Promissory note news roundup redux

A couple of days ago I was giving out that the proposed deal lacked nuance given the time spent trying to reduce the payment by the government to IBRC for the promissory notes which would, in turn, pay down the ELA issued by the Central Bank of Ireland. Now that news of the deal has come, with much scratching of heads and flowing of flow charts, for some reason, we can all agree that not very much has happened at all.

Really what’s just happened is the government has been given a loan by the Bank of Ireland for a year, after which the previous status quo reasserts itself. The ECB hasn’t budged in its position that Ireland must get the ELA written off quick smart. Bank of Ireland’s shareholders must be feeling ambivalent about the deal which sees their holdings of Irish debt increase, albeit for a short time. The taxpayer is still on the hook, of course. But the people I feel sorry for most are the journalists who have to explain what just happened[1]. My sense is that in the complex negotiations that went on, the ECB won, hands down.

To the roundup then. Karl Whelan is underwhelmed. FT’s Alphaville gets the story mostly straight, Constantin does a good job of spelling things out clearly, and the IrishTimes gets the story a bit muddled but mostly right.

[1] This is a lie.

Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

40 thoughts on “Promissory note news roundup redux”

  1. I love the footnote. It is certainly beyond me to feel ganuine sympathy for somebody who does not hold the same qualifications as me who but thinks they are competent to do my job.

    Hmmm… should I review all my previous posts for hypocrisy? 🙂

  2. I hate to impose on someone, but is it possible to use three and four letter words, and simple sentences, to describe this Byzantine situation: ie; “The shit has hit the fan” sort of thing. Thanks.

  3. Complex negotiations? Nah. Brutally simple and following an ancient pattern:

    Athenians: Why, the fact is that continentals generally give us but little alarm; the liberty which they enjoy will long prevent their taking precautions against us; it is rather islanders like yourselves, outside our empire, and subjects smarting under the yoke, who would be the most likely to take a rash step and lead themselves and us into obvious danger.

    Melians: Well then, if you risk so much to retain your empire, and your subjects to get rid of it, it were surely great baseness and cowardice in us who are still free not to try everything that can be tried, before submitting to your yoke.

    Athenians: Not if you are well advised, the contest not being an equal one, with honour as the prize and shame as the penalty, but a question of self-preservation and of not resisting those who are far stronger than you are.

  4. @Stephen

    You are right – the “negotiations”, if that’s what you could call them, were a total whitewash.

    Patrick Honohan may be a good economist, but he is not a leader and he is clearly a poor negotiator. As for the DoF…

    Any meaningful deal will have to be hammered out at a political level. Although I will never vote for the Sinners, I think we need the likes of Pearse Doherty in the negotiation room. The current cabinet are just not up to it.

  5. Trojan Horse of the Compact is nothing less than the forerunner of full ransack and looting of the economy, that eventually, if the Bundestag agree, will lead to full takeover through asset tripping. Looks to me like all of NAMA’s ‘asets’ are eventually up for grabs as well. Meanwhile remaining blood from the Irish zombie will be extracted until it flatlines, then the grab will take place. The Spanish spanner in the works is the flawed design of the ECB whose center cannot hold…..the ‘debt sustainability’ negotiations make a mockery of the term unless burden sharing is involved. ECB have trounced the Irish negotiating team once again…conditions for default have been made more favorable, surely abandonment of the euro is now a compelling argument? Didn’y believe the Irish zombie nation had any more to give following the PN debacle, but they’ve found a better way for the ECB to fleece the place.

  6. @Colm Brazel
    “Trojan Horse of the Compact is nothing less than the forerunner of full ransack and looting of the economy, that eventually, if the Bundestag agree, will lead to full takeover through asset tripping.”

    Ah but we’re so smart we’ll offload all those assets to the Chinese first – it’s called cutting off your nose to spite your face.

  7. These negotiations have indicated a seachange. Noonan looked very glum in the Dáil. They must clearly given ‘poster boy’ status expected in return for commitment not to burden share, to honour all outstanding debt and achieve in return a deal based on ‘debt sustainability’. Clearly their expectations have been hollowed out and they’ve been slapped down. The penny has dropped; how much systematic abuse of the Irish debt position can the economy, the politicians or people withstand?

  8. @ TrueKilcockian
    I’m with you on the Milenians.
    At the moment the Europeans too strong to take on.
    We just have to sign their crap referendum. It’s hard to resist an empire.

  9. Karl’s last paragraph, the Hayes quote, is where we are. The ECB is a lost cause. DoF didn’t come up with pari passu all by their lonesome either. That came from Frankfurt too.

    It was Barzini all along.

  10. @ Frank G

    Its like where Michael left poor old Frank Pantangeli – they got us waiting in the lobby!

  11. Is this like one of those three cup tricks were the conman puts the ball under one cup and whizzes them around a bit but the ball ends up staying in more or less the same place and you end up forking out €35m?

    You walk away a bit confused and with a lighter wallet but have a vague feeling of at least having ‘done something about it’ and engaged in some kind of process – one that even kept a few people looking on for a while.

    Meanwhile, the guy with the cups wanders over to Spain. I must catch up on their budget. Been to busy to look at what’s happening in the world this morning – playing games with some IT people about how to communicate that you can’t fit a regulatory development quart into a pint pot….. without losing their jobs for telling the CEO something he doesn’t really want to hear 🙁

  12. The only game in town is to get our deficit down to zero asap and cut Anglo loose and all the other rubbish. Insiders rubbished Morgan Kelly last year for going heavy on Honohan. looks like History has absolved Kelly. When you have guys like John McHale batting for the establishment who needs enemies.

  13. The more I think about this the more I am beginning to realise the banks are renationalising the monetory system albeit the private banks (Bank of Ireland?) in charge of the nations money supply once again.

    LTRO and now this head fake seems to be pointing in this direction.

    Once can never escape the power of these vampires – they operate at night you see.

  14. It seems to me that ‘the stroke’ is still alive in Irish politics. The Government needed to save face following the rebuff from the ECB and lo and behold this pass the promissory note/government bond game is announced. Fianna Fail may be a long way from power but their legacy lives on in more way than one. FG go into their conference pretending that a short term solution has been found pending a more substantial renegotiation. In reality the ECB have said no and the game now moves to the European political level to try get a better deal via the use of the ESF funds. Any hope of such a better deal will depend, inter alia, on getting the Fiscal Treaty ratified. So sign up or sign out appears to be the message. Incidentally interesting article in today’s FT about Iceland and how their return to some form of economic health came from burning the banks’ bondholders etc…….

  15. Watched the VB interview. Karl was wrong and the FG guy was dead right, though he just failed to nail his argument.

    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.

  16. PS

    That’s why it was at market value and why it is a marketable instrument. NAMA bonds and Promo Notes suffer on either or both of these scores.

  17. @ BWII

    The problem with the deal, as I see it, is that Anglo is not able to go to the ECB direct, as the ECB does not want direct exposure to them. So while BOI may decide to roll this transaction over next year, they also may decide they don’t want to. IBRC is to a certain degree relying on the kindness of strangers. It’s not a terrible deal or arrangement by any means, but there are obvious flaws and holes in it.

  18. @ BWII

    The bond may have a value of €3.1bn today, but that doesn’t mean it will still be worth €3.1bn in one year’s time. The state is guaranteeing to BoI that they’ll get 100% of their money back in one year even if the value of Irish bonds take another dive and it’s worth much less. Since there’s no real transfer of risk, the effect of the transaction is the same as the state issuing a €3.1bn 2014 bond to BoI and making a separate undertaking that they will issue another €3.1bn 2025 bond in one year’s time to be sold to persons unknown.

    The FG guy was totally wrong because they haven’t pushed out the refinancing risk to 2025 at all.

  19. The ‘FG Guy’, aka Speed_e Gonzalez, is I believe Damien English TD.

    I expect that snippeets of his ‘hystericks’ will go ‘viral’ shortly on U-Tube …

  20. FYI

    Press Conference: Friday 30th, 11.15am Central Hotel, Exchequer St Dublin

    Campaigners say promissory deal is a stitch up and a lost opportunity

    The ‘Anglo: Not Our Debt’ Campaign, which includes a wide range of community, global justice and other organisations, has described the deal on the deferral of the €3.1 billion ‘promissory note’ payment due tomorrow as a “political stroke” that does not address the real issue and that squanders an opportunity to write down an illegitimate debt.

    http://www.irishleftreview.org/2012/03/30/campaigners-promissory-deal-stitch-lost-opportunity/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+irishleftreview%2Ffeed+%28Irish+Left+Review%29

  21. @ BEB

    I agree that the ECB has theological objections to dealing with the devil that is IBRC. But I am assuming, perhaps naively, that the BoI found the deal commercially acceptable and did not have their arms twisted. In a years time IBRC should be able to find private takers on the same terms to rollover the repo. I understand this happens all the time.

    @ Edward

    Yes the collateral is subject to market risk but it is not true that the State is guaranteeing that a fall in the bond’s value will be made up. It is guaranteeing that Anglo will pay back its loan just as it is guaranteeing so much of the covered banks’ liabilities.

  22. @Stephen

    “Constantin does a good job of spelling things out clearly,…”

    +1

    I do not always agree with opinions expressed by Dr G but am grateful to his computer for going on “strike” because of over work. Consequently, IMHO, he analysed the bare facts quite well with the information he had. 🙂

  23. @ BWII
    The state owns IBRC so that amounts to the same thing.
    As an example, say:
    1. IBRC gives a 3.1bn 2025 note to BoI in a repo transaction for one year
    2. The implausibility of Spanish/Greek austerity plans reemerge over the next year and peripheral country bonds decline by 20%
    3. In March 2013 BoI hands the 2025 bonds, which are now worth 2.5bn, back to IBRC and say ‘thanks very much, I’d like my 3.1bn back please’
    4. The IBRC would then say no problem, I’ll sell this 2025 bond in the market for 2.5bn and come cap in hand back to taxpayers for another 600m.

    The whole point of issuing long-term debt is once you issue it, you forget about it until it matures. In this case, taxpayers take a mark-to-market in one year and still have to find a new buyer for the bond then, which is exactly the same as issuing one-year paper and rolling that over next March.

  24. @ Edward 2.0

    On that logic, what has happened is that the government has been obliged to issue an additiional, undeclared, guarantee against any MTM loss by the bondholder. A Mini bluff by comparison with the Monster bluff of September 2008.

  25. This is hugely disappointing. I had hoped for a lot more from Europe when we got a new government.

    Putting aside the medium term the case against remaining in the Euro in the long-term grows ever stronger. When we get back on our feet the first thing to do is to leave it. Otherwise when the next crisis happens I fear we will be either:
    A. The bully or B. The victim
    A. Struggling and resentful of others dependent on us or B. In crisis and deeply dependent on North European charity

  26. It looks to be a guarantee that covers against losses and margin calls. From the FT Alphaville article:

    All IBRC’s payment obligations to the Bank (BOI) with respect to the Repo including the cash margining are covered by a guarantee from the Minister for Finance of IBRC’s exposures for transactions of this nature.

    So changes in the secondary market value will now impact the GG debt and deficit.

    @Edward v2.0

    In this case, taxpayers take a mark-to-market in one year and still have to find a new buyer for the bond then, which is exactly the same as issuing one-year paper and rolling that over next March.

    Good point. Although nominally a long-term bond, in practice it has the same characteristics as a 1-year bond (except it is more expensive?)

  27. @ Edward

    It is not the same thing at all. The government has issued a 13 year bond, full stop. IBRC needs to pay down some of its short term ELA. It can use the bond as collateral to borrow that money from the private sector. In a year’s time it will need to rollover the arrangement, that’s the way repos work. If the market value has fallen it will need further collateral, so what?

    What would be bad is if IBRC actually sold those bonds, even at today’s price for that would mean that the State had in aggregate borrowed at today’s yields which are higher than EFSF rates.

    As it stands the Bonds are a loan from one arm of the State to another and so the high yield doesn’t matter.

  28. http://www.tv3.ie/3player/show/41/46902/1/Tonight-with-Vincent-Browne

    was very interesting. I thought Karl Whelan did a good job. The IT journalist said she read his blog before the show- does she look in here as well ?

    There were some references to the dismal science and implications that certain people were very smart and perhaps out of touch with the man on the street. If only it were a question of revising assumptions. The scale of the stitch up is stonking.

    I felt sorry for the junior minister. They weren’t going to send a big hitter for a repeat of Noel Dempsey in November 1010. One of the roles of the politician is to imply there is hope and progress is being made. He reeled off a list of achievements as if the Government was going places. They must be deeply disappointed to have been shafted again . Part of the role of the national media is to reinforce the sense of self worth of a nation. It doesn’t do the national bitchslap very well.

  29. @ BWII
    Just think about what you’re saying. Noonan has thrown in the date on the 2025 bond as a red herring and you’re falling right for it.

    If the government issues a 13-year bond to itself there is no new money to pay for schools or welfare or anything else – nada. Otherwise the government would simply issue 30bn of 2050 notes to IBRC and we’d be done with it. The only real-world money in this set up comes from BoI, on a one-year basis. That’s it – 3.1bn for one year only. Not for 13 years. Whether the government used a hypothetical 3.1bn 2025 note as collateral, or one dated 2020 or 2050 or even if they used Disney dollars the result is the same, in one year’s time BoI will take it’s 3.1bn back and rescind its right to the collateral. At that stage, IBRC, ie the state, will continue to simultaneously own and owe money on a 2025 bond, which nets out to nothing. That is one year financing. If you get BoI to agree another one-year transaction at that time then great but that is the definition of rolling-over one-year financing. At no stage does this ever resemble 13-year financing – the only way that would happen is if they actually sold the bond to an outside investor who didn’t expect to get paid until 2025.

    One could argue that 1-year financing is better than 13-year financing because it’s cheaper (as you appear to do above and thereby defeating your own argument) but instead they’ve tried to misrepresent one-year funding as something more stable than it is.

  30. @Oliver Vandt, seafoid

    Re-classify the ECB as an odious dictatorship, from a citizen-serf perspective, and the case at Den Haag would be water-tight as the famous Dutch gorsoon’s finger in the dyke.

  31. @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.

  32. @ Edward

    The government has in effect extended the bail out fund by 3.1bn as this was meant to have been paid in cash into Anglo. In a year’s time Anglo may or may not have a problem refinancing this bond. Next week or whatever AIB, PTSB etc. may or may not have a problem refinancing their government bonds or indeed their NAMA bonds. But that is a different matter.

    Note that in effect the ECB have financed this extra funding as BoI intend to refinance with the ECB. All very contorted, I know, obviously designed to stay on the right side of the ECB catechism. But the reality is that the ECB have allowed, very reluctantly it seems, monetary financing of the goivernment’s promise.

    A one year bond would be different. We would be right back here next year with the government needing to tap the EFSF for the 3.1bn (as well as next years).

  33. @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!

  34. 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!

  35. from Karl Whelan Blog [uncut ……..

    Promissory Note Arrangement an Exercise in Political Optics

    Posted on April 2, 2012 by kwhelan From a public relations point of view, the revised promissory note arrangement has been a great success for the Irish government. This editorial in the Sunday Independent declared

    In the staring match between Ireland and the EU and the ECB, the other guys blinked first.

    The Irish Times, only slightly more restrained, headlines the new promissory note arrangement as a “coup” for Michael Noonan.

    What is supposed to have been achieved? Apparently, the Irish state has saved having to make a cash payment to IBRC with the burden of the payment being delayed until 2025.

    In reality, a quick inspection of the announcement makes clear that neither of these claims are true.

    The Irish state has not been saved making a cash payment: NAMA, an arm of the state, has provided €3.06 billion in cash to the IBRC, which IBRC is using to repay Emergency Liquidity Assistance loans, just as the ECB (the blinking guys) had always insisted.

    In a separate arrangement, the government are planning to have Bank of Ireland provide a one-year loan to IBRC so that NAMA can be repaid and the state’s cash levels (including NAMA) can be restored to what they were prior to the ELA payment. IBRC will need to repay this loan next year.

    Because the state is providing cash to IBRC to make its promissory note payment, the only thing added to what was already supposed to happen is that the state has arranged a one-year loan from Bank of Ireland.

    Is arranging short-term loans from Bank of Ireland—a bank that has limited access to capital markets and is looking to shrink fast to meet troika-imposed deleveraging targets—a route to putting Ireland’s debt on a more sustainable path? Clearly not.

    So the deal does literally nothing to improve debt sustainability. It also compromises the supposed operational independence of NAMA and raises questions about state intereference with the majority-private-owned Bank of Ireland.

    For these reasons alone, this arrangement is an unwelcome development. However, in addition, it appears that the shenanigans surrounding this arrangement have seriously upset European officials who are better able to see what is going on than the Irish media.

    This story from Arthur Beesley of the Irish Times likely illustrates the attitude of our EU colleagues. In relation to Minister Noonan’s comments that he now wants a wider deal to replace the promissory notes altogether, the story reports:

    “This risks further antagonising the ECB governing council,” said a euro zone source.

    “His remarks were not helpful, particularly on the day after the bank agreed to facilitate an operation designed purely to give him an opportunity to make a statement saying that the payment of the promissory notes was settled with bonds.”

    The Euro zone source is making clear that, as far as they are concerned, this deal was purely about optics.

    I suspect that pennies may start to drop in Ireland about what has been arranged when Bank of Ireland have their shareholder meeting. For now, though, I’ll let it drop.

    http://karlwhelan.com/blog/?p=263

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