Interest rates redux

Under the old Promissory Notes arrangement there were four interest rates involved:

  • Promissory Note Interest Rate: 8.2% (from 2013)
  • ELA Interest Rate: 2.50% (MRO + 1.75%)
  • ECB Interest Rate: 0.75% (MRO)
  • Government Borrowing Rate: 3.3% (under EU/IMF Programme)

As was eventually realised it is really only the latter two that matter.  The repayments in the Promissory Notes converted very cheap debt at the ECB MRO rate to more expensive debt at the government borrowing rate.  The problem was never the interest rate on this debt, the problem was that it needed to be paid down too quickly transforming it into higher-interest debt.  Under the old arrangement the average duration for this was around seven years.

If we just focus on the Promissory Notes element of the arrangement (and ignore the transfer of IBRC assets to NAMA) the key interest rates in the new arrangement collapse to:

  • Long-Term Government Bond Rates: c.3.5% (spread over Euribor)
  • ECB Interest Rate: 0.75% (MRO)

Initially the interest rate on the new government bonds doesn’t really matter.  The interest is paid to the Central Bank which repays it back to the Exchequer.  The Central Bank pays the ECB MRO for the facility to hold the bonds.

Once the Central Bank sells the bonds the interest becomes payable to a third party and will no longer be returned the the state.  This will start slowly with €0.5 billion of the bonds to be sold by the end of 2014.  This will continue at a rate of €0.5 billion per year up to 2018, €1 billion a year from then until 2023 and €2 billion a year thereafter.  Under the proposed schedule the Central Bank will have fully disposed of the bonds by 2032.

It is through this process that the cheap debt (based on the ECB MRO) will be transformed into more expensive debt (based on the rate on the new bonds).  The difference now is that this process takes place at a much reduced speed over an extended period.  The average holding period by the Central Bank is nearly 15 years.

In effect the period we have access to funding at the ECB rate has been extended by nearly eight years.

After the bonds have been fully disposed there is little difference between the Promissory Note arrangement and the Long-Term Bond arrangement.  As stated this will happen in 2032.

The emphasis on what happens with the bond redemptions from 2038 to 2053 is somewhat misplaced.  There was always going to be debt to service/roll-over during this period as a result of the Anglo catastrophe.  As pointed out the real cost of this will likely have been significantly reduced but yesterday’s announcements make little real difference to this period.

The key gains are the short-term funding benefit with the cancellation of the Promissory Note repayments and the fact that the period for which cheap ECB funding is available has been extended from around 2022 out to 2032.  The benefits are not related to the length of the bonds used (and nor does using long-term bonds generate an additional cost).

78 replies on “Interest rates redux”

History shows that much sovereign debt has been eroded by the failure of nominal interest rates to keep pace with inflation.

Unanticipated inflation during the post-war decades substantially eased the heavy burden of sovereign debt incurred by the US and UK during the Second World War.

Patrick Honohan pointed out in an ESRI study published in 1994 that Irish real interest rates averaged minus 0.5 per cent over the period 1935-81.

Real rates were seriously negative in the 1970s. Did I detect a nostalgia for those years as Minister Noonan reminisced yesterday on how the burden of his mortgage had been lifted with the passage of time?

Default has many disguises.

Seamus, I have seen your spreadsheet on your blog. As usual it explains better than words exactly what is at stake here. My understanding is that you have calculated the NPV saving of the New Deal as 4bn. The schedule of substitution of monetary financing with market funding is probably fairly robust in this demonstration. So the key question is what will be the differential between monetary financing rate and market funding rate. You have assumed 3.25%. That seems high – I think Noonan puts it at 2.5% and remember not so long ago this differential was about 20bp!

Hence I think your NPV assessment of 4bn is a bit toppish – I would go for 2bn. And of course there are other benefits i.e. fiscal targets easier and cash flow easier.

Question: The Department overview talks of the rate being 6 month Euribor + Irish spread. Do you think the spread will be decided at the commencement of the issue or will it be decided at the time of each coupon payment?

@ BW II,

I agree and have said I wouldn’t hang my hat on the €4 billion number. I think the 30% relative savings is a better measure. You could change the interest differential but as it would be applied to both scenarios the impact on the relative difference would not hugely impact on the conclusion.

You are missing the point about seniority here.

Implicit in your point of view is that the PN were credit risk free and the Government had to treat them in the same way as bone fide sovereign debt, pari passu with all other creditors. That was definitely not the case.

The PNs were of dubious legality and just owed to our own Central Bank – not the IMF, the EFSF, a sovereign bondholder or any other investor-creditor. Your post seems to assume that the Govt would indeed pay off the PNs and the choice was between taking this deal or converting the PNs to bailout financing.

The dogs in the street know that the Govt could have, without a lot of hassle, decided to declare the PNs illegal and refused to pay. There may have been unknown costs to this in terms of goodwill, but what is that worth? The ECB knew this, which is why they hated the PNs (just see Joseph Coterill’s post on FTAV last night about this).

Rather than face up to the ECB, the Government has gone ahead and traded the PNs for senior Government bonds. The cost of not paying back the Anglo debt is now a genuine sovereign default, that would be recognised by ISDA and would affect all other investors in Irish Govt debt.

I agree there is not much difference between paying back all the PNs on schedule or this new deal. However, the PNs were never going to paid back on schedule – it was not feasible economically or politically. Instead the government has locked the public into paying back all the Anglo debt.

And on the inflation – the interest rate on new bonds will be floating and will be a good deal greater than the rate of inflation. The interest paid on these bonds will negate any real erosion of the value of the bonds.


The principal and spread of the bonds will be decided at inception. There is a real danger that these bonds will trade at a discount, meaning that their yield to maturity, from the time they are sold, will be higher than the par rate. Which means we will pay more interest.

@ Bazza

why would the bonds trade at a discount?
whats the real “effective rate” of interest on these bonds for the first c.15yrs?

@ bazza

Peter Matthews et al weren’t asking the government to default on the PNs. They were asking the CBI/IBRC to tear them up. They based this on Karl Whelan’s assertion that a bust central bank harms no-one. Couldn’t the CBI equally tear up these new bonds?

@Bazza by refusing to acknowledge that EU law which neither the Irish legislature, nor the Irish constitution can override, you have come to a politically palatable but wholly impossible conclusion.

Regardless of how the PNs came into being, Ireland was obliged to stand over IBRC repaying the ELA once we nationalised that bank.

Should we have nationalised Anglo/ INBS? That’s a whole different question, and a much older mistake, but a mistake that was made and cannot be unmade.

It doesn’t matter whether the ELA was repaid via the PNs, or via the ECB suing us for damages for breach of EU law. The net effect would have been the same thing i.e. we were on the hook for mistakes made by the previous FF Government.

So ignoring this little reality, as many chose to do, and I can see that there is a down side to what the Government did.

Accepting this little reality and this deal is almost as good as could possibly have been hoped for.

That’s not to say that separately the Government should not be pushing for the ESM to help out with the bank bailout costs, and that is subject to ongoing EU Council politics.

But once we nationalised the constituent parts of IBRC we were on the hook for their ELA, and the ECB’s hand was a whole lot stronger than just being based on “goodwill”.


I believe you are basically correct. However, please note that:

– The schedule of CBI bond sales you present is the minimum schedule. They may sell faster.

– Indeed, in yesterday’s press release, the CBI announced its intention to sell its portfolio as soon as possible.

– The ECB has taken note of the agreement, but not agreed to anything. In other words it has reserved the right at any moment in the future to come to the conclusion that the financial stability justification for the arrangement has ceased to exist and therefore, to avoid violating the prohibition of monetary financing, the CBI must accelerate its bond sales.


Regarding your calculation: how did you arrive at 6% for a discount rate? It would seem that you included a hefty Irish Govt credit spread. It is not correct to just apply 6% to all cash flows across the board.

By this rationale, the more dodgy that Irish Government debt becomes, the value of that debt decreases to us. So, lets say there is a shock to the Irish economy and Irish Govt bond spread go out to 20%, do you then discount all CFs at 20% so that the value of the debt declines substantially. Eh, no. If a CFO did this he would be put in jail.

There are two ways to proceed. You can consider that all cashflows MUST and will be paid and are essentially risk free. In this case you would discount everything at the risk free rate of EURIBOR 6M, say 2-3%.

If you want to take account of credit risk, we can assume that the coupons on each instrument accurately quantifies the credit risk of that instrument (if not, then there should be a specific reason for this).

To take account the credit risk of the dodgy PNs, we should use a far higher discount rate than the Govt Bonds, maybe in line with their nominal coupon of 7-8%. The bonds used to replace the PNs could be discounted at a lower rate, say 5%, but this is still above the special deal we would get under the bailout of 3.3% interest.

The governmet bonds that will be issued under the new deal will be FRNs with a spread for Irish Govt risk. If we assume this spread is about right, then it is appropriate to also discount those bonds with the floating rate + spread. Therefore, new govt bonds would price back to par.

It is incorrect to show that the discounted value of the new bonds is less than the par value. By doing this you are assuming that the Irish state is riskier than the spread of the bond suggests. What is your reason for this assumption?

I will try to do the same calcs as yourself over the weekend, with clear assumptions about all the discount rates used.


“Ireland was obliged to stand over IBRC repaying the ELA once we nationalised that bank.”

Why? The only guarantee given was in the form of the PNs, which, as far as I am aware, being a contract between the Irish Govt and the Central Bank of Ireland, would come under Irish law. The Govt can change Irish Law as they did during the week.

There is nothing in European Law about nation states making good on commitents to other parts of that state. That is precisely why the ECB were so nervous about the PNs and the ELA, because both were between the CBoI and the Irish state.

What does come under EU law is what the ECB can demand of nation states. It manifestly cannot demand that states pay back unguaranteed bank bondholders. Why has the Irish GOvernment not taken the ECB to Strasbourg over this?


How would tearing up the PNs bust the CBoI? If the PNs were not paid, the CBoI could have drawn a line through the liability that was the created ELA. If the ECB decided to prevent them from doing this, then the alternative is anyones guess – maybe they would have asked for the ESM for an asset to replace the PNs, maybe not. Either way, who cares?


Lets say the bonds are written as EURIBOR 6M + 150bps.

If the CBoI sells them in 5 years time and the equivalent Discount Margin on Irish Govt FRNs (the markets view of Irish Govt credit risk) is greater than 150bps, then those bonds would trade at a discount.

Thanks Seamus and Philip for the various posts over the last few days. Yesterday seems to have been an important development for the country – not the end of the road but an important milestone on the way .

I was wondering if there would be any chance of an economist vox pop on the event- what does it mean and how do people see things working out from here on? I’d love to hear John McHale’s and Kevin O ‘Rourke’s views .

And now that the PNs are out of the way any chance of some analysis of long entrenched Irish structural problems such as unemployment and what to do about it ?

@ bazza

Oh dear, you are having a deposit selling moment. ELA is an asset of the CBI not a liability.

I too think that 6% is somewhat toppish as a long term discount rate but again I think you may be having a bit of a moment, reducing the discount rate increases the NPV of the relative advantage of the New Deal.

@ Bazza

or they could trade at a premium, obviously…

you also seem to be ignoring the Target2 liability that was created by the ELA? (on the discussion about the tear up)

@Bazza First things first. This is not about unguaranteed bondholders, this is about the collateral for borrowing between a State owned bank and the Central Bank of Ireland (CBI). So park the bondholders, they’ve pretty much all been paid by now, that horse has been turned into lasagne.

In terms of the ELA being between the CBI and an Irish State owned bank the relevant law is Art 123, Art 125 (if you’d like to think that the losses could have been shared through the ECSB), the Protocol on the European System of Central Banks Arts 7, 14, and 21.

The ELA was only legal under Art 123(2), and then only if properly collateralized. Default on the collateral i.e. the PNs and the ELA was illegal at which point Ireland would, if the CBI had not sued to be made whole, have breached the independence of our Central Bank.

Were there the slightest possibility that the Government would default on the PNs then the ECB would have, by a 2/3 majority, pulled the ELA and collapsed the house of cards that was IBRC resulting in €12bn of remaining assets in IBRC being sucked out of it wth us still being on the hook for the rest.

Really, just because it sound nice does not make it legal or possible. Why must people believe that our Government was sold a pup on this when all they did was behave within the confines of the law?

Back to the bondholders. Nowhere in EU law does it say that the ECB can force a State to pay out to unsecured bank bondholders. Similarly, nowhere in EU law does it state that the ECB must keep one nation’s banking system open for business.

That was the choice, our previous Government made it, rightly or wrongly.

@Bazza One final point. The reason that the ECB did not like the PNs was that they felt it came dangerously close to being prohibited by Art 123, and risked setting a precedent but chose to cut us some slack.

They refused to cut the same slack to Spain!

Helpful explanation above. Thanks for this and other analysis. ps Anyone with access to Bloomberg might be interested by the tone of this and other FAZ articles eg “Irland bekommt 25 Jahre Zahlungsaufschub” {NSN MHV81W3M0C8Y } Also suggests the bonds will need to be ANFA-registered. So off-balance sheet.


The ELA may have been covered by European Law, but the PNs were not.

What would have happened if the PNs were judged to be illegal? The Govt would have stopped paying them and what then? The CBoI sue the Irish state under Irish Law? How do you think that would go?

IBRC would have collapsed for sure, but the total cost of the PNs was 31bn. The assets in IBRC were 12bn and it is highly unlikely that all of this would have been lost. So the net gain would have been at least 20 bn.

And regarding the ECB behaviour towards the Irish banking system – the ECB may not be specifically legally bound to maintain EZ wide banking stability, but this is taken as a given. When the Italian banking system looked a bit wobbly in 2011, it shored up the whole EZ banking system with the LTRO. Someone in the BuBa could easily argue that this action was a substitute for Italian Govt action and called it monetary financing too (in fact I think some did). In the end nobody cared, because part of the job of a Central Bank is Lending of Last Resort, whether Weidmann likes it or not.

Finally concerning the bank bondholders. I know very well that most have been paid (but not all). CMcCarthy has outlined out the ECoJ could award damages to Ireland if the ECB was found to overstep its mandate. Seamus Coffey cautioned against doing this in expectation of a sizeable deal on the PNs – he said in the Indo that any deal would be much greater than the amount saved in burning the bondholders. However, his own calculations above show this to be definately not the case.

@Gavin Kostick

I was wondering if it would be possible to “do a Jad Abumrad” on the Irish economy and the numbers and the key phrases and turn the economic discussion into a really good radio programme .

“If there’s a next Ira Glass, it might well be Jad Abumrad, who has teamed with the veteran reporter Robert Krulwich to produce what may be the most- talked-about show of the moment, Radiolab. In an almost comic attempt to make their job hard, the duo take only the most difficult subjects from science and philosophy: “Time,” “Morality,” “Memory and Forgetting,” “Limits.” They’ll usually interview a few experts, but the beauty of the show is the interplay between the hosts, separated by several decades and by sensibility. A musician by background, Abumrad plays with the sound of voices to underscore points, to circle back, to undercut assumptions. “Jad uses a layered, jazzlike metric,” says Krulwich, “creating breadths and spaces and layers of sound that are new. Not new to Tchaikovsky or John Cage, but new to radio.”

Meticulously engineered, the soundtrack often repeats, stutters, returns. The recent show on “Numbers,” for instance, begins with Johnny Cash’s famous song about the last twenty-five minutes of a condemned man’s life and proceeds to an interview of sorts with a thirty-six-day-old baby and a Parisian neuroscientist who has demonstrated the early age at which children acquire numeracy. You can hear how infant brainwaves respond to a picture of eight ducks—and what happens when sixteen suddenly appear. “I remember when the show began, I’d get this comment all the time: ‘I really can’t wash the dishes when I listen to you guys,’” says Abumrad. “


I meant:
“the CBoI could have drawn a line through the liability that was the money created for the ELA.”


IBRC would have collapsed for sure, but the total cost of the PNs was 31bn. The assets in IBRC were 12bn and it is highly unlikely that all of this would have been lost. So the net gain would have been at least 20 bn.


It is galling to hear those involved in the financial sector or sympathetic to the German goldbug inflected “zombie treasury view” of EMU that the law is on their side and it was the government that let them down by failing to magic up a sufficiently thorough solution to their appalling collective effect on the states finances.

To repeat myself, there is a poor supply of shame on the neoliberal right, because there is no demand for it.


One further thought – I don’t deny that there would have been a legal quagmire had the Govt torn up the Prom notes. No doubt a political crisis would have ensued, but the ECB and the EU would never have scuppered the whole Irish banking system – the result of that would have been a Euro meltdown.

In a political crisis, the end result would be determined by political will, not by Irish or European Law – default is rarely solely determined by the letter of the law – especially between supposed friendly nations.

The overwhelming likelihood is that in a political crisis, the Government would have struck deal and repaid a lot less of the ELA. For sure, the rules surrounding ELA would have tightened up and the European Institutions would have evolved so that this wouldn’t happen again. If a crisis had ensued, most probably it would have hastened a banking union.

Instead the Govt got hardly anything – we must pay more in the long run instead of less in the medium term – but now every red cent will be repaid. The govt had no mandate to implement that deal and the negotiators have shown their total incompetence.

Given the multi-generational timeframes involved can I put 3 questions out there . What if anything would happen this new debt arrangement if/when

1) The Eurozone breaks up
2) Ireland leaves the Euro
3) The EU breaks up

With aging populations building lifeboats for themselves, pyramid-based PS pension schemes, and tinderbox of youth unemployment in EU, these scenarios are not fanciful.

@ bazza

Hmmm, you have been reading too much Karl Whelan. It is really quite simple, as BEB has pointed out. IBRC paid back all its German bondholders, for example, with CBI printed money. The German bondholders naturally presented that money to the German banking system for conversion to a liability on it. The Bundesbank obliged by accepting the CBI printed stuff. So when you say the CBI should cancel the money they created, you mean they should welch on their liability to the Bundesbank.

@ Seamus

Point of detail. You refer to an MRO rate of 0.75%, Noonan refers to ECB financing at 1%. Do you know why the difference?

@Bazza Can you please stop discussing EU law which you clearly do not understand at all?

It is directly effective. It binds Governments and Institutions and confers rights on individuals – see for example Thomas Pringle’s challenge to the Irish Government’s ratification of the ESM treaty.

So no, this would never have been under Irish law, EU law governs the relationship between the Irish Central Bank and the Irish Government in this regard, not Irish law.

No, this would not necessarily have been political, and a fudge could not necessarily have been found, because a German taxpayer could have sued to force action by the ECB.

I get that you think that this is unfair, I don’t think that it is fair that we’re shouldering the burden of IBRC’s rescue, you’ll be hard pressed to find an Irish person who thinks that that is fair.

I get that you don’t like it, I don’t like it either.

I get that many people in Ireland wish that we could unmake the mistakes of the past, and that’s where wishing and reality so often part ways in life. We cannot change the past.

What I don’t get is that you are engaged in a discussion when you have done nothing to educate yourself as to what it is that you are discussing i.e. the EU legal provisions governing the ECB and ECSB.

I’m going to do the grown up thing and discontinue this discussion.

I would like to add “grown up” to the list of phrases which now mean “conservative”.

It joins “serious”, “responsible”, “determination”, “beneficiary”, “European partners”, “irreversible”, “credible” and “realistic” in the grave yard of meaning that the European component of the global financial crisis has left behind.

@ Aisling

‘So no, this would never have been under Irish law, EU law governs the relationship between the Irish Central Bank and the Irish Government in this regard, not Irish law.’

That’s interesting. Is the relationship between the BOE and the UK government similarly governed, or is our arangement a consequence of having agreed to join the EZ ?

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%.”


Yes, I am sure you have more knowledge of EU law than I – for that I am grateful.

But you do not have a good appreciation for the process of financial default in the real world. Governments have always defaulted on obligations both to external creditors and to internal parties and in doing so, they reneged on contracts and broke the law. However, the end result is almost always a negotiated settlement and the full amount is never paid. That is the reality – just read your Reinart and Rogoff – regardless of the fact that a hedge fund has dragged Argentina through a NY court.

In the real world there is a huge difference between Thomas Pringle taking the Irish Govt to court and Ireland defaulting on its obligation to its own Central Bank. Maybe a German taxpayer could take the ECB to court over Article 123 and maybe they would win. However, in this case, the ECB would be found to have broken its own rules, not the Irish Govt. What would have been the outcome? You say the ECB would be forced to act, but how? The ECoJ cannot force Ireland at gunpoint to hand over money.

It is doubtful that any European institution could rule that Ireland should pay the money – even if it did, Ireland can just claim that it is defaulting on the instrument at hand. That is where seniority matters, for there is no rule or contract that says that the PN are senior to other forms of Government Debt. And that is the big problem with this new deal: if the Government debt burden turns out to be unsustainable, there are no easy options left except for a full blown default on its market debt instruments, triggering CDS and market chaos. A PN note default would not have had anything like the same consequences.

I guess you probably consider yourself a serious person with deep knowledge of the law, the LAW, goddammit. In that case, perhaps you can tell us how the law squares up with Chirac’s and Schroder’s handling of the Stability and Growth Pact? Or the ECB’s mandate with regards to Ireland’s bailout conditions? Or Greece’s default on its sovereign debt?

The fact is that when it comes to financial default, the law provides some guidance at best and the reality is that a deal would have been hammered out.

The Govt had a clear mandate to negotiate a debt write down. The ECB were never going to acquiesce, because as you point out, it would have broken its own rules. Which is why a default should have been and could have been imposed upon them by the Irish Govt. The courts cannot force the ECB to withdraw support for the Irish banking system and it is against their interests to do so as it would run the risk of the break up of the Euro.

As I said before, the most like outcome (in the real world, where grown-ups live and where the inadequate financial rule book does not have the final say) of Ireland defaulting on the PNs, would be a negotiated settlement and stronger banking union to ensure this wouldn’t happen in the future.

I welcome any further comments on the above. Unlike you I am not closed to other points of view and do not feel the need to “discontinue the discussion” because I don’t like where it is going.

Minor point:

We are paying for feeding a “black hole” from which nothing concrete or in any way useful will ever emerge.

Were we to pay “Zero” it would make no difference whatsoever to the “Black Hole”.

Entities that enter a “Black Hole” are lost “Forever”.

This remains an exercise in “Madness”.


“Point of detail. You refer to an MRO rate of 0.75%, Noonan refers to ECB financing at 1%. Do you know why the difference?”

Genuinely, i believe this is just Noonan’s style of rounding figures and simplifying things. He mentioned something about “9 year government bond issues” being required to grant access to the OMT program, a couple of weeks back. This led to about an hour of journalists scurrying to find some reference to “9 years” in the ECB/EU treaties, or asking market players why a 9 year bond would be significant, before everyone finally decided that this was just Noonan being a bit kooky for the sake of it.

@ Bazza

this isn’t meant as an insult, but i genuinely believe that anyone who thought a debt write down was even remotely achievable is approaching this debate from an angle which is intrinsically flawed and therefore essentially baseless and without merit.

The comparisons to this week’s “deal” are not an agreed write down. They are a unilateral default, and the signifiant negative repurcussions that would arrive alongside it. Can you provide me with an NPV of those negatives? I’d suggest the years 2013-2016 all each have large single or low double digit negative “€ billion” values attachted to them to offset the initial “25 billion” gains.

A gamble that inflation will significantly reduce the debt over time – a reasonable bet I would say in that the worldwide QEs are likely to produce significant inflation in the foreseeable future (albeit timing predictions have been consistently wrong, from everyone, everywhere). However, with inflation will come much higher interest rates….so current models of the future financial impact as as limited (‘meaningless’) as ever, notwithstanding people’s desire to ‘justify’ the deal as ‘good’ now. It’s a gamble, with positive short-medium term cashflow impact. Surprised therefore that fixed interest wasn’t inserted, given how low interest rates are now. That said again, I do like the ability of the CBI to time the sale of bonds to Ireland’s advantage. The deletion of refinancing risk is also a very significant plus, from a credit /creditor point of view, and does help with investor confidence.

So ‘good’ in the sense that it is better than the PN alternative (assuming no tearing up of the PNs).

The legit fear is that the cashflow positive will be squandered and will slow reform. That’s very likely.

Now, back to the economic performance of the country…… How’s ‘growth’ doing?

@PQ It is a eurozone specific issue so BOE & British Government can do as they see fit under British Law.

@Grumpy Does anyone think that Gilmore actually understood the detail of this?

@Bazza The EU is a whole new type of legal structure which is why the Greek default was not like any other default in the history of the world.

Commentators in the financial press, the IMF rub their heads as to why the ECB could not participate in OSI – IT JUST CAN’T.

Never before has there been a supranational law like EU law, a Law which not only binds at an intergovernmental level (how traditional International Law works) but at an individual, citizens level.

So EU law affords EU institutions jurisdictional seniority, all debt held by EU institutions is de facto jurisdictionaly senior, even to the IMF.

The IMF is maybe, possibly, senior to other creditors under customary international law but no court with teeth can enforce a judgement in its favor. The CJEU has teeth and can enforce seniority in relation to EU institutions and EU Member States.

If you don’t like EU law then leave the EU (which is the reason why you shouldn’t talk about leaving the eurozone without leaving the EU, you’d have to break a bunch of EU laws and get sued negating all the benefits of leaving the EZ).

If, of course, you don’t favor leaving the EU, figure out how it works and stop giving out that our Government failed to deliver the impossible.

@Seamus Coffey, B.E.B et al

Same question as I posted at the end of a previous thread

When the CBI makes one its annual disposals (say the 1bn in 2019) does it

(a) sell bonds with a face value of 1bn


(b) sell as many bonds as necessary to raise 1bn (which could be more or less than 1bn face value)

If (b) doesn’t it mean that the interest rate pre-disposal is irrelevant, and the arrangement is equivalent to just raising 1bn at whatever the market demands at that time?

@Bazza I’m not arguing that EU law is not a part of the problem, it is a huge part of the problem.

It just cannot be ignored when German of Finnish taxpayers can sue to make sure that it is applied, and this crisis was not envisaged when the rules were drawn up.

@ Paul W

I think there is some mention that the Government has a choice of issuing fixed coupon bonds. In any case, once full market access is achieved that is always an option, the government can always issue a tranche of fixed coupon bonds to retire the floaters.

@ bazza

The irony is that the Government hasn’t spent one cent of its own money on this bank bail out. It is all borrowed. We continue to live beyond our means thanks to access to cheap official lending. Come back when the interest on our debts are forcing to us to run a primary surplus, then at least your default strategy would have some short term point to it.


They refused to cut the same slack to Spain!

I had been wondering why the ECB treated Ireland and Spain differently. My conclusion was that the ECB were unhappy with the conditionality (or rather the lack of it) being applied to Spain, since it is not in a troika program. Conditionality related solely to financial market restructuring is not enough – they want the “structural reforms” etc.

More broadly I think all the essential elements of the Euro crisis “solution” were put in place last Summer. The ECB will print money as needed, provided there is sufficient conditionality attached to the recipients of the printed money. The inter-governmental transfers will be capped at 500bn in the ESM. This is why Germany has already killed off the common bank deposit scheme, and is in the process of killing off/re-nationalizing the common bank resolution scheme. There will be no more inter-governmental transfers outside the scope of the ESM, only support (directly or indirectly) from the ECB.

The whole “is it monetary financing or not” question is just a sideshow – what matters is “is it the right kind of monetary financing” as seen by the ECB.

Black and white statements like “it is not monetary financing” are just a convenient fiction. Like Mr. Adams saying “I have never been a member of the IRA”.

For those unable to sleep at night because they are worried about possible Treaty violations the following handy guide to countering such charges might help

a) “It isn’t monetary financing – we’re fixing a broken monetary policy transmission mechanism”

b) “It isn’t monetary financing – we’re repairing a malfunctioning securities market”

c) “It isn’t monetary financing – we’re addressing unfounded fears of a Euro breakup”


‘… the big problem with this new deal: if the Government debt burden turns out to be unsustainable, there are no easy options left except for a full blown default on its market debt instruments, triggering CDS and market chaos. A PN note default would not have had anything like the same consequences.’

I agree. A much better deal would have ensued – and imho the markets would have welcomed such a deal and there would have been much international support for such a decision. Others may spin it as they wish – but the reality is that we are pumping billions and billions into a black hole which in anybody’s lexicon is ‘madness’. Human costs thus far have been horrendous … yet avoidable.


Let’s face it – it is a win, modest but better than nothing.

How much credit to Karl Whelan? To me he was the father of the anti PN campaign, though his first presentation on the matter to a Dail sub committee seemed far more ambitious, seemingly pointing to some central bank wizardry that could magic it all away. That’s how it read to me though I concede he latterly championed the reasoned resistance. So two cheers to Karl.

No such plaudits to the “tear them up” looney tunes who became a real hindrance to any sort of resolution.

Hate the fact that Kenny has already promised to reduce budgetary targets with the ‘savings’ on this deal. BS. Why does this Govt jump in with rash promises all the time….(a remark, rather than a question). Populist, path of least resistance is the overriding policy it seems. Ok insofar as it relieves some human hardship…but why this unintelligent ‘promising’!!

Clearly, they are trying to max. the benefit of the all-in rate and so favour floating. However, when the forward curve moves to the upside, there is a significant threat that it will be quick….and the current low fixed option will then be gone…..Was with senior poprtfolio managers here in NY last night. All positioning /positioned for a significant correction…..Very much the subject of discussion in NY and London right now (as Dublin talks about PNs).

@ Bryan G
Not quite sure what your question is but (b)…..the market value of the bonds fluctuate, and could be negative /positive to par, so interest rates are or rather can be less important in that context….built into the premium/discount at any point in time. However, the CBI does have the ability to wait for a positive result…..Best laid plans and all that. ECB has clearly kept its powder dry.

@Paul W

I’m trying to parse “Clearly, they are trying to max. the benefit of the all-in rate and so favour floating. However, when the forward curve moves to the upside, there is a significant threat that it will be quick” without much success as I don’t have the bond market knowledge.

In Ireland’s case (ignoring intra-government circular flows between Exchequer and CBI), does it matter if the coupon on the long term bonds is fixed or floating, or is all that matters the market interest rate at the time the CBI disposes of the bonds?

@ shay
Serious and grown up are the last refuges of clowns. Remember Bertie in 07 telling Joe Higgins he was a failed person for questioning the level of house prices in working class areas like Finglas? Or the PDs. Or the hard money crowd. Or Jp Morgan’s 70 million value at risk assessment on a unit that lost 3.5 bn. Chancers more like. Nobody knows how it will pan out in the new normal.

@ BG
Here is my best attempt, simple explanation (but caveat, far too simplistic)…..Actual euro floating rates are less than actual equivalent term fixed rates right now, so the Sovereign Bonds are issued as floating to take advantage of the all-in (actual) lower rate versus the fixed all-in (actual) rate. However, both are very low by historic standards….good either way.

There is significant interest rate threat right now. If things change, it may happen very quickly and will most likely be to the negative. Hence, future floating rates are likely to be significantly higher than current fixed rates…..

Fixed vs floating differentials move all the time… does it matter? How long is a piece of string……However, in the context of your question, no it doesn’t matter in principle (as opposed to ‘in fact’ at any particular time). At any point in time, whether fixed or floating, the interest rate is reflected in the mtm, and ‘theoretically’, the fixed /floating differential at any particular point in time expresses the economic outlook.

@Paul W

Thanks for that – if instead of the deal saying “Floating rate, Irish spread over 6 month Euribor” it had said “Fixed rate, Irish spread over ” would it make any difference to the Exchequer? Trying to understand if someone somewhere is “making a bet” on the direction/timing of future interest rate changes or if it doesn’t really matter.

@Paul W

“If BEB is out there, he can probably give a clearer explanation….!”

I think trying to understand the PNs is like trying to understand electricity or calculus. First you know you don’t understand it at all. Then you learn something and you think you understand everything. Then you learn something else and you realize you don’t understand it at all. Then you learn something else and you think you understand everything. Rinse, Repeat…

Can certainly make a difference in actual terms. Just for illustrative purposes, say floating all-in (base +margin) is [4]% and the fixed equivalent is currently [5]%, clearly the actual interest accruing is lower on a floating basis in the short term. Now, the market takes fright of inflation, etc, and the floating rate moves to [6]%, with the equivalent fixed rate moving to say [7]%. Locking in today at [5]% may be better in actual interest cost than the average of floating today [4]% plus future floating [6]% over time.

It’s not as simple as that as there are different interest rate ‘markets’, etc etc e.g. tracker mortgage versus variable rate mortgage.

The overall, substantive point though is that, in general, the inherent bond interest rate (or more accurately, yield) outlook is to the negative (more expensive) rather than positive (cheaper). As MN always says, there are consequences to actions….all the QE around the world will come home to roost at some point, despite all the inaccurate predictions re timing(s). The further ppoint is that the wholesale markets are already positioning for a less positive interest rate environment…..

Your are thinking logically from the issuer point of view. But what does it profit the exchequer if it stuffs long duration bonds into CBI portflio at the bottom of the rate cycle.
I am sure this has been gamed out to the nth degree.

@Paul W

Good – I see that the difference is that when the CBI sells the bonds, it will be offering a floating-rate product for sale, which will be competing with fixed-rate products for buyer attention. Depending on the interest rate outlook at the time, this may be viewed as a good thing or a bad thing. I guess there’s always to ability to switch between fixed and floating via an interest rate swap, for a modest fee of course.

@ Tull
It has already been discussed that,in general, the PNs are equivalent to the new Sov Bonds, over time. No advantage in that sense. Full amount of principal plus more interest will have to be paid, However, significant shorter term cash benefit versus more interest in the long term. However, cash in the pocket is better than no cash in the pocket. I do take DOCM’s and others’point that a write-off would have been better. But that’s on a standalone basis. In the bigger picture,, Ireland has quite some challenges ahead….debt sustainability, economic growth, etc…..retaining FDI, its 12.5% tax rate and more. There will lbe more important ‘win’s to be secured than this one. Many battles ahead to “win the war”.

The issuer of the bonds = the exchequer….What’s your Q? My overall point is that interest rates are low right now so lock in for Ireland’s benefit?

My point is that at the bottom of the rate cycle, an issuer should issue as much fixed as he can get away subject to rate of course. However, CB will hold them on trading book so will have losses if rates rise. It could also suffer losses on sale of portfolio.


The consequences of EU states breaking EU rules are far from clear – remember the no-bailout clause? – so stop talking like EU law is enforceable like state criminal law. You said it yourself, the rules were designed before the crisis and with every escalation of the crisis, the rules are changed to keep the show on the road – no bailout, no default, no buying of sov bonds – all went the way of the dodo when they got in the way. In fact, it seems to me the EU needs crisis in order to evolve – look at the inertia for Banking Union since the crisis abated.

As a matter of interest, which EU laws would leaving the Euro break? If any state left the Euro, especially if that state is not Greece, then it would be highly likely that the Euro would break up. And if not, or if Greece left, it is unlikely that that state would be booted out of the EU for breaking the law. Maybe you know a lot about EU law, but you need a healthy dose of realism and historical perspective.

You say:
“It just cannot be ignored when German of Finnish taxpayers can sue to make sure that it is applied”

How does this work exactly. As before, say Ireland defaults on the PN. A German taxpayer takes the ECB to court and the court somehow finds that, a posteriori, the ECB lending of ELA to Anglo was illegal – even though the same situation wasn’t illegal before the default.

Even in this bizarre case, what happens to Ireland? Ireland didn’t break Article 123, the ECB did. Ireland just defaulted on a very dodgy exotic debt instrument, that was quite possibly illegal under its own laws. The reality is the ECB would get a slap on the wrist and Ireland would settle with a big fat haircut on the PNs. One doesn’t need to be an EU law scholar to understand that. In fact, judging by your own contribution, it would appear to be a hindrance.


I did the calcs myself and I surprised myself by more or less concurring with your calculation. In a situation where all the debt is uniformly risk-free or uniformly risky, then we save about 4bn in the new deal.

However, if we say that the previous PN based cash flows was riskier and more likely to involve default (I implied this using a higher discount rate of about 8% for these cash-flows), then this 4bn is wiped out and the NPVs of both deals is about the same.

From this I infer the following:
-The option to default resulting from the relatively junior status of the PNs was equivalent to about 4bn.
– This week we effectively cashed in this option and achieved a 4bn drop in the long run cost of debt (out to 2033).

So the deal is financially neutral. From a macro point of view, I can see that there is some small advantage to giving the economy a break now in the hope that we can better shoulder the debt later on.

However, I have extreme doubts about the long term sustainability of the total public and private debt burden, which wasn’t reduced in any meaningful way this week. It is far from certain that we will avoid default and the possible costs of that default just got greater.

@ Aisling

‘It is a eurozone specific issue so BOE & British Government can do as they see fit under British Law’

So when we joined the EZ, we agreed to give up control of our Central Bank, or at least control of a core part of its functions. That is a pretty significant loss of sovereignty,bur we never felt a thing at the time.

Some folk made a lot of money out of the euro punchbowl, and they are going to make a lot more, as this odious debt is paid down. I don’t like it either, but as bazza points out, power and money usually trumps law.

@ Bryan G and Tull

“I see that the difference is that when the CBI sells the bonds, it will be offering a floating-rate product for sale, which will be competing with fixed-rate products for buyer attention.”

“My point is that at the bottom of the rate cycle, an issuer should issue as much fixed as he can get away subject to rate of course.”

Investors generally want floating so as to match market. In this very low interest rate environment, borrower’s position is more certain with fixed. Therein lies the conundrum of the borrower….whether to fix or float. If the CBI can hold for a very long time (and that’s the intention) at current low fixed, it’s better for the borrower assuming accrual as opposed to trading book treatment. You raise an interesting accounting question re whether it’s trading vs accrual book…..but why should that matter with a Central Bank…?

Actually “Investors generally want floating so as to match market” should more accurately read “Investors generally want floating so as to match inflation”.

@Paul W

You raise an interesting accounting question re whether it’s trading vs accrual book…..but why should that matter with a Central Bank…?

Pat Kenny <a href=”″ interviewed Noonan on his radio program and there’s a lot of interesting stuff there.

One of things Noonan said is that the bonds held by the CBI will “not be in the investment portfolio but will be in the trading portfolio”. Are there implications here relating to mark-to-market/margin calls that could result in extra taxpayer funds being required in some way, and perhaps influence the fixed/floating decision? While for simplicity the Exchequer – CBI money flows can be viewed as a closed loop, in practice it is more complex as the CBI could hold onto some inflows for “reserve” purposes.

@ Bryan G
Trading book is mtm, with premium /discount being reflected via the P&L (see Tull’slast comment above). An interesting (?) treatment for bonds that are to be held for say 15 years or more, if required to generate a positive disposal into the markets. So upfront intended disposal in (average) 15 yrs but no guarantee of disposal (subject to the price being right) = Trading book treatment. Strange one….very much a matter of interpretation.I’mnot an accountant,but would expect any accountant working for me to question that…..Ok though,initial intention is not to hold to maturity so that would appear to override. However, why mtm does profit /loss matter for CBI? Would the potential for negative mtm as Tull alludes to (i.e. increasing interest rates causing mtm deterioration….but better than market interest cost if accrual treatment basis) be material to national accounts?

A classic case of mtm accounting taking precedence over cash…? With the result that the accounting artifically causes difficulty with national accounts? More ‘suffering’ notwithstanding the (15+year) cashflow profile is the same?


Accounting (trading book) treatment therefore appears to exclude interest rate fixing flexibility/optionality? The country will “blow in the wind” re interest rates for at least the next 15 yrs….? What happens if there is a severe spike in floating interest rates….e.g. if there is hyper inflation in the next years?

@ Seamus
If so, financial projections are even more ‘jaundiced’ (limited, meaningless).

So fixed interest rate would appear to be /at least might be a significant problem. That still leaves open the possibilty of forward (floating) hedging…..but, damn, that’s highly uncertain,open-ended and therefore ‘dangerous’ in this world….in the world of potential future hyper-inflation and highly increased interest rates…again,look at what the wholesale markets are doing at present…..

@ seafóid

That sounds like a great idea. You could try Kevin Reynolds at RTE radio who is pretty active, or Sarah Carey who, I believe, is looking to expand the kind of work Newstalk do.

What everybody is losing sight of in this messy deal is the evolution of the ECB. Programmes such as SMP, OMT, the Greek recap and now this stretch it’s mandate. If further changes are required involving write offs, dropping the rate to zero they will come in order to avoid default & the end of the euro,
This policy may fail in which case we leave the euro in a wave of default. In that case a line will be put through these.
As you march today, think on this. The high arts depend on public subsidy. I’f we had torn up the PNs, there is a non trivial possibility of us being forced to default and balance the books. In that event, do you think your industry’s cheque would have arrived.

@ Peter Stapleton

History shows that much sovereign debt has been eroded by the failure of nominal interest rates to keep pace with inflation.

Morgan Stanley data show that while real GDP growth reduced debt/GDP by 1.3% on average, the effect of inflation on the debt ratio was larger: 1.6%, on average, between 1946 and 2003 (In relative terms, 56% of the total Nominal Growth Effect on the debt ratio is due to inflation, with the remainder being due to real GDP growth.)

After OPEC quadruped oil prices in 1974 on top of an existing commodity price boom, inflation hit 21% in Ireland in 1975.

Bondholders had not expected the inflation surge and bonds generally had a long maturity profile compared with today.

According to the Treasury Department in 2011, almost three-quarters of US debt matured within five years.

Could inflation reduce public sector debt burdens?

@ Tullmcadoo

Thanks for the reply.

Arts funding has already been savaged with, for example, the Arts Council itself down around 25% (now on e60m approx). Relative arts funding in Ireland put us 24th out of 28th in Europe at best, it is probably lower now. Low pay is endemic with average wages in the larger arts/culture/ entertainment sector at 23K – amongst artists it is probably lower.

Purely in terms of money the arts are, of course, a net contributor to the state.

But in the ‘default and balance books’ scenario (which I’m not advocating by the way) and in a situation where all arts funding ceased I suspect the wave of energy in such a case would encourage more creativity than ever. The Icelandic National Theatre certainly was very active pre and post boom.

Come along to Tiny Plays for Ireland II and see how we’re doing:

The rubbish about eu law is precisely that….rubbish. Eu law has been flauted by eu institutions from day 1 of this crisis. It’s actually the weakest of any case made for why we should have repaid the promissory notes. It’s not unlike international law…it is only complied with as long as everyone is happy.

@Michael Hennigan

On Thursday Michael Noonan seemed to look forward to the prospect of inflation eroding the real value of our bonds.

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