We have become used to broken promises in this financial crisis. Remember Enda Kenny in December 2010 after the Greens had pulled the plug on the previous administration and political parties were on an election footing. Remember “Mr Kenny said there is no question of defaulting on sovereign debt or on senior bank bonds that are covered by the Guarantee but he believes that the taxpayer can save between €12-17bn by negotiating a sharing of losses with the unguaranteed senior bondholders”. Of course that promise became more nuanced in the subsequent manifesto a month later but no-one ever disabused us of the notion that this government would pursue to success a significant write-down on the remaining senior bondholder debt. And in June this year, Enda emerged from the all-nighter of the EU summit to tell us that some people had just found out he was not someone to be tangled with and that we could expect a deal on our bank bailout by October 2012 – that was the promise owned by Enda and his government, not Olli Rehn or Eamon Dunphy or the Tooth Fairy. Though it seems today that all three might be blamed for slippage in the date.
Fast forward 10 weeks and where are we with the negotiations? Seemingly no place. Presumably that’s why, a week ago, we had the leak of the letters from the ECB to Ireland’s finance minister in October/November 2010 – not a comprehensive leak, and we still haven’t see the precise language used. But can anyone be in any doubt that the decision to show the letters to the Irish Times was taken at the highest level. Two can play the extortion game it seems, and the ECB should understand that as surely as a nod is as good as a wink to a blind man, the letters will be leaked in full if the ECB doesn’t start to get serious in these negotiations.
Yesterday, courtesy of RTE’s This Week radio programme, we had an update on the negotiations from three individuals with knowledge of the matter – Governor of the Central Bank of Ireland, Patrick Honohan, from transport minister Leo Varadkar and from Sharon Bowles – Sharon is a British MEP but her relevance to Ireland is that she chairs the Committee on Economic and Monetary Affairs at the European Parliament and is accordingly at the heart of the efforts to resolve the crisis across Europe. What we learned was that Patrick Honohan is shifting the responsibility for negotiations emphatically into the court of the government, Patrick is assisting all he can but it’s the Government carrying this baby. Patrick thinks there will be a deal, but what and when? Who can tell, maybe after the Spanish deal. Leo thinks there will be a deal before the next promissory note payment is due in March (2013). Sharon thinks there will be a deal in November because certain (unspecified) arrangements come up for renewal then.
Because the negotiations haven’t been concluded, attempts to extract detail from the participants will inevitably be met with responses which mention not giving away our position. However at this stage, we should at least be able to get an answer to one question – who is the Santa Claus who will fund relief in Irish bank debt? From what I can see there is no Santa Claus and all that is being pursued is a sale of the Irish stake in Bank of Ireland and AIB, worth about €8bn according to the NTMA and for the gross interest rate on the promissory note to be reduced, something which is irrelevant as the interest rate affects what the Department of Finance (which we own) pays IBRC (which we also owns) and there is no net effect on the ultimate debt position of the State if the interest rate is reduced. If there is a Santa Claus which will compensate Ireland above and beyond the present value of our banks, then 10 weeks after the EU summit announcement, we should at least expect that Santa Claus to be identified.
On October 1st, exactly three weeks away, AIB which we 99.8%-own will pay €1bn to senior unsecured bondholders (bond reference XS0455308923). We have so far shoveled €20.7bn into the AIB group which of course merged with EBS last year. Without a Santa Claus, here is a representation of how we might be reduced to getting some relief on our debt.
I think the emphasis on deadlines is misplaced. Does anyone really care if this is achieved in October, November or March 2013? Setting ourselves deadlines gives the ECB clout. It’s an old negotiating trick to set deadlines to force the opposition into acceptance of a crappy deal.
We are a small player so our ability to hustle is limited.
Success is going to be based on getting the timing right.
At some stage our great leader needs to try and do a Monti (the Italian version). Merkel needed to bring something home and Monti held firm until he got his way.
Ireland is no Italy so this needs to be done with a lot of finesse.
I’m not sure our great leader is strong on timing or finesse but we live in hope.
the bankers should pay for Ireland’s banking debt, not the irish people, as they have enough debt in our hands, alot of people are negotiating the irish bank debt, but will they be able to pull it off, I think not unfortuneately and we need someone to negotiate it on our behalf.
[...] If’s the word. [...]
@nama,
if hypothetically we get everything we are looking for, the best case scenario. Reduction in our debt, PN spread out over a longer period, ESM taking equity stakes in our banks and such, what exactly will it mean to the average person on the street?
Or will we still be looking at austere budgets for the next 3-4 years regardless.
The reason i ask is that my friend who works in the public sector is of the opinion that a deal will give us breathing room i.e. (no more pay cuts) which is more wishful thinking than sound economics.
What would the likely outcome be?
Thanks
@Guest, good questions, let’s look at the possible answers
(1) “Reduction in our debt” – this is where some Santa Claus might give us say €10bn in recognition of the €70bn cost of the bank bailout. If the €10bn was provided with no strings attached then yes, we might recognise that as income which would mean we could lower taxes and increase public spending and welfare. But (a) there is no Santa Clause and (b) if there was, there would be strings attached and the main string would probably be that the €10bn be used to pay down our national debt, that is, redeem bonds or pay back the Troika early. But if we did cut national debt by €10bn that would save us €600m per annum in interest at say 6%, and that €600m would cut our deficit so instead of finding €3.5bn in 2013, we’d need find €2.9bn, but we would would still need find an additional €3.1bn in 2014 and an additional €2bn in 2015.
(2) “PN spread out over a longer period” – there’s about €27bn of promissory notes left at IBRC and as things stand, we are expected to pay these off with interest by 2025, that is over the next 14 years. So let’s say we can pay this off over 30 years instead so instead of having to come up with €3bn each year, we had to come up with €2bn. Unfortunately this wouldn’t affect our annual deficit because the €31bn promissory notes were recognised in our deficits in 2009/10/11 when the promissory notes were created. So spreading the PN over a longer period will just mean that our national debt comes down at a lower rate than presently planned.
(3) “interest on PNs reduced” – okay, this wasn’t one of your suggestions but it seems to be on the table. This would affect our deficit but only cosmetically, because we own IBRC 100%, so any reduction in interest rate means IBRC makes less profit and consequently may end costing us more of a bailout, so yes it may reduce the deficit but when we need wind IBRC up, the benefit will be reversed.
Take a look at this excellent blogpost from Seamus Coffey and it might help you understand (2) and (3).
http://economic-incentives.blogspot.co.uk/2012/03/changing-nature-of-our-budget-deficits.html
(4) “ESM taking equity stakes in our banks” – this is akin to (1) above but is more likely. Our stakes in Bank of Ireland and AIB were worth €8bn in June 2012 according to the NTMA though I think that will have reduced after Bank of Ireland’s surprisingly bad performance reported in July. The €4bn bailout of PTSB is I think dead money because of PTSB’s €23bn tracker mortgage portfolio and BTL portfolio. So let’s say we get €8bn for our stakes in the other two, BofI and AIB, then the string attached is that the €8bn be used to pay down national debt but that in itself would reduce our annual interest bill by €480m assuming 6%, and that would reduce our deficit so instead of finding €3.5bn in 2013, we’d need find €3bn, but we would would still need find an additional €3.1bn in 2014 and €2bn in 2015.