In March of this year, a number of us Twitter folk including economists Karl Whelan and Brian Lucey, banking/economics analyst Lorcan Roche Kelly and the Irish Independent’s banking correspondent Laura Noonan made a €20 bet about the outcome of the Government’s ambition to defer the €3.06bn promissory note payment that fell due at the end of March. From recollection Karl, Brian as well as mise bet there would be no deferral and Laura and Lorcan bet that there would be. The winnings were all going to charity. Three months later and we’re all beginning to appreciate Paddy Power’s skill and experience with defining bets because we still can’t agree on exactly what was announced by Minister Noonan in March.
We know what immediately happened in the aftermath of the March announcement – the Government issued a new sovereign bond that matured in 2025, NAMA was directed to advance a loan for up to 90 days for €3.1bn in cash to IBRC so as to satisfy the promissory note payment, Bank of Ireland was to hold an Extraordinary General Meeting (EGM) to approve a 2.35% per annum loan to IBRC for 12 months which would used to repay NAMA, the Bank of Ireland loan was to be secured on the 2025 government bond and the ECB was to lend Bank of Ireland €3bn for 12 months at 1%. The Irish government saved itself borrowing €3bn from the Troika at 3.5% per annum and is instead paying 2.35% on the funding which was used to satisfy the commitment to pay the promissory note. It is simple enough, though the number of steps involved make it look convoluted.
Yesterday Bank of Ireland held its EGM and approved the loan at 2.35% for 12 months secured on the collateral of the 2025 Irish government bond. We learned yesterday, via the Irish Independent, that BofI will be insuring its loan to IBRC and the cost of the insurance plus the 1% interest that BofI will pay to the ECB means that BofI will make no profit on the deal, not even the €35m previously reported. “The cost of insuring the bank against default risk would wipe out the profits on the deal, he [BofI CEO, Richie Boucher] said” reported the Independent.
But bottom line it appears that the Government is getting a loan of €3bn at 2.35% for 15 months – 3 months from NAMA and 12 months from BofI. The original plan was that the Government would have funded the promissory note payment due in March with a 3.5% loan from the Troika. So the Government has saved about €45m in interest over a 15 month period – that is 3.5% minus 2.35% applied to €3bn for 15 months. Yes, eye-brows have been raised that “independent” NAMA and BofI, in which we now only have a 15% minority shareholding, are agreeing to the arrangement – in BofI’s case without any profit, apparently. But NAMA says it provided the 3-month funding on arms-length commercial terms. And as for non-state controlled BofI, their decisions are their own business, even if they look curious. So €45m for the Government – a minor win, but a win nonetheless.
We still don’t know what is to happen in 12 months time when we need repay the loan to BofI, the hope had been thatIrelandwould be back in the traditional bond markets at sustainable interest rates, but from this perspective in June 2012, that looks like a forlorn hope, becoming more forlorn with each passing week. But presumably we can borrow the €3.5bn from the Troika at 3.5% next June 2013, if no other source is available. In which case, we are back to what was planned for March this year but have still saved €45m. Officially our deficit will be worse by €90m – according to the Department of Finance though their calculations look wonky – but that is because of the interest Ireland is paying on the 2025 sovereign to IBRC which we 100% own, and it isn’t a real cost to this State in the sense we own IBRC.
As for the charity bets, I would still maintain that the promissory note was unconditionally “satisfied” in March 2012 and that there was no deferral on the promissory note commitment. We deferred the source of planned funding – the 3.5% loan from the Troika – for at least 15 months. But we have substituted the source of funding with a sovereign bond which is more secure – in our creditors’ eyes - than a promissory note.
Despite the minor win, there has been no appreciable progress in “re-engineering” the €30bn promissory notes that will be paid off over the next 13 years. There was talk of a “technical paper” which would outline options which would form the basis for canvassing the Troika, but as yet that “technical paper” has not been completed, according to An Taoiseach Enda Kenny in the Dail last week, despite its being mentioned as far back as January 2012. The Government appears keen to downplay any expectation of any imminent “deal” on the promissory notes, and the view on here is that there will be no deal, unless a collateral scrap falls from the Spanish or Greek table.
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