Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

Promissory note news roundup redux

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

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

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

[1] This is a lie.

China to the rescue?

Thanks to frequent commenter Eoin Bond for the heads up on this piece of news, which may well be very significant for Ireland. From the piece:

The National Treasury Management Agency has signed an agreement with a subsidiary of China’s sovereign wealth fund which would allow the Chinese agency to buy Irish Government bonds.

The agreement was signed after Taoiseach Enda Kenny’s meeting with the Chinese Prime Minister Wen Jia Bao. Ireland is scheduled to return to the bond market next year under the terms of the EU/IMF bail-out.

The official press release is here.

Promissory note news roundup

We have no deal yet on the 3.1 billion euro payment due on March 31st, but the government remains as hopeful as it was before the weekend that a deal will be struck. A legal challenge is being considered to the promissory notes by New Beginning founder David Hall, who is taking this case as an individual, not as a member of New Beginning. Finally, I’m a bit worried about the can-kicking plan’s lack of nuance.

Update: Governor Honohan expects we won’t have to pay the 3.1 billion at the end of the month.

Promissory note restructuring

This is breaking that Prof. Honohan will seek leave from the ECB to not repay part of the promissory note worth 3.1 billion due at the end of this month. This is good news in the short run (and something Karl, Brian and I spoke at length about recently at the Oireachtas)

From the piece:

The Minister for Finance Michael Noonan confirmed in the Dáil this evening that negotiations were taking place with the ECB about settling the promissory note by delivery of an Irish government bond.

The concession may facilitate a longer-term effort to cut the cost of Ireland’s banking rescue, which helped tip the nation into an international bailout in 2010.

The immediate questions are:

1. What interest rate(s) will be charged on this(these) bond(s) and at what maturity(ies)?

2. What will fund the asset side of the balance sheet of the IBRC?

3. It looks to me like the promissory notes are going to be funded by the EFSF, or some other funding structure, but specifically what funding structure at the EU level will the bond use?

Update: RTE’s David Murphy reported on Twitter that the government are proposing to pay off the note with a bond which matures in 2025. If ECB says yes, the government gets 13 year delay on the €3bn payment.

Update2: Karl has the text of Minister Noonan’s speech on his blog now.

McCarthy: This burden of bank debt is simply not sustainable

Colm writes another dinger of a piece for the Sunday Independent, it’s required reading. From the piece:

No other eurozone member has incurred bank-related debt under ECB duress. There are no provisions in the Maastricht Treaty, in the Stability and Growth Pact or in any other pact or international treaty which grant this power to the ECB, nor was any eurozone member state ever asked to accede to such an arrangement. Commissioner Rehn’s Latin phrase (“pacta sunt servanda”) has no pact to refer to, insofar as these imposed debts are concerned. Ireland never signed a pact or treaty which empowered the ECB to behave in this fashion.

One can only speculate as to the ECB’s motives, since it does not deign to explain. European banks have come to rely heavily on unsecured bond financing and the ECB may have felt that no bank bondholder should suffer losses, in order to encourage the survival of this market in bank debt. If this was the motive, the policy is being paid for, not by the ECB, but by Irish taxpayers and sovereign bondholders and financed by European taxpayers and the IMF. There is no pact which confers powers of taxation on the ECB.

All of the Greek debt relieved, to the tune of €100bn in recent weeks, was contracted, without duress, by the lawfully elected Greek government. The write-down was welcomed by Commissioner Rehn, who described himself as “very satisfied by the large positive turnout of the voluntary debt exchange in Greece”. The same “exchange” was described by one of the bankers enduring a 74 per cent haircut as “about as voluntary as the Spanish Inquisition”. The bondholders agreed only after punitive retrospective clauses had been inserted into bond contracts, with the agreement of the European Commission. Some of them are initiating court actions, presumably in jurisdictions cognisant of the “long European legal and historical tradition” to which Commissioner Rehn refers so approvingly.

The Financial Times, in a leader last Thursday, argued that Ireland should be afforded debt relief in order to ensure debt sustainability. “Pacta sunt mutanda” it intoned, which means treaties should be altered. The portion of the Irish debt in dispute here does not derive from any pact or treaty but was arbitrarily imposed by the ECB. There is no need to alter any treaties and the FT, uncharacteristically, has misunderstood the Irish case.

This whole sorry saga has raised once more the enduring policy dilemma of ensuring that central banks are both independent and accountable.