Category: Banking Crisis

€74 Billion in Guaranteed Bank Debt Maturing Before October

Last week, I provided calculations from annual reports showing that at the end of 2009, the banks covered by the State guarantee owed €71 billion in various types of bank debt (bonds, commercial paper, interbank loans) that matured before the end of the year (the reports did not provide information on how much matured prior to expiry of the guarantee at the end of September.)

The Department of Finance have now provided figures as of the end of April on how much covered debt expires before October. In a written answer to a question from Joan Burton, the Department have stated that €74.2 billion in bank debt expires before the end of October, €57.8 billion of this being senior debt and €16.4 being interbank deposits.

The Impact on the Exchequer

Ok, I promise this is the last time I’ll write about promissory notes for a while.

Pat McArdle, still keen to minimise the link between the cost of bank bailouts and our fiscal problems, writes:

That is not to say that large subventions to the banks were not needed – more than €10 billion has gone into Anglo alone. However, the Minister has been quite clever in the way this has been done. He has issued promissory notes which deliver the capital bang upfront but will be drawn down piecemeal over the next 10-15 years. As a result, the exchequer has had to raise only €200 million to capitalise the banks this year.

And also:

Nama, too, has been structured to minimise the impact on the exchequer. Though it is likely to pay over €40 billion for the assets bought from the banks, this will not be in the form of cash and so will not have to be funded in the markets.

I find it funny that the issuing of promissory notes is now regularly described as, like NAMA bonds, a stroke of genius on the part of the Department of Finance: Last year, advocates of NAMA often told us that overpaying for assets was the best way to recapitalise the banks because if we didn’t do it that way we’d have go out and get “real money” by borrowing on the sovereign debt market, i.e. that banks couldn’t be recapitalised with promissory notes. 

It is certainly true that promissory notes and NAMA bonds do not require going to the sovereign bond market to borrow the money. However, this stuff is debt and the people who have been worried about our ability to pay back all our debts (and they seem to getting worried again) are well aware that we are accumulating extra debts in the form of promissory notes and NAMA bonds. In this sense, they have the exact same “impact on the exchequer” as regular borrowing.

Note, however, that the promissory note route will put more pressure on the Irish state to come up with money for the banks in the coming years than would a normal debt issuance. €10 billion in ten-year bond issuance requires forking over interest of about €500 million a year over the next ten years before the full amount has to paid off on maturity, hopefully via issuing another ten year bond. An interest-free promissory note for €10 billion would require average payments of €1 billion a year over the same period.

At the end of the day, debt is debt and those who lend to us aren’t easily fooled. I’d prefer to let history judge exactly how clever this debt issuance has been.

Irish Banking Policy

Brian Lucey writes on this topic in today’s Irish Independent – distributed over three articles:

Part I

Part II

Part III

Honohan Interview with Bloomberg

There were some media stories over the past few days with selected quotes from an interview Patrick Honohan gave to Bloomberg. Dara Doyle from Bloomberg kindly sent me the full text of the interview and since it doesn’t seem to be elsewhere (or at least anywhere I could find) and contains a lot of interesting material, I’m posting it below the fold.

Continue reading “Honohan Interview with Bloomberg”

European Commission Extends ELG Scheme

Today the European Commission announced that they are allowing the government’s new guarantee scheme, the Eligible Liability Guarantee, to be extended from including securities issued before June 1 (i.e. tomorrow) to securities issued up to the end of June.

Now the fact that the Commission had only allowed the scheme to cover bonds issued before June 1 seems pretty clear from this press release announcing its original approval on November 20 last year. It says “The instruments guaranteed under the scheme may be issued from 1 December 2009 until 1 June 2010.”

I have to admit that until now I had thought the ELG scheme covered securities issued up to the end of September. For instance, here’s the Department of Finance’s press release welcoming the November 20 decision from the Commission. It describes the new guarantee as follows: “It will apply to certain liabilities (including deposits) incurred by participating institutions during the period up to 29 September 2010.”

And here’s an FAQ about the scheme issued after it came into operation in December. It also mentions 29 September 2010 as the date up to which securities could be issued and covered by the scheme. On the face of it, this seems at odds with the European Commission’s statement about the scheme. It is possible that this statement from the FAQ reconciles the apparent contradiction:

The ELG Scheme is therefore scheduled for review by the European Commission in June 2010 and the references to 29 September 2010 below must therefore be read in that context.

But strictly speaking, this doesn’t seem enough to fully reconcile the two sets of statements. Realistically, it seems to me that the correct interpretation of the scheme was that it applied to debt issued up to June 1, at which point the Commission could assess the scheme and potentially extend it. (Of course, we’re into angels-on-pins legalistic territory here and there may be some complex sense in which government and Commission statements on the scheme were, in fact, consistent.)

In any case, it certainly seems as though September 29 is the government’s preferred end-date for the ELG. In that sense, today’s one month extension may be a disappointment to them. Perhaps there’s another extension coming next month. It will also be interesting to see if any debt securities get issued under the scheme during this month.