Okay the above is tongue-in-cheek and is intended to illustrate the complexity of what actually happened last month when the Irish State was required to give €3.06bn to Anglo which was going to use that money to repay a loan from the ECB. Yesterday on the first day back at work after the Easter break in the Dail, there were exchanges between Minister for Finance, Michael Noonan and Peadar Toibin and Stephen Donnelly on the mechanics of the payment last month of the Anglo promissory note.
Minister Noonan has had three weeks to prepare an explanation on what was summarily announced in the Dail on 29th March 2012. There was then a refusal to have a debate and we must have looked like eejits to the rest of the world as the Dail then devoted itself to sheep worrying on the Cooley Peninsula, though in fairness to the Deputy who spoke on the subject he did offer to give way to facilitate a debate on the Promissory Note announcement. The Dail then went into recess for three weeks, and yesterday was the first day back.
Minister Noonan was asked about the €90m additional negative impact on the 2012 deficit and for the first time we have something nearing a calculation in the response which was “I will deal with the €90 million calculation first and then with the second part of the Deputy’s question. The €90 million is estimated to have an incremental impact on the Exchequer which is calculated as follows. The status quo was estimated as the cost of borrowing under the programme for the promissory note instalment, namely, €3.06 billion at 3.5% for the remainder of 2012 giving an interest cost of €80 billion. On 29 March, before the Government bond was issued it was estimated that the bond power value would be €3.53 billion. The coupon was known to be 5.4%. In 2012 the interest cost was therefore €140 million. There is also a technical adjustment under the Government accounting rules which increases the deficit impact to €170 million. The €90 million was therefore the difference between the estimated status quo of €80 million and the estimated deficit impact from the new Irish Government bond of €170 million.”
So there was a “a technical adjustment under the Government accounting rules” which increased the cost of pursuing the current route by €30m and when added to the cost of the bond that was issued, the total cost of what happened last month was €170m for the remaining nine months of this year and that compares with borrowing from the Troika at €80m. Apart from the technical adjustment, that is clear.
But is the €90m a true additional cost to this State or is it just a payment from the Government to IBRC which we own anyway? It seems that the true cost to the State is an interest payment to Bank of Ireland which totals 2.35% of €3.06bn which for nine months equals €54m which is less than the €80m that would need be paid to the Troika had we borrowed from it at 3.5%. So it seems clear that what happened in March 2012 has, in net terms, saved this State about €26m for the remaining nine months of 2012. Which is not to be sneezed at. Indeed Minister Noonan indicates the Bank of Ireland deal will last for 364 days which would mean a net saving to the State over a full year of €35m (3.5%-2.35%*€3.06bn) Mind you, it would be nice to understand what the “technical adjustment” of €30m was.
There appears to be one outstanding question about the transaction. Why would Bank of Ireland lend €3.06bn to the State at 2.35% secured on a 10-year bond, when Bank of Ireland could go out and buy a 10-year bond on the open market today which pays 6.9%? Ah, but Bank of Ireland will get its money back in a year, you say, not 10 years. That is true but then why doesn’t Bank of Ireland go out and buy the Irish bond which matures in April 2013 which was trading yesterday at 3.9% according to the NTMA. It seems to defy commercial logic, and because Bank of Ireland is 85% owned by private shareholders who are being asked in May 2012 to vote on this transaction, they might ask their management why they are gifting away the difference between a 1-year bond at 3.9% and the 2.35% being paid by the State – the difference is nearly €50m for one year.
Minister Noonan was also being misleading yesterday about NAMA yesterday when he said “the money which we accessed for bridging finance from NAMA was money which is due to be repaid to the ECB for the loans it gave to NAMA to acquire the impaired assets in the bank.” The view on here is that Michael Noonan is the most articulate politician in Irelandwho chooses his words carefully and considers his audience when he composes his message – he would have made a terrific teacher. Whilst NAMA may owe nearly €29bn to the banks – AIB, IBRC and Bank of Ireland – following the acquisition of their loans, NAMA doesn’t need repay that €29bn until 2020. The banks used NAMA’s bonds to get loans from the ECB. So although NAMA owes €29bn, it is not due today, nor tomorrow but 2020. Laura Noonan reports in the Irish Independent today that if and when Bank of Ireland’s shareholders agree to loan €3.06bn to the State, then that €3.06bn will be given to NAMA and “it is understood that between €1.5bn and €2bn is now likely to be paid out to the banks [by NAMA] in May.”