Transaction Overview

The ECB hasn’t agreed to the deal.

Philip / Anyone – on the second leg of the transaction involving the NAMA SPV – is there any clarity what the liquidation value of the remaining assets in NAMA is? Presumably it needs to be £15bn plus remaining liabilities?

That link seems to be dead.

The flexibility regarding when the bonds should be sold by the Central Bank is interesting. However, the following should be noted:

In a recovery scenario, the EZ is highly likely to be in recovery in tandem. That means higher ECB rates and German Govt Bond rates (2-3%), even if Irish spreads are only about 3%. Therefore the market interest rate on Irish debt in such a scenario could be as high as 5-6%, which is not historically high. This in turn means these bond would trade at a discount.

Wouldn’t this mean that the Central Bank/Government would make a loss when the bonds are sold?

In any case, the amount of money we will save on the deal in the long run is a pittance compared to the fact that the new instruments will be bone fide sovereign debt, pari passu with all other govt bonds.

If we had default on the prom notes the markets would probably have reacted positively. We cannot default on the new bonds without risking the position of other sovereign bondholders. Worse, this deal would seem to be much more difficult to undo.

It seems the Govt has locked the taxpayer into repaying every red cent of the IBRC debt, for the sake of short term political gain. Furthermore, they have struck a deal which they had absolutely no mandate for, given they campaigned on the basis of debt write down. Finally, those involved have shown (again) their absolute incompetence at negotiation and their inability to act in the long term national interest. It is a disgrace.

Anyone know where a recording of the DoF briefing by John Moran can be viewed?

Key points of the ECB “deal”, Irish Times, Reuters

http://www.irishtimes.com/newspaper/breaking/2013/0207/breaking56.html

@bazza

‘… the Govt has locked the taxpayer into repaying every red cent of the IBRC debt ..

Precisely.

Is the “interest only” rate “pegged” or will it shoot up just when there are likely to be multiple defaults on mortgages that are also on trackers?

@ Bazza
+ 1

Anyone know where a recording of the DoF briefing by John Moran can be viewed?

Or the Noonan/Howlin press conference? The merrionstreet.ie site has a very nice still photograph of the press conference but no apparent link to any transcript or audio/video recording of the actual press conference itself.

@ All

FYI

http://www.reuters.com/article/2013/02/07/markets-global-idUSL1N0B7BC720130207

Draghi may not be able to move mountains but he certainly can move markets.

if bond eoin bond is out there… it would be great to hear his take on this event.

@fiatlux

The minimum sales schedule looks on the face of it to be a retreat by the hard money wing. It looks like an extension to me and I would be interested to hear arguments as to how and why this is not monetary financing.

Despite all the talk about the ESM replacing Ireland’s bailout of its banks, and the ECB being forced to admit it was naughty and wrong in ‘forcing’ Ireland to bail out banks and senior bank bondholders – which was totally unrealistic without something that would stand up to international and German popular scrutiny (and didn’t appear) – I don’t think the Irish gilt market needed as good a deal as this one to stay steady.

It looks at first reading like monetary financing and it looks like a comparative victory for Ireland over the FANG hardliners – assuming they have properly approved it.

OK, so as I said before, the ECB hasn’t agreed to this deal. Effectively these manoeuvres are a unilateral move by the Irish Central bank to provide (very generous) monetary financing to its own government.

I think that allowing this deal will lead to the break-up of the eurozone; Germany out first.

I feel a little odd writing this because, while it seems obvious, absolutely no-one seems to be bothering to mention this. The giant green €25 billion elephant in the room is the fact that this deal involves the ICB directly, unilaterally accepting an interest only Irish Government Bond in exchange for more lucrative promissory notes. There has been no approval of this deal by the ECB, and not even a hint that the deal was ever going to be approved.

Fundamental eurozone rules and positions, which were such an insurmountable blockade to Irish debt relief less than a week ago, seem to have evaporated over the last 48 hours. Nobody seems to be asking how the German’s are going to react to this. More importantly, how are the Spanish, Portuguese and Greeks going to react to it.

Is it now OK for eurozone governments to create bank resolution corporations, and get their central banks to accept promissory notes followed by government bonds in order to reduce state costs in saving those banks? Is this the new bank resolution scheme for the eurozone and nobody told me? Did the creditor countries and the Bundesbank have a Damascene conversion at Davos, or did somebody slip something into the water for the rest of the delegates?

Am I just hallucinating here, or is my memory slipping away? Was I just imagining that the Irish authorities could not actually do what they have just done? Not at least without provoking a crisis in the monetary union? Isn’t this the sort of thing that leads to furious rows at board level?

It seems to me that, just as in 2008, Ireland has done something very, very foolish, in haste, whose reverberations will precipitate the next stage in the european financial crisis.

@OMF it is all in the structuring.

IBRC goes into liquidation so CBI seizes the collateral for the ELA being the PNs. Not making a loan, enforcing security. ELA disappears.

CBI agrees to swap the PNs with Government for new bonds. Again, not making a loan, swapping one highly illiquid asset for a much more liquid asset with the same value.

SMP and OMT (supported by the CJEU decision in Pringle) one can distinguish between making a loan, and acquiring a loan instrument other than through making a loan.

This falls into the latter category, and does not constitute monetary financing, just as acquiring Government bonds does not constitute Government financing under SMP/ OMT.

The ECB could have objected, they did not object, hence they tacitly approved it but reserve the right to prevent any one else using a similar structure (Spain or Cyprus) and reserve the right to put pressure on the CBI to liquidate its holding when in the money rather than sitting on these notes through to maturity.

Aisling, something tell me your arguments wouldn’t convince a Bundesbank committee.

This is monetary financing. OMT applies to the secondary market, not to central banks accepting bonds in exchange for cash or any other kind of asset. Just because promissory notes, or other assets like, say, gold, are not cash/credit does not somehow magically make this OK.

The ECB could have objected, they did not object, hence they tacitly approved it but reserve the right to prevent any one else using a similar structure (Spain or Cyprus)….

This is nonsense. Ireland has broken the rules, and the ECB’s lack of objection signals only that the members of the bank are in potential turmoil. Left satnd, this deal opens the floodgates of monetary financing, and while everyone in Ireland seems to be rejoicing at rain, I suspect other countries are getting ready to launch their boats. The ECB has not objected _yet_, and their lack of object is no kind of approval at all, tacit or otherwise.

It is yet possible that the ECB, which requested more time to scrutinise this deal, will in fact veto it completely. In this event, the government will probably fall, but I think the ECB will choose that over a Ger-xit.

@OMF

I don’t know about that. This “deal” seems to be designed to push 40 year servitude. I think it’s exactly the kind of slavery the ECB wants. If you can push half a lifetime, or a generation of slavery, whose to say you can’t push indefinite slavery and/or poverty.

The Depression is going into accelerated phase, soon. FX problems; real economy reassertion; tax increases; single earner, two parent families; IFSC collapse; currently illicit drug legalization and taxation; further asset price falls; capital shortages forcing interest rates up.

Pop that into yeer pipes and pull on it!

The debt will be capable of being purchased for 5% of face value. A good investment. Especially if bought by the state!

Old Deal: Euro 3.1 billion due on March 31, 2013.

New Deal: Euro X billion due on March 31, 2013.

What is X ?

@Geronimo

What is X ? For now zero.

Really the difference is

Old Deal: Borrow Euro 3.1 billion (from who?) and pay PN due on March 31, 2013
New Deal: Do nothing. Debt not due for 30-40 years

Peter J

“New Deal: Do nothing. Debt not due for 30-40 years”

I don’t believe you.

What can you do when this passes for journalism?
http://www.independent.ie/irish-news/turning-point-as-20bn-is-wiped-off-our-debt-burden-29055740.html

It’s utter tripe and a new low for the indo. No wonder it wants blogs banned!

This is a good deal if you’ll be dead in 27 years time and a bad deal if you’re not. The ECB has strict inflation targets and will stick to them meaning that there is little saving here.
This is the new normal low inflation, low growth, high but sustainable misery

@Bond Eoin Bond

You can’t be serious!

@moderator

well done!

Some good news for admirers of Germany: it posted its second biggest merchandise trade surplus in 2012, since 1950 – – but the interesting news is that there was only a surplus of €7bn with the other 16 of the Eurozone :

The French are doing well also in Asia thanks to Airbus and luxury goods.

http://www.finfacts.ie/irishfinancenews/article_102556.shtml

@ Geronimo

Maybe Shane Ross might turn up….Maybe Brian Lucey?

Time Magazine in 1973 had a piece on rewriting history: The Nation: It’s Inoperative: They Misspoke Themselves…

THE Nixon Administration has developed a new language—a kind of Nix-speak. Government officials are entitled to make flat statements one day, and the next day reverse field with the simple phrase, “I misspoke myself.” White House Press Secretary Ronald Ziegler enlarged the vocabulary last week, declaring that all of Nixon’s previous statements on Watergate were “inoperative.” Not incorrect, not misinformed, not untrue—simply inoperative, like batteries gone dead. Euphemisms notwithstanding, the Nixon Administration’s verbal record on Watergate is enough to turn ardent believers into skeptics.

We know from Noonan’s statements to the Dail that the ECB required the liquidation of IBRC as a precondition of any deal, so that part of the arrangement will have come as no surprise to anyone at the ECB. However Draghi did seem pretty bemused about the whole thing, saying that “it is unclear”, “the matter isn’t over” and “there is no agreement” etc.

I think the clue to understanding this is to recognize that the ECB are really only focused on when the money they printed will be unprinted, and are not concerned about how the government funds or finances these payments. This was clear with last year’s PN deal – the ECB “noted” the arrangement (with NAMA/BOI etc) but this was essentially irrelevant to them since they got their 3.1bn in full and on time. In the new deal I’m assuming that when CBI sell the new bonds, that the proceeds will be “unprinted”.

With today’s deal the unprinting schedule has been changed, but from the ECB’s point of view this is still logically separate from how the government raises the money to make the scheduled repayments. I would claim that the limited information available is consistent with the following “negotiation”

1) Starting point is 100% of the money paid back in 10 equal instalments over 10 years (i.e. 3.1bn a year for 10 years)

2) Honohan says: “We can’t live with that – how about a holiday of 10 years, and then 10 equal installments over the next 10 years. (Corresponds to the 15 yr CBI holding period that was reported as being rejected by the ECB 2 weeks ago)

3) Weidmann says: “No deal – the holiday is too long and makes it look like monetary financing – we could do 20 equal installments over 20 years”

4) Honohan says: “Still too much short-term pain – how about 25% in the first 10 years, ramping up, and then 10 equal installments of the remaining 75% in the second 10 years”

Now (4) is exactly what is in the DoF presentation published today.

What I suspect is that although things were converging the unexpected timing of the liquidation meant that Weidmann never got the chance to say “OK – it’s a deal”. By “noting” the action and saying there’s “no agreement” it means that the ECB reserve the right to revisit this part of the deal, which is what is important to them. All the rest is not important, or rather regarded as outside their scope (in the way that the details of last year’s NAMA/BOI arrangement were not important to them)

You can see there are some differences between the following statements:

From DoF presentation

The Central Bank of Ireland will sell the bonds but only where such a sale is not disruptive to financial stability. They have however undertaken that minimum of bonds will be sold in accordance with the following schedule: to end 2014 (€0.5bn), 2015‐2018 (€0.5bn
p.a.), 2019‐2023 (€1bn p.a.), 2024 and after (€2bn p.a.)

From the CBI:

The bonds will be placed in the Central Bank’s trading portfolio and sold as soon as possible, provided that conditions of financial stability permit. The disposal strategy will of course maintain full compliance with the Treaty prohibition on monetary financing.

My take is that both sides weren’t that far apart, but hadn’t come to a final understanding on what “as soon as possible”, and “financial stability” meant in practice, and perhaps on the disposal/unprinting schedule itself.

@Bryan G
“The bonds will be placed in the Central Bank’s trading portfolio and sold as soon as possible, provided that conditions of financial stability permit.”

Financial Stability =Debt/GDP ratio of 60%…
It could be a very long time!

@Eureka
You have a point on the possibility that inflation may be very low but this deal was as good as it was going to get, without outright confrontation. Ireland does not have the stomach for outright confrontation, though I concede that it was heading in that direction. [Below is copy of post on Namawainelake ]
“I welcome the deal.
It was probably as good as could be got. It reduces the deficit by about 1bn per year from now until 2021 and reduces the cost of the Anglo/IBRC debacle to a little less than 1bn per year.
I appreciate that this debt should never have been public debt, but short of going to all out war with the EZ, this is about as good as was going to be got.
There are two particular concerns
1. The amount of State bonds that must be sold back into the market in about 10 year time is very high. These may have to be sold at a sharp discount to par.
2. How will NAMA manage to collect 16bn cash from loans, some of which will be the dregs of the loan barrel.
Collins phrase the ‘freedom to achieve freedom’ comes to mind.”

@Fiatluxjnr

But the fact remains is all we did was to convert legally dubious promissory notes (legally knocked out at first base) to genuine sovereign debt which cannot be renegades upon without bringing down the whole house.

That might not eventually be recognized as a smart move.

But in the here and now it’s a cute move for the government as it shuts up David McWilliams and SF, at least until they find a new bandwagon. (Don’t worry, I have a new bandwagon for them. 😉 ) Now as it happens I don’t believe it would be either smart or moral for the Irish government to repudiate the promissory note at present, while there were costs (costs falling in March, for example) to keeping the option open in future by continuing to service them. Let’s be charitable and assume that the economic costs to the country of holding out through March were a much more important factor in this decision than the political costs to the coalition.

Some of the reaction to this announcement is OTT. It is basically the deal that has been known to be under discussion for over a year.
The potential alternatives were:
A debt write down
PNs to be replaced by very long term bonds eg 100y
Something broadly in line with the actual deal announced
A deal with no more than a token lengthening of the repayment schedule
Only one of those has looked likely since at least last summer. There was a recent wobble in the last couple of weeks because a particular version had been rejected.
I don’t think there is anything inconsistent with people who have been campaigning for write offs being unimpressed while those who don’t think the Irish have made a realistic case for write offs think it is a helpful deal. The German wing of the ECB has certainly conceded ground and allowed the original printing by Ireland to be made less temporary.
The question of whether this can really be argued to not also be monetary financing might be an appropriate topic for a less charged thread?

Can someone confirm the following?

If the Central Bank are forced to sell the bonds at a certain time, according to a schedule, and those bonds only sell at a discount, doesn’t that mean that the NAMA and the Government will take an even bigger loss?

The nominal interest rate may be EURIBOR 6M + spread, but if they only sell at 95%, then the effective yield will be even bigger. So instead of trading a debt instrument with an effective interest rate of .75% for instruments with average interest of 3%, we have traded low interest notes for bonds with unknown future yields that could be far higher than 3%?

Please tell me it ain’t so.

@Celebrity Economists

Don’t you think it might be time to come out and tell everyone how truly awful this deal is? Two fallacies that need to be put to bed:

1. This deal will save us 20bn in ten years – however, the total cost over 20 or 30 years will be far more than cost of the prom notes. This deal doesn’t save us money. Period.

2. The debt will be inflated away over 30-40 years. The interest on the bonds is floating – EURIBOR 6M + spread – this will always be higher than inflation, so there will be no Real gain – none whatsoever.

“Central Bank expected to hold the government bonds for a weighted average of 15 years ”

“expected” is very imprecise expression. Expected by whom?
What authority determines when the bonds must be sold by the Central Bank?
Precedent is not a reliable guide in unprecedented circumstances.

@Bryan G Oh no, absolute need for bonds to exist. If they didn’t exist then the arguments on monetary financing would be far stronger.

Here CBI swaps one asset (PNs) for another more liquid asset (bonds) which in theory it could flog tomorrow.

As you note, it would be mad to do so in the current market and thus the interests of CBI/ ECB and Ireland align. But if we did have a blistering 5 yrs of growth and falling bond yields (no matter how unlikely any of us think that it) one would expect the CBI to have largely exited its position, provided that such exit was managed to not overly disturb the market (but as the largest holder of longer dated bonds the interests of the CBI also does’t benefit from flooding the market to the detriment of the price).

Cleverly done that commercial interests mostly align and thus self correct.

Anyone understand what happened to the Bank of Ireland held Irish government bond. Why is the Central Bank of Ireland now the owner and how is Bank of Ireland getting its cash which had a ministerial guarantee?

In theory the liquidation of IBRC should have meant that the Bank of Ireland will not get repaid the €3.1 billion it provided IBRC in a repurchase agreement in June of 2012. However, in the document published to the markets concerning this transaction on the 30th of May 2012, the bank stated that a guarantee from the Minister for Finance of Ireland existed for this transaction.

“All of IBRC’s payment obligations to the Bank with respect to the Transaction will be covered by a guarantee from the Minister for Finance of Ireland of IBRC’s exposures for transactions of this nature.”

Section 290 of the 1963 of the Companies Act in Ireland allows the liquidator to seek to disclaim onerous property. It is clear that this repurchase agreement would be seen as onerous property as the consideration for the agreement is €3.1 billion cash that the liquidator of IBRC does not have.

“290.—(1) Subject to subsections (2) and (5), where any part of the property of a company which is being wound up consists of land of any tenure burdened with onerous covenants, of shares or stock in companies, of unprofitable contracts, or of any other property which is unsalable or not readily saleable by reason of its binding the possessor thereof to the performance of any onerous act or to the payment of any sum of money, the liquidator of the company, notwithstanding that he has endeavoured to sell or has taken possession of the property or exercised any act of ownership in relation thereto, may, with the leave of the court and subject to the provisions of this section, by writing signed by him, at any time within 12 months after the commencement of the winding up or such extended period as may be allowed by the court, disclaim the property.”

Without detail, the Taoiseach announced in his speech that the Central Bank of Ireland has now taken ownership of the €3.1 billion government bond which the Bank of Ireland acquired as a security for repurchase agreement with IBRC.

“In addition, the liquidation of the IBRC has caused the Central Bank to take ownership of the €3.4 billion bond used to settle the promissory note last March.”

Presumably the Central Bank of Ireland’s economic ownership of the Irish government bond that was issued to IBRC is because at the time of liquidation, Bank of Ireland had repo’d this government bond in the Central Bank of Ireland. It’s not clear whether this means that Bank of Ireland’s cash reserves which were being boosted through repo’ing the government bond have essentially been permanently transferred to Bank of Ireland by the Central Bank of Ireland given the liquidation of IBRC or whether the Central Bank of Ireland is just holding the bond as security for the defaulted IBRC.

The Taoiseach used the word “owner” while Department of Finance talks about “hold”.

If the Central Bank of Ireland is not the economic owner of the bond, the Bank of Ireland has a ministerial guarantee to honour the cash repayment terms which would in effect mean that the €3.1 billion the exchequer did not spend in 2012 in consideration for the promissory note, would now be spent to honour the ministerial guarantee. Although this isn’t very clear from the Department of Finance’s official presentations.

Anyone wanna help?

‘There are liquidation costs in 2013, so no material difference in this year’s general fiscal balance.’

It is projected that liquidation costs in 2013 will be €1bn. However, the surplus of assets over liabilities in the last IBRC balance sheet published, 30 June 2012, was €2.7bn, thereby giving a figure for the additional losses to liquidation of €3.7bn. Additional losses, post 30 June 2012, have to come mainly from the loan book, €15.6bn. It’s nearly all that’s there.

This has consequences for us: €1bn less to go around within this year’s government programme & budget. IBRC should explain now how these additional losses are so large. (Noting that within the period, July-Feb, IBRC gained considerably from the promissory note net interest received.)

NAMA will likely have a lower cost base.

It would appear to be a very good deal if one accepts that the promissory note was effectively a sovereign debt obligation to the ECB/CBI. Obviously, the capital repayment obligation will decrease substantially over time with normal inflation. People who do not acknowledge that core point are surely disingenuous.

@ gar ocos

You have outlined a good point about this year’s budget and government program.

If I understand the point you have made, this year’s government income and expenditure programme will not be adjusted to include an interest saving of €1 billion arising from the new agreement on the promissory note. Put another way, 20 x €50m available projects (say) across the full range of government expenditure areas and tax reliefs will be left undone. And why: because of further big losses in Ibrc. I agree with you, some explanation is required.

@ gar ocos

The Comptroller and Auditor General will be down on you.

Will the NAMA/ELA aspect of the arrangement crystallise a contingent debt which is currently additional to the Promissory note?

Whereas the funds provided to IBRC by the Central Bank on foot of the Promissory note will be available to distributed to creditors parri-passu (our old friend!) won’t any shortfall covered by the ELA have to be made up by this action?

Also, will the ELA floating charge crystallise over valuable assets leaving other unsecured creditors on a hiding?

Looking beyond the technical issues, there is a reality that nobody owes Ireland a first world standard of living, which we are unable to provide ourselves. But teachers, doctors, lawyers and politicians earn a lot more than counterparts in countries that can create wealth to sustain high salaries.

Foreign firms are responsible for 90% of Ireland’s tradeable exports while CAP welfare from Brussels sustains many farmers.

Nevertheless, like the cargo-cultists of the South Pacific, many argue that the cost of the misgovernance they voted for, should be all borne by taxpayers elsewhere.

The free lunch hasn’t been invented and there is NO inevitability that the standard of living currently supported by loans from the EU and IMF can be maintained.

The world is very different to what existed after 1987.

On the central bank minimum sales schedule, this seems to contradict:

“The following exchange took place in the Dail this afternoon [7th Feb] which throws a little more light on the bond.

Michael McGrath: The Tanaiste might say in his response how long the Irish Central Bank will be allowed to hold these long term Government bonds, which is the key issue at the heart of all of this. As long as the bonds are held by the Irish Central Bank the true interest rate to the State is reduced

The Tanaiste: On the specific questions asked, the Irish Central Bank will only sell the bonds where such sale is not disruptive to financial stability. There is a schedule of sales, which if the sale conditions are right, will amount to €500 million up to end 2014, €500 million in the next four years, €1 billion in the following five years and €2 billion per annum thereafter. As I stated, such sales will only be in circumstances where they are not disruptive to financial stability. The interest rate will be a floating interest rate. We expect it to be between 3% and 3.5%.”

http://namawinelake.wordpress.com/2013/02/07/nama-responds-to-the-ibrc-scheme/#comment-61981

@ MH

Do you not mean that salaries are being squeezed in Germany as the figures suggest?

If so, there is no change in German policy.

@ Aisling

You are batting on a difficult wicket. The complexities of the abolition of the PNs and the associated abolition of the ELA are such that they are likely to lead to debate for years to come.

The bottom line is that the deal is done and the debate has already moved to a different question. How will we spend the money? The rather paradoxical situation is that for the right answer to be given, economic conditions generally have to continue to be difficult.

The real national benefit is that the issue has been put to bed – despite the best efforts of David Begg – and the parties involved in the domestic debate now have nowhere to hide.

The fact that politics is a tough business is reflected in the lack of media attention being paid to the plight of the now redundant staff of the IBRC (senior personnel excepted).

@Geronimo

“New Deal: Do nothing. Debt not due for 30-40 years”
I don’t believe you.

What is it that you don’t believe? That nothing is due this March or the new bonds mature up to 2053

@ DOCM

The salary figures stated are the excess over inflation.

The key message on exports is that German exports to markets such as China, helps other EMU countries.

I guess now that claims that it has been shown that German exports are not a one-way street, the positive will likely be ignored because it does not fit an existing narrative — I’m speculating generally.

Of course there is no perfect economy and according to Destatis this week, about 5m people were in marginal employment in 2010. A total of 27% were looking for a job with more hours but did not find anything suitable. This was reported on the basis of a study prepared in co-operation with the statistics section of the Federal Employment Agency. In autumn 2010, well above 6,000 people in marginal employment were asked to answer questions about their social situation and their motivations.

Another 25% would have liked to work more hours but did not manage to put this into practice because of their personal situation. Nearly half of those in minor employment said they were content with the number of hours they worked.

@ MH

And the excess is falling when, if there is to be any return to balance between the European economies, it should be rising. I rest with my conclusion.

You are also assuming that the build-up of claims by Germany will not have a destabilising impact because the associated real trading activities are with countries outside the EA. I do not think that this is the case. It is competing for market share in third countries with other EA economies, the most striking example being, of course, the car industry where Germany has the added advantage of outsourcing (having recovered her Mitteleuropa hinterland while, astutely, blocking free access of labour for a full seven years). The core issue is the relative rates of productivity. Were Germany a leader in this field, it would have no need to hold dowm wages in the manner that it does.

I suspect that there may be another agenda at work i.e. demonstrating that, if no other country can maintain the disciplines associated with the euro, Germany can.