Transaction Overview

The presentation file is here.

Update:  supportive FT editorial here.

Some key points (from the ongoing press conference):

  • Central Bank expected to hold the government bonds for a weighted average of 15 years  – so the cheap ECB funding will not be extinguished very quickly.  The gap between the interest rate it receives on the bonds and the cheap ECB funding will flow back to the government via the profits of the central bank.
  • (Only if financial stability restored would the central bank sell the bonds on an accelerated schedule, beyond the minimum specified path. But if financial stability restored, sovereign bond yields would be lower, so selling the higher-interest bonds sensible.)
  • There are liquidation costs in 2013, so no material difference in this year’s general fiscal balance
  • In 2014-2015, the fiscal balance improves by 0.6 percent of GDP.

82 replies on “Transaction Overview”

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.

Steven Donnelly on VB seemed to have a better handle on this than has been the case since in the media.
Well, if RTE after years of ignoring the fact can finally repeatedly say over the last fortnight that the guarantee was forced by Trichet, perhaps in four or five years time their slo-turning-cogs will permit them to admit that debt that should and could have been written-off was consolidated and made permanent.

Was there a real danger that the upcoming High Court date could hae scuppered this, and the ‘leak’ was made to hasten things up prior to this ?

@ bazza +1

Financial illiterates, they have done the opposite to everything they waffled on about. Odious debt? They now accept every cent of it. Enda Kenny telling us last June that there had been a seismic shift and now he goes and converts bank debt into the strongest form of sovereign debt.

I honestly think that we have far too many political has been’s running the country it is easy for a bunch of people in their 60’s and in Noonan’s case almost 70 to sell young people into debt. In all this has been a complete sell out.

Some detail from the link posted by David O’Donnell above

* The new government bonds being issued are made up of three tranches of €2 billion maturing after 25, 28 and 30 years, three of €3 billion maturing after 32, 34 and 36 years and two of €5 billion maturing after 38 and 40 years.

* The payments on the debt move to an interest-only system, and the outstanding principal on the new government bonds will only be repaid when they reach maturity.

* If Ireland sticks to its spending plans, the deal is forecast to bring the country’s budget deficit down to 4.5 per cent in 2014 from an earlier projection of 5.1 per cent, and to 2.4 per cent from 2.9 per cent in 2015, a presentation from the Department of Finance showed.

* The Central Bank has agreed to sell off a minimum amount of bonds every year, described by secretary general of the Department of Finance John Moran as a “very light disposition” in its early stages.

* The minimum sales are: €500 million worth to be sold by the end of 2014, at least €500 million a year from 2015 to 2018, at least €1 billion a year will be sold from 2019 to 2023, and after 2024 at least €2 billion a year will be sold.

* Sales of the bonds must be done in a way that is “not disruptive to financial stability”, Mr Moran said.

What do you think of the sales plan?

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?

from the FT Editorial:

‘As the opposition rightly argues, restructuring the promissory note does not make the public liability for banks losses lower, just easier to bear. Europe must still make good its promise to separate bank and sovereign debt.’

The Conflationist Fallacy still holds – most so right now in the case of Ireland. The June 2012 statement remains ‘rhetoric’ – the war goes on to smash this fallacy into smithereens turning this ‘rhetoric’ into reality: this could be a longish war. [Blind Biddy is somwhere in the Sahel!]

“That, added to this week’s deal, may throw open Ireland’s door to bond markets. When that happens, Dublin should – proudly – ask for ECB bond market intervention to be activated. With words alone, Mr Draghi has kindled tentative market confidence in the euro. With a little more help, Ireland can present him with a worthy candidate for putting words into action.”

To quote an old rhyme; “Come into my parlour, said the spider to the fly!”

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

Or the Noonan/Howlin press conference? The 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.


to quote Foucault – ‘.. those that from a long way off look like flies.’

… are actually people.

Who is this George Lee fella? Thought he had eloped with Seven_of_9? Has he been assimillated by the Borg? Pat Kenny certainly has.


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.

@paul quigley

Ta for clarification:

Michel Foucault begins his preface to The Order of Things,[6]

This book first arose out of a passage in Borges, out of the laughter that shattered, as I read the passage, all the familiar landmarks of thought—our thought, the thought that bears the stamp of our age and our geography—breaking up all the ordered surfaces and all the planes with which we are accustomed to tame the wild profusion of existing things and continuing long afterwards to disturb and threaten with collapse our age-old definitions between the Same and the Other.

Foucault then quotes Borges’ passage

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.


They have not ‘approved’ it – danger of precedent – they have simply ‘noted it’ and addressed it as an ‘internal arrangement between the Irish Gov and the CBI’ for semantic and legalistic reasons: imho.


Any Chinese scholars on the blog?

@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.


is this some sort of funky derivative deal? ECB has green lighted it btw, nothing unilateral here. If you can find an announcement from the ECB when they ok-ed the original ELA program that’d be great thanks (hint: they didn’t ever formally or publically agree to that either).

@ Holbrooke

It’s a great deal given what was achievable (anyone asking for a debt write down should not be considered a serious individual).

@ All

The level of financial illiteracy displayed today from people claiming to know what they are talking about is genuinely distressing. I’m including a few well known academics. Doesn’t take a genius to guess who. Numerous politicians, journalists and miscellaneous commentators doing it too. Pls stop it.

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.

is this some sort of funky derivative deal?

Pointing at elephants is not an easy job.

ECB has green lighted it btw, nothing unilateral here.

No, they haven’t. That’s the whole point.

If you can find an announcement from the ECB when they ok-ed the original ELA program that’d be great thanks (hint: they didn’t ever formally or publically agree to that either).

Nobody here needs me to explain the difference between the ECB issuing ELA to banks and the ECB/ICB buying bonds directly from governments with interest bearing assets. Nobody is going to need to explain it the German’s either.

Perhaps I’m completely wrong here and everything is absolutely hunky-dory, and we can all go back to the punch bowls. There’s no elephant, and there never was. And the last five years have just been a negotiation leading up to this entirely permitted and completely uncontroversial action. This is all OK, we’ve dealt with a big slice of our debt, and the eurozone is going to be just fine. This is the deal that finally works. That sounds good, and I can safely say that I would be delighted with that.


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.

@Eoin Bond

It’s a great deal given what was achievable (anyone asking for a debt write down should not be considered a serious individual).

The needlessly extended European component of the global financial crisis is the product of serious people and serious policies.

Germany’s gold bug tendencies stem from seriousness. That poor fool Trichet was serious every misguided step of the way (why “strong determination” simply reeks of seriousness!). George Osborn is serious about the UK deficit. Alan Greenspan was deeply serious.

Serious individuals do not think the ECB bears significant responsibility for the privileging of private financial capital over state interests – it is just the natural order. Serious individuals respect (almost revere) the shortcomings of EMU (rules are serious, even misguided ones). Serious individuals bandy about market discipline as a solution to a crisis caused by a huge market failure.

Serious individuals seem invariably to be seriously reactionary.

You are not a bad example of it Eoin (Hi Aisling) but pronouncing that the political opposition is “unserious” is self satirizing in a deeply unflattering way. Really.

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!

Clearly it is monetary financing. Why did the ECB not approve..merely noting it had occurred. Obviously they are concerned about precedent.
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.

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

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

What is X ?

David Begg, trade union leader and former central banker, has penned a piece in The Irish Times today on his Saturday ‘atonement’ protest against debt.

The Sept 2008 bank guarantee was an ‘act of madness’ but it took him 2 years to leave the asylum — and then only after the existing board was abolished.

I have added my best wishes:

Mr. Begg,

This is the first bust, panic, depression or recession since the genesis of the Irish trade union movement where you have made common cause with counterparts in the wealthy professions to maintain sectional privileges……


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


I’m lost.

How in the name of the Mother of God does Begg get away with this ? This is surely the definition of insanity.

Will Brian Cowen, Patrick Neary and perhaps Hurley, Dunne, Fitzpatrick and Fingers be at his side in this protest?

What can you do when this passes for journalism?

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

Wonder what will the Gov do with the ‘FICTIONAL’ and deeply misleading 20 BILLION that is headlined in The Irish Times and Irish Independent?

First they might Apologise to the women of the Magdalene Laundries

Second they might restore the 1.7 BILLION for the LImerick Regeneration Project that was pulled by Fianna Fail (have they self-liquidated yet?) to pay unsecured bondholders. [any others]

@Irish Examiner

Well done. Paper of record which did not buy the misleading bullsh1t – excellent illlustative photo with a toddler and 2053. BTW Aoife and Anto are furious … not sure where Anto picked up the lingo **&^%%%$£$$” must have spent too much time with Biddy.

Not too difficult to figure out the Gov’s PR Strategy

PNs are gone. 20 BILLION 20 BILLION 20 BILLION PNS ARE GONE 20 BILLION 20 BILLION 20 BILLION PNS ARE GONE 20 BILLION 20 BILLION 20 BILLION PNS ARE GONE 20 BILLION 20 BILLION 20 BILLION 20BILLIOM 20 BILLIN 20 BILLIN 20 BILIN 20BLN 20 BLN 20 BLIN ETC ETC while ‘those that from far off look like flies’ ………. are grandchildren.

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.

@ 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.

Irish Economy: Economic fairytales of Ireland, exports, FDI and the IMF

By Michael Hennigan, Finfacts founder and editor

Minor point Michael: as with all IMF working papers the views are those of the Author and not necessarly that of the IMF.

That said, keep up the good work in highlighting these fairy tales – the one that really bugs me are the inflated average ‘worker competitiveness’ due to transfer pricing in the MNCs.

@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!

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.”


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?

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?

@ MH

The real concern is with comparative wage and inflation developments between Germany and the rest of the EA. I gather that they are not good. You may have the statistics.

On the FT’s friendly advice that Ireland “proudly” avail of OMT, the point about the latter, as I understand it, is that it is a weapon that is best used as a deterrent i.e. it should never be used. So far, it seems to be working. How could it be in Ireland’s interest to be seen to be disturbing this and, in effect, seeking a second bailout?

Draghi has apparently “kindled tentative market confidence in the euro” when the reaction of the markets to his comments yesterday was that he was trying to talk it down!

Go figure!

Still, it is nice to know that the FT has Ireland’s and the euro’s best interests at heart.

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.

@Bryan G I think that the difference is actually self correcting. If we struggle (and as such would really need the benefit from the CBI sitting on the bonds) the bond prices would probably be such so that it would not make sense for the CBI to sell, and would commercially make more sense for it to sit on the bonds.

If we somehow repeat the Celtic Tiger and the debt burden and borrowing costs fall, these notes appreciate and thus the CBI would be incentivized to sell (generating profits to be returned to us).

The deal includes minimum sales by the CBI, but not maximum sales. CBI , making solid commercial decisions, is thus motivated to sit on the bonds while we struggle, and motivated to sell if we don’t.

Assuming that our financial stability is reflected in our borrowing costs/ bond yields this should all come out in the wash.

@OMF Have you read the Pringle judgement especially the pragmatic approach that the Court took to Art 125 when dealing with EMF lending? If not I’d suggest you do so before continuing to declare this illegal monetary financing which you expect Weidmann to denounce in the coming days (and a failure of him to do so will further evidence that he did not seek to veto this).

“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.


That’s an interesting point – the gov could “prepay” when market rates are favourable, though this may be counterbalanced by the effect the additional supply would have on regular bond issuance costs.

One thing that appears to be completely lost in the discussion, however, is that the bonds are only “real” when they are sold on. Issuing bonds to yourself, and paying interest to yourself, is only an accounting construct. The CBI will remit any income, whether of interest or principal, right back into the Exchequer – it is money flowing in a circle. As Draghi said, it’s a purely national arrangement.

For simplicity the whole thing could be recast as a promise by the gov to issue bonds, at the then prevailing market rate, on a set schedule, and give the proceeds to the CBI, who will then unprint. This is where the money flows out of the circle. There no need for the bonds to exist at all until the point they are sold into the capital markets to raise the funds to pay back the CBI.

Much less scope for obfuscation and spin however.

@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.


Arguments required on:

a) Was the printing by the CBI in exchange fot PNs ‘monetary financing’?

b) Does taking the sterilisation schedule and lengthening it amount to a) ?

Monetary financing in economic terms means printing money to fund a deficit instead of borrowing it.

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?

St Patrick of Honohan in the IT

“He said he had “quite a lot of sympathy” for people involved in the 2008 bank guarantee. “Some should have been better informed, some should have had better advice, some shouldn’t have jumped to conclusions, some shouldn’t have been so arrogant and over-confident.”

That riff has the makings of a great song .

Or else an election poster.

‘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.

@Grumpy Did it fall with Article 123? Certainly, but there is a carve out for lending to banks owned by States once they are on terms generally available in 123(2) which the original ELA fell within.

So Art 123(2) was what cleared the original ELA.

Because this involved no “lending” but rather a swapping of assets I don’t think that the CBI sitting on the notes (once commercially that makes sense) changes this. If it sits on the notes at a point where the commercials indicate that it ought to be selling I don’t think that technically changes anything on the Art 123 front.

But, and this is a significant but, I would expect pressure to be brought to bear by the ECB based on the need to “unprint” the original euro “printed” for the ELA. This is in the Protocol on ESCB rather than the main body of the treaty, but legal pressure remains, just that pressure does not come from Art 123.

Not as hard and fast as the Art 123 prohibition, but certainly the ECB would have an argument and this is one of the reasons they cannot come out and bless this.

@ 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.

@ gjninkaro

NAMA will apparently take over the IBRC loan portfolio after portions of it are offered/sold to other third parties. It seems the original price agreement will be per book value, but, after independent valuation, the Dof guide says, ‘the Minister will make good any shortfall to NAMA.’

The independent valuation will be important. If values fall close to the 30 June 2012 book value the provision will not have been necessary. But it is clear that losses of €3.7 billion have been projected.

I would prefer to give the benefit of the doubt to this year’s projects than be overly cautious with this transfer to NAMA.

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?


Real earnings (inflation adjusted) grew by an average of 0.6% in Germany in 2012 compared with a year earlier. Following increases of 1.0% in 2011 and 1.5% in 2010, this is the third consecutive rise.

UK earnings fell by 7.1% in real terms in 2010–11.

@ All

As with a company, the key issue in the short term is cash flow and space to address challenges on creating sustainable jobs and so on — that is the type of issue that is difficult to deal with and often ignored.

As for pining about grandchildren, how many today think about the positive and negative legacies of generations ago?

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.


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

Let me rephrase the question – from the point of view of the real economy (ignoring the dancing around on the legal issues surrounding monetary financing and ignoring purely intra-governmental flows), does it matter?

Imagine two parallel universes – one corresponding to the current deal, and the other where the bonds are created just before sale. You are placed into one universe – how can you tell which universe you are in?

An important consequence is that the interest rate on the bonds created before sale doesn’t matter. It is like the coupon rate on the tap of the 2025 bond that was used in last year’s NAMA/BOI arrangement. That was at one value (5.4%) but market rates were higher (6.8%). So to issue at market rates 3.46bn of bonds were issued to cover 3.1bn unprinting. The effective liability/yield is dependent on the market rate of interest at the time the bonds are issued, not on the nominal value of the coupon amount.

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%.”


b) Does taking the sterilisation schedule and lengthening it …

It seems to me that it is (only) the lengthening of sterilization schedule/reverse QE that represents the true gain to the Exchequer. Whether these payments are funded by issuing bonds at market rates, or selling off parts of Kerry to some Russian oligarch, is a separate issue. It is like buying a car – there’s the cost of the car, and the cost of the financing to buy the car. None of the coverage I’ve seen seems to address this.

My assumption is that whenever the bonds are sold, that it won’t just be –

“sell bonds with face value of x, and remit whatever you get to the CBI”,

but rather

“sell as many bonds as you need in order to remit x to the CBI”

I could be totally wrong of course, but it is important to clarify which one of the above applies.

@ 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).


“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

I commented above (11:58 am) that there would be no benefit accruing to the government this year from the €1bn interest savings arising from the promissory note deal, stating that I thought this was as a result of further downward valuation of the €15.6bn loan book. The issue has been explained in an RTE news item, ‘IBRC bondholders to get €750m from €1bn liquidation costs.’ Most of the €1bn provision (which cancels out the interest savings) is cover for a cash payment of €750m for guaranteed bonds.

However, that still leaves the question of how the the final deficit/surplus will emerge. The CBI is also going to cover some of the deposits, possibly from CBI’s own provisions/insurance (should the final situation be a deficit). That’s an IBRC gain. The language of DoF’s briefings suggests a final deficit. Adding the 30 June net asset position, €2.7bn, with the bond provision, €0.75bn, plus the additional provision, €0.25bn, plus CBI’s deposit guarantee, say €0.3bn, gives a final loss since 30 June of €4bn.

That more than balances out the non-payment of the €3.1bn promissory note instalment – which is only deferred. We need sharp answers on this €4bn loss over 8-months, particularly following claims before an Oireachtas Committee recently that the final deficit would be €4.3bn ahead of projections.


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.

@gar ocos

“The language of DoF’s briefings suggests a final deficit. ….We need sharp answers on this €4bn loss over 8-months”

I agree with you. It seems that a significant and as yet unreported loss in IBRC from June 30th 2012 to date is being entangled and dispersed into the State’s ELG payment and any CBI insurance payout.
Not exactly ‘best practice’. If your figure of 4bn is correct, the loss of €4bn comes from a loan portfolio of ~16BN last June, a 25% hit on June 2012 valuations. Some hit.

@ 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.

Extract from “The Fitzpatrick Tapes”(Tom Lyons and Brian Carey)
Chapter 7 “Massacre” page 123

” Our exposure is not to the building it’s to the money that comes from the leasing of it. If the value of the property goes down it doesn’t matter we still get our loan repaid” Fitzpatrick was nothing if not consistent in this ,one of his core philosophies.

If you examine Fitzpatrick’s core philosophy,if the property was worth zero, it didn’t matter because he wasn’t lending against the properties,he was lending against the feudal leases.
Ruinous Irish commercial property lease law i.e.upward-only rent reviews tied to long leases,say 25/35 years with no break clauses,were only available in Ireland.No other eurozone country,or any other country in the world allowed this ruinous lease law. These feudal leases were imposed on all Irish commercial tenants because the sovereign had signed them for the corrupt politicians donors/bagmen.

This is the real Anglo Irish Bank story.

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