In articles over the last couple of days, Simon Carswell reports/speculates on the technical discussions that are on-going on the promissory notes question. See here and here.
From Simon’s reporting, one proposal seems to be along the following lines: AIB/Permanent TSB would swap their trackers for a long-term government bond. (There is no magic value creation there; presumably the value of the bond would match the value of the trackers.) The trackers would be moved to IBRC, where they would be used as collateral for a long-term, low-interest, Government-guaranteed loan from the EFSF/ESM. (The loan might have to be provided directly to the Government given EFSF/ESM rules.) The funds would be used to pay off the ELA and the promissory note would be cancelled. I would guess that the ECB would welcome this, as the promissory note/ELA arrangements have a more than a whiff of monetary financing of a government. The various swaps would be designed to be “capital neutral” for the various entities involved.
Of course, this is all speculation, and might not even be one of the multiple options under consideration. But I think the Government needs to proceed carefully if it is. For all the criticism of the promissory note/ELA arrangement, stripped of the complexity it amounts to an interest-free loan from the euro-system to the Irish State. (I say interest free because the Central Bank of Ireland’s profit on the ELA goes to the Exchequer.) The advantage of restructuring the promissory notes is that it reduces the heavy near-term funding requirements facing the Exchequer. Such funding requirements will complicate the return to the bond markets. But any improvement in the funding situation would need to be weighed against any higher ultimate interest rate cost. (One complicating factor could be the dependability of ongoing ELA.)
Holders are low-interest trackers are told to be wary of giving them up. The Government needs to be similarly wary in any complex multi-swap deal. An arrangement that leaves the EFSF/ESM out but extends the maturity of the promissory notes looks preferable.