether there is a yes or no vote, as Bazza says above “A more appropriate course of action is to say loud and clear that Ireland will be forced to default unless our debt burden is eased substantially.” (I would say selectively default in relation to Ireland’s odious bank debt element).

    Time to up the ante one way or the other.

    @MH “It’s too early”…I understand.
    However, no time is perfect. As Aidan R says “The more the Irish government throw their weight behind this (i.e. to be good pupils in the EPP) the more our capacity to recover diminishes.” I clearly agree with that. One shouldn’t wait for the cancer of austerity to weaken the patient to the point of no return /recovery.”

    Can the EU super-welfare sucking-up approach of Official Ireland be transformed into “leadership” providing better alternatives? That is not to deny the challenges (@MH in particular). However, what kind of adult people are the Irish? (the “ballsy” Icelanders must be scratching their heads…I was up there recently…happy, rebuilding, “together”, proud….REALISTIC, NO BS people).

    Tbc

  99. @Kevin Donoghue
    Thanks for link. Informative.
    Seems the ECB didn’t move an inch in view of B Hayes take on bankers. Politicians are more reasonable people?
    In fact I would say it was humiliating outcome which merely delays the day of reckoning.
    That coupled with the fiasco of 1m households (2.5 m people?) rebelling ….. Not a good week for government.

  100. @Bond. Eoin Bond (also @John McHale /@Paul W)

    re:”I’ll have one last stab at this before I retire to the pub…”

    Your final post helped split the most obstinate and hardest concrete block of the day.
    I accept that I am wrong.
    The only net funding cost to the State is what IBRC pays BOI, 2.35%.

    My humblest apologies on this as I was not listening to the arguments put forward in addition to not fully understanding them.

    I will also have to apologise to Minister Noonan and Prof Honohan, who may remain in their respective positions for another while yet!

    The deal, therefore is a good deal better than I understood it.
    Quite a good deal in fact. Perhaps that why the ECB was so cheesed off.
    Maybe it was like Limerick beating Tipperary after all!
    Until the crunch championship match next year!

  101. @all

    This:

    “Seems the ECB didn’t move an inch”

    is being repeated often enough to become true as a result.

    They did move a bit (Not a lot! [copyright. Paul Daniels, prospective Governor, Central Bank of Ireland]), in that the original plan was for the ‘un-printing’ / ‘burning’ of the repaid ELA to take place.

    When BOI repo with the ECB the cash is not going to end up as an additional deposit at the ECB – so it doesn’t sort of self-sterilize. So I would say they moved about an inch.

  102. @ceteris

    “When then use the 2025 series bonds?
    There must be some logical reason….or”

    Grumpy’s second law of financial analysis – if you are puzzled by something, try forcing yourself to be even more cynical.

    This alows the Minister and his spinning team to state that he has pushed out the repayment until 2025, and technically, that is not a lie (see Grumpy’s first law of political analysis). If the yearly repo of a long bond was replaced by a one year loan he would have to say “I have taken out a one year loan to make the payment on the promissory note”.

    Does that make it any clearer?

  103. @Grumpy
    Not really. I assumed that the Minister had a cunning plan in that he was going to
    Kick the can on the entire 31b down the road for 13 years. But Super Mario was not having that with Jens riding shotgun, so rather than have Paddy default,
    Technically or otherwise, he let Mickey raid NAMA temporarily while Richie got
    Wilbur’s consent to lend 3.06b for a year. I suppose you could say that NAMA
    Came in handy…we would be in deep doo dah if they hadn’t a handy 3b in their arse pocket from the proceeds of the fire sales at the reported 70% discount they were getting from the supposedly best property assets abroad.
    Assume nothing is the motto!

  104. @ grumpy “When BOI repo with the ECB the cash is not going to end up as an additional deposit at the ECB – so it doesn’t sort of self-sterilize.”

    So where is the cash?

  105. @Ceterisuparibus

    In fact I would say it was humiliating outcome which merely delays the day of reckoning.
    That coupled with the fiasco of 1m households (2.5 m people?) rebelling ….. Not a good week for government.

    Railroad owner William Henry Vanderbilt famously snapped to a Chicago newspaperman in 1882: “The public be damned!”

    Damning is sometimes merited.

    However, the Irish record shows that a crook has a much higher chance of being elected than a purveyor of truth – – as generally understood.

    Plus ça change, plus c’est la même chose!

  106. @ All

    Le Figaro agrees with the analysis of CP with regard to the leverage used – implicit threat of default – but fails to see through the smokescreen of what was actually agreed to save face on both side.

    http://www.lefigaro.fr/conjoncture/2012/03/28/20002-20120328ARTFIG00719-premier-couac-sur-la-dette-irlandaise.php

    The Google Translate function translates ‘couac’ as ‘quack’ which is appropriate enough as there has been plenty of quackery in this debate. However, what it means in this context is “false note” or “misstep”.

  107. @ All

    A good analysis by Colm McCarthy in the Sindo.

    http://www.independent.ie/opinion/analysis/voting-no-is-a-leap-in-the-dark-that-we-cant-afford-3067573.html

    I would disagree, however, with the view expressed that “A successful outcome to the programme depends almost entirely on events outside the Government’s control”.

    This line of reasoning simply lets the government and those easing their way through the crisis off the hook of the domestic reforms that are absolutely essential. Insofar as the government is sticking to its last, only the pressure of the Troika is making it do so.

    As to the saga of the PNs, it is to be hoped that the coming year will be devoted more to the issue of reforms than the pursuit of the chimera of national salvation through some reduction in the burden of banking debt. It too is too convenient an excuse.

  108. @ Brian Woods II
    “Watched the VB interview. Karl was wrong and the FG guy was dead right, though he just failed to nail his argument.”

    Agree …….. the unedifying squabble on Vincent Brown was full of inaccuracies. FG guy was technically right on the minor point of the government not redeeming the tap and wasn’t allowed to clarify the FG position.

    “IBRC have been paid with a Bond which has a market value of 3.1bn. It has refinanced that with BoI for a year. In a year’s time it can refinance again with BoI or any other takers, or indeed it might sell it in the marketplace. This is the way our financial markets work. If you have a marketable government bond trading at 3.1bn you will be able to get it refinanced or sold.”

    Not quite…… IBRC will receive Eur3.06bn cash so that the existing Promissory Note is performing as per ECB expectations and that ELA is reduced (aka the infamous “pacta sunt servanda” comment from Mr Rehn).

    But the government would rather not give the money to IBRC and so has suggested that IBRC buy a tap of an NTMA bond for Eur 3.06bn. From the government point of view the net position on the day is no net cash flow and an increase in borrowed cash resources and GGD. To avoid risks from gross cashflows in the payment system some counterparty netting arrangement between the transactions will occur – hence the statements made by VB and KW that the government “gave” IBRC the bond in lieu of settlement are technically incorrect.

    Where does IBRC get the money to buy the bond since it has paid down ELA? As the ECB policy is for zombie banks to not participate in OMO, direct access to OMO is unlikely; hence IBRC will repo the bond in the private markets. Conveniently BoI is willing(!) from end-April onwards. Good economics for BoI – 135bps spread on a zero risk weighted bond. [ Won’t go into intra-day settlement risk issues of repo on this blog but BoI would no doubt insist on protection of some sort e.g. (govt) gtee?] Since BoI doesn’t have the cash [remember it’s still issuing own use bonds which makes Karl’s usual retort of well maybe it uses it’s own funds as highly unlikely. Similarly with storing the bond in BoI’s liquidity portfolio displacing others] BoI will rehypothecate the bond as part of OMO or with another market counterpart.

    As a small aside, a tap is preferable to a new issue as the existing pre-tap bond has a secondary market set price and avoids the single investor concentration problem of a primary issue. This ignores the issue that the 2025 investor concentration will likely make the bond an off-the-run issue.

    So what objectives were achieved by the various parties with this structure? Suggest these include:

    ECB – very positive result
    • Ireland still performing in respect of its commitments
    • ELA coming down as per Promissory Note schedule
    • Zombie bank not participating in monetary policy operations (OMO)

    IMF/EC(ESFS/ERM) – positive result
    • Less immediate draw on international funds
    • Reinforces Ireland’s PR image with self-help

    NTMA – very positive result
    • Immediately available cash resources increased by 3bn.
    • Less draw on international funds
    • Reduces incremental gross issuance requirements over the decade
    • Administrative benefits from a tap over new issue

    Government – positive result
    • All Mr Noonan’s points in his press release
    • No net cash outflow on 02 April means less reliance on international funds
    • GGD goes up marginally
    • Small increase in the 2012 deficit (<100m), but decrease from 2013 (i.e 8% less 5.4% on 3.06bn) until 2025.
    • Achieve targets faster – deficit/GDP target; longer dated SGP targets
    • Achieves targets slower – debt/GDP

    BoI – financially positive but reputation risk
    • Very lucrative – 135bps spread on a zero risk weighted bond
    • Potential reputation risk from dealing with a zombie bank in an arranged transaction
    • Scale of repo operations may distort market /ratings bodies perceptions of b/s risks (e.g. ratio of unecumbered / encumbered assets rises)

    NAMA – not enough detail yet but likely positive

    IBRC – net positive but increases risk profile
    • Balance sheet does not delever as quickly as planned
    • Promissory Note not impaired as the Note is performing and technically as this structure is not classed as forbearance(!)
    • Capital accretive (at present)
    • Open interest rate risk rises – fixed rate term bond
    • Depending on accounting policy adopted for the bond (eg AFS) there may shareholder fund volatility. Impact on regulatory capital reversed through prudential filters.

    Taxpayer– remains funding the very high level of bank bailout debt even if the overall cost of the funding the debt falls marginally.

    DottyD

  109. @Colm McCarthy

    ‘The deferral of the cash payment on the IBRC promissory note that was due yesterday is unimportant. In reality, the payment has been financed for only a year, through borrowing from the Bank of Ireland against a longer-term bond. There has been no change to the level of debt outstanding. Nor is there any recognition that a substantial portion arises because of the imposition on Ireland by the ECB of full repayment to unguaranteed bondholders in Anglo and other bust and defunct banks.

    This deal does not open any obvious corridor to further negotiations. The Government needs to prosecute vigorously with Europe the case that debts the ECB has imposed on Ireland not merely inhibit Ireland’s ability to deliver on the programme and re-enter the bond market, but are also an arbitrary and unprecedented imposition on a country that is already unable to finance itself.

    The loss of investor confidence in European sovereign debt has been exacerbated by the ECB’s insistence that bank bondholders come first and that the resolution of failed banks must be at the expense solely of taxpayers and sovereign bondholders.’

    “NO” to this odious dictatorship.

  110. @all

    Tuff night in Thomond Park last night … the main bright spot came in the Shannon Bar after the game when I spotted, behind the bar, a neat note of comfort as follows:

    “Herr Geithner – U Owe US €20 billion”

    On a comforting chat with the lovely sympathetic lady behind the bar was informed that The Shannon Front Row remains on standby to collect next time Herr Geithner lands in Shannon Airport. Spose one can take it as a Proxy Bonus Point!

  111. @Ceterisparibus

    I think that quote is the most plausible answer to your question as to why bonds were dragged into the deal. I believe it’s what’s known in theatrical circles as a McGuffin: “a plot element that catches the viewers’ attention or drives the plot of a work of fiction.”

  112. @ John McHale 3:12

    But I did make it clear that I was talking about the financing mechanism not the decision to take on the bank debt in the first place.

    I did reply to explain I was actually referring to your views on the refinancing deal in my original post. That post has been removed.

    I note the correction of my post quoted here has been allowed to stand even though my reply correction has been withheld/censored.

    You’ve obviously very strong views on this matter yourself amounting to censoring those who disagree with you!

  113. @ DottyD

    I note your very positive report on the beneficiaries of the PN refinancing operation. I note your rather casual dismissal of the losses incurred by taxpayers in funding this operation. However, all of the anomalies regarding the IBRC portion of the operation have not been adequately explained or addressed, eg

    • Achieve targets faster – deficit/GDP target; longer dated SGP targets
    • Achieves targets slower – debt/GDP

    Appreciate if you could clarify the above in relation to the following questions:

    Why IBRC in the first place
    Is IBRC not mandated solely to purchase toxic assets from the banks and prohibited from such a refinancing operation of PN’s. If not, how so?
    Will IBRC have a future role in regard to future PN operations of this kind?
    As IBRC is a SPV in that its debt is not counted as part of general government debt, what, if any, effect on the determination of the PN repayment, will its refinancing have for General Government debt? Will the transaction disappear as a liability on the government government deficit?

    There has been discussion on this above Kevin Donogue:

    “Gov gives a bond to IBRC in lieu of €3.06bn cash. Nama, which is simply a pawnshop for purposes of this transaction, takes this bond as security and lends IBRC the cash which it uses to pay CBI. It is proposed that Nama will transfer both the asset (its loan to IBRC) and the collateral (the bond) to BoI if and when BoI shareholders agree.”

    I am intrigued by the IBRC portion of the transaction. I’m also puzzled as to how BOI cannot provide the loan for now but have to wait a while for shareholder approval? Surely, there was enough time to get this approval already. I’m presuming BOI can get access to LTRO funding at 1% to pay for this bond and am curious as to how this leverage could not have been used to purchase the total ¢30 bn with LTRO funding at a more favorable rate to the Govt. I’m wondering if the IBRC portion of the above transaction is more to do with the act of hiding government debt than paying it down in the B@B bridging loan fashion above. I regret the distinct lack of clarity leading to open speculation on the nature of the deal.

    I should also state I believe it to be a disastrous deal ill omened for future negotiations on the PN’s.

  114. @ Kevin Donoghue 5:32

    From IT link

    “The feeling within the ECB is that it simply cannot explicitly promise to provide medium-term funding. This stems from concern not to stray into the realm of monetary financing for a government. Such financing is illegal under EU law and distinct from central bank financing for banks, even if those banks are guaranteed or owned by states.”

    Can we finally put the nail on that coffin! This is pure hypocrisy. LTRO was specifically designed to persuade banks to buy Govt sovereign bonds. We have bailed out the ECB and its banks by recapitalising our banks with the guarantee under advice from ECB. We’ve undertaken through NAMA and the present bailout the most expensive option for doing this. Now the ECB expects Ireland, which cannot avail of the full benefit of LTRO, having paid through the nose through the NAMA entity for large tranches of its toxic debt, to be denied funding through EFSF or similar means, because of a focused and penal interpretation of these rules, that are relaxed for other countries, but not for Ireland.

    Once again, we lack political imperatives to stand up to this ‘feeling within the ECB’.

    Its time to say ‘No’ to the above anomalies and state there is no quid pro quo in the relationship between the ECB and the matter of Irish debt especially to the odious debt on IBRC.

    My 5:09 when I refer to IBRC I’m referring there to the NAMA portion of the IBRC transaction throughout, apologies for that. Actually, I better clear that up:

    Corrections are:
    Par 1
    “anomalies regarding the IBRC portion” IBRC there should be NAMA portion
    Par 4
    “IBRC” replace with NAMA
    2nd last par, ‘the IBRC portion’ should be ‘the IBRC portion’

    In summary, as well as requiring some coffee, I should point out the NAMA part of the whole operation in the NAMA, IBRC, BOI triad still mystifies me. It requires further explanation, for me at any rate.

  115. @all

    Opposition Party Warning
    EU Fiscal Pact May Breach German Constitution
    By Thomas Darnstädt

    Germany’s opposition Left Party says the fiscal pact agreed by 25 of the EU’s 27 members may breach the constitution because — the party argues — it can never be rescinded. Legal experts are divided. But Germany’s top court may be called on to settle the issue, and to rule on Europe’s future yet again.

    http://www.spiegel.de/international/europe/0,1518,825166,00.html

    POSTPONE THE IRISH REFERENDUM ON THE FISCAL CORSET NOW!

  116. German lawmakers and the chancellor were all ears last Thursday when Gregor Gysi, the parliamentary group leader of the opposition far-left Left Party, addressed parliament. In the debate on the European fiscal pact, Gysi surprised his listeners with a few “constitutional issues” that “might” be worth “seriously considering.”

    Gysi’s objections to the European pact for stricter budget discipline proved thought-provoking even for leading EU law experts. The agreement, says Gysi, a lawyer, violates Germany’s constitution, the Basic Law, because the country can never rescind it. He argued that Germany would be committed to drive with its debt brake on for all of eternity.

    He may have a point. Steffen Kampeter, a senior official in the German Finance Ministry, confirmed what every reader of the treaty text will notice on the first read-through: “The treaty does not provide for a right to rescind.”

    No to Austerity into Eternity!

  117. @ dotty diver

    Two queries if I may. First, are you saying that IBRC bought the bond from NTMA? Most commenters are assuming that the PN was settled by giving IBRC the bond instead of cash, albeit with the benefit of financing from NAMA. The NTMA press statement suggests that the bond was “sold” to IBRC.

    Secondly, what is the benefit to BOI of the repo. In effect, BOI is providing one year money to the Irish state at 2.35%. Is this not lower than the yield on a one year government bond? If so, why would BOI not just pay a one year bond? I appreciate that the minister is to give a guarantee to BOI, but is that guarantee really add anything? The minister is simply adding his guarantee to a sovereign bond.

  118. @ gadge

    “First, are you saying that IBRC bought the bond from NTMA? Most commenters are assuming that the PN was settled by giving IBRC the bond instead of cash, albeit with the benefit of financing from NAMA.”

    An individual or firm must subscribe to an issue. Settlement is in cash not specie.

    “The NTMA press statement suggests that the bond was “sold” to IBRC.”

    This is most likely accurate.

    “Secondly, what is the benefit to BOI of the repo. In effect, BOI is providing one year money to the Irish state at 2.35%. Is this not lower than the yield on a one year government bond? If so, why would BOI not just pay a one year bond?”

    Yield differentials reflect that one transaction (repo) is a secured transaction with joint probability of default (sovereign and IBRC credit risks). The second transaction (secondary market purchase of sovereign bond) is an unsecured transaction with a single (sovereign risk) probability of default.

    “I appreciate that the minister is to give a guarantee to BOI, but is that guarantee really add anything? The minister is simply adding his guarantee to a sovereign bond.”

    Yes ….No…… intra-day margining risk is covered.

    DottyD

  119. @Colm Brazel

    “I note your very positive report on the beneficiaries of the PN refinancing operation. I note your rather casual dismissal of the losses incurred by taxpayers in funding this operation.”

    The reverse is true…..all that has been stated is the fact that the taxpayers continue remain liable for all the costs of the bank bailout. No comment has been made as to the wisdom of the State committing taxpayer’s funds to a banking system bailout.

    “However, all of the anomalies regarding the IBRC portion of the operation have not been adequately explained or addressed, eg
    • Achieve targets faster – deficit/GDP target; longer dated SGP targets
    • Achieves targets slower – debt/GDP”

    Hmmm….In retrospect it should have been made clear that these comments are relative to government baseline medium-term forecasts.

    “Why IBRC in the first place.”

    IBRC hold the Promissory Notes.

    “Is IBRC not mandated solely to purchase toxic assets from the banks and prohibited from such a refinancing operation of PN’s. If not, how so?”

    IBRC has no mandate to acquire assets (toxic or otherwise). The State has an agreement with DG Competition in regards to acquisition of assets. (cf EC website http://ec.europa.eu/competition/state_aid/cases/239466/239466_1251121_21_3.pdf)

    “Will IBRC have a future role in regard to future PN operations of this kind?”

    No idea. The government has suggested the transaction buys time for the main restructuring of the Promissory Note and Sovereign debt.

    “As IBRC is a SPV in that its debt is not counted as part of general government debt, what, if any, effect on the determination of the PN repayment, will its refinancing have for General Government debt?”

    IBRC is a hybrid SPV where the Promissory Note appears on the government balance sheet but the residual (i.e. Total IBRC assets less Promissory Notes principal) is on the banking sector balance sheet.
    Treatment of refinancing will depend on the nature of the instrument chosen for refinancing and the routing of cashflows.

    Will the transaction disappear as a liability on the government government deficit?
    No….coupons flow through the deficit (GGD).

    “There has been discussion on this above Kevin Donogue:
    Gov gives a bond to IBRC in lieu of €3.06bn cash. Nama, which is simply a pawnshop for purposes of this transaction, takes this bond as security and lends IBRC the cash which it uses to pay CBI. It is proposed that Nama will transfer both the asset (its loan to IBRC) and the collateral (the bond) to BoI if and when BoI shareholders agree.”

    It is not a loan but a repo.

    “I am intrigued by the IBRC portion of the transaction. “

    So am I

    “I’m also puzzled as to how BOI cannot provide the loan for now but have to wait a while for shareholder approval? Surely, there was enough time to get this approval already.”

    It is not a loan but a repo.

    “I’m presuming BOI can get access to LTRO funding at 1% to pay for this bond and am curious as to how this leverage could not have been used to purchase the total ¢30 bn with LTRO funding at a more favorable rate to the Govt.”

    No idea.

    “I’m wondering if the IBRC portion of the above transaction is more to do with the act of hiding government debt than paying it down in the B@B bridging loan fashion above. “
    It seems to me that replacing maturing €3bn of visible government liability with a new €3bn of visible government liability is fairly transparent under ESA95.

    “I regret the distinct lack of clarity leading to open speculation on the nature of the deal.”

    It’s pretty clear what the government is up to – deferring deployment of cash.

    “I should also state I believe it to be a disastrous deal ill omened for future negotiations on the PN’s.”

    It is not obvious that there is a causal linkage between the performance of this structure and that of any future structure still to be negotiated.

    DottyD

  120. Some more Q’s

    What role did NAMA play?
    Enough time to set this up, why the delay in BOI shareholder approval?
    Why not set this up directly with BOI shareholder approval?
    Does NAMA by virtue of its SPV status allow the Govt to claim the bond, the cash paid for it, or the liability to the Govt represented by the PN it replaces, is now no longer considered a part of general government debt ?

  121. @ Dotty diver

    Many thanks for taking time to respond.

    So it looks as if most commentators (including to a lesser degree than most, Karl Whelan) are incorrect in suggesting that the PN was settled by a bond instead of cash. It seems as there was a cash payment, albeit be one that was cancelled out by IRBC turning around and purchasing a bond from NTMA.

  122. @ Dotty diver,

    Thanks for your lengthy reply and apologies re 5:09 error NAMA/IBRC I corrected in 5:32.

    Re my Q ““As IBRC is a SPV in that its debt is not counted as part of general government debt, what, if any, effect on the determination of the PN repayment, will its refinancing have for General Government debt?”

    Your Answer:

    IBRC is a hybrid SPV where the Promissory Note appears on the government balance sheet but the residual (i.e. Total IBRC assets less Promissory Notes principal) is on the banking sector balance sheet.

    Treatment of refinancing will depend on the nature of the instrument chosen for refinancing and the routing of cashflows.”

    Actually there’s a little serendipity benefit there in your answer. My question, see correction, should have been phrased, “As NAMA is a SPV….” Apologies again.

    Moving on, your answer though I find intriguing as while I knew NAMA was designed as SPV, never knew that IBRC is, as you state, “IBRC is a hybrid SPV”.

    Don’t wish to labour the point, but I’m confused by that statement wondering at the same time how the interest on the PN’s fits into this. Don’t feel the need to clarify this for me as I’m losing interest on the matter. But feel free.

    Thanks for your efforts there to clear up any confusion. Anyway, this whole matter is becoming irrelevant in regard to the wider issue of the rest of the PN’s.

    Re your “Treatment of refinancing will depend…” above…Its just been announced new deal involving EFSF will replace the PNs two weeks before May 31 referendum.

    That doesn’t give much time to debate the issues involved, does it?

  123. @ dotty diver

    Thanks for a penetrating analysis

    Noonan siad on the steps of the Dail (in the clip at the top of the VB piece): “We’re not paying the promissory note […] So we’re not borrowing 3.06bn which we would have had to borrow if we were paying it”

    By your analysis he did both pay it (via cash to IBRC and thence CBI) and borrow (sell a bond) to do so? So the government spin on this essentially the opposite of the truth?

    Didn’t quite follow the deficit reduction post 2012 — what are the 8 and 5.4%?

    Remain confused as to how risk / reward works for AIB versus buying a one year bond? Surely joint probability of default saves you little when the two entities (IBRC and sovereign) are essentially the same and so correlation is one?

  124. What role did NAMA play?

    NAMA seems to provide secured finance at short notice (i.e. 1 mth repo on the same basis as the proposed BoI repo) from its infamous cash pile (even if it’s insolvent – another story that is likely to develop in the next few months)

    “Enough time to set this up, why the delay in BOI shareholder approval?”

    A question for DoF officials / BoI management. Can speculate that either BoI were slow to arrange or the government/DoF was slow to look at the structure (Plan B) to the main restructuring of the Promissory Note. Never underestimate market pressures on the pragmatism/inelegeance in time-pressured transaction structures.

    “Why not set this up directly with BOI shareholder approval?”

    It could ……. hindsight is wonderful thing …..

    Does NAMA by virtue of its SPV status allow the Govt to claim the bond, the cash paid for it, or the liability to the Govt represented by the PN it replaces, is now no longer considered a part of general government debt ?

    Neither CSO nor Eurostat would agree to this classification under current guidelines.

    DottyD

  125. “Noonan siad on the steps of the Dail (in the clip at the top of the VB piece): “We’re not paying the promissory note […] So we’re not borrowing 3.06bn which we would have had to borrow if we were paying it”

    By your analysis he did both pay it (via cash to IBRC and thence CBI) and borrow (sell a bond) to do so?

    Correct……In terms of the gross payment the government performed in respect of the Promissory Note obligations. However it is clear that the net effect is that there was no net cash movement and no drawdown arrangement in respect of rescue funds.

    “So the government spin on this essentially the opposite of the truth?”

    No comment

    “Didn’t quite follow the deficit reduction post 2012 — what are the 8 and 5.4%?”

    8% is the coupon from 2013 after the interest holiday.

    “Remain confused as to how risk / reward works for AIB versus buying a one year bond? Surely joint probability of default saves you little when the two entities (IBRC and sovereign) are essentially the same and so correlation is one?”

    Assume you mean BoI not AIB.

    A very perceptive insight that while the joint probability argument is valid for the uncorrelated credit of asset and holder. In this case given the dependence of IBRC on the Irish State there is a high correlation of default between them. This would usually be classed as “wrong-way risk” by most risk functions who would increase the joint pdf of default depending on the degree of correlation. Unfortunately the financial industry has no consensus over treatment here – some allow for it, some do not.

    DottyD

  126. Confusion continues with release of Exchequer figures for first quarter

    “The Exchequer deficit at end-March 2012 was €4,263 million compared to €7,066 million in the same period last year. Non-voted capital expenditure is down significantly because the payment in respect of the Promissory Note to IBRC was not part of Exchequer expenditure at end-March 2012 as it was in the first quarter of 2011. Increased tax and non-tax revenues were offset by higher debt servicing costs and higher net voted current expenditure.”

    This has been interpreted by RTE news as meaning that Government did not pay the PN and thus “saved” or “avoided” a payment of 3.06 bn when compared with 2011.

    In fact, the language in the Dept Finance’s note is ambiguous: on one reading, it might suggest that no payment was made; the more natural reading, however, is that a payment was made, but did not feature in the first quarter’s expenditure. The NTMA press statement suggests that the “sale” of the bond would settle on 2nd April, 2012, i.e. in the second quarter.

  127. @ DottyD

    Tx for response (on a four day old thread..!)

    On deficit reduction, you’re saying “we now pay 5.4% coupon on the bond instead of the 8% coupon on the promissory note”?

    But surely the trade-off isn’t bond versus PN but rather bond versus bailout drawdown (given PN was due, choice was how to fund it) ..? With economic cost to state of bond being the 135 bps margin on the BOI repo versus I think nil margin now on bailout funds?

    And with one year bond spread at~400 bps currently BOI doesn’t seem to have much room for covariance?

Comments are closed.