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Archive for September 17th, 2011

When Professor Morgan Kelly re-ignited the debate about debt forgiveness on 18th August, 2011 something strange happened in the aftermath. Out of nowhere came the announcement of a report being produced by a “mortgage expert group” by the end of September 2011. No-one seems to have previously heard of this group though the group’s title was practically the same as another group which had produced a report in 2010. But that 2010 group had done its job, delivered its recommendations and disbanded. This new “mortgage expert group” seems to have mushroomed up overnight and if you were cynical you might say it was a knee-jerk response to headlines on debt-forgiveness, and that the “end of September” report was an attempt to deflect focus away from politicians who were, after all, still on the beach with their spades and buckets. Cynicism was only increased by the Government failing to give even the most sketchy of details about the work of the new group – its members and expertise, terms of reference, deliverables.

Deflecting focus may be a motive at play today also in another financial matter. Although it made the headlines on 15th June, 2011 when Minister for Finance, Michael Noonan was in the US, the subject of repaying senior unsecured unguaranteed bondholders at Anglo Irish Bank (“Anglo”) and Irish Nationwide Building Society (INBS) has been bubbling at the surface of the media for months. Today is a crunch day in the Polish city ofWroclaw where Minister Noonan will have a meeting with the president of the ECB, Jean Claude Trichet where Minister Noonan will seek agreement from the ECB to implement “burden-sharing” with the Anglo and INBS senior unguaranteed unsecured bondholders. No-one seems to be holding out much hope for success on Minister Noonan’s part – just a week ago President Trichet said the ECB had not changed its position in respect of senior bonds in Irish banks, and that position is that every last cent is to be repaid – regardless of whether the bonds are in Bank of Ireland (the healthiest Irish state-guaranteed bank) or Anglo (the “bank” whose deposits have been sold, whose branch network has been closed, which doesn’t lend, which is working out a legacy portfolio of loans, which has been merged with fellow zombie, INBS and which may be wound down in five years judging by comments by chairman, Alan Dukes during the week). In fact the ECB reaction when the subject of burning bondholders is raised, is feigned surprise; after all this subject has been settled, and to burn bondholders would cause contagion in the euro area and de-stabilise the banking system.

So Minister Noonan is entering a meeting right about now where the likelihood is that he will emerge unsuccessful and we will helplessly stand back as the countdown to the repayment of a USD $1m (€725m) unsecured unguaranteed senior bond is repaid by Anglo on 2nd November 2011. Of course Minister Noonan might continue to cling on to the possibility of raising the subject with the Troika missionaries when they visit us in October to conduct the latest bailout review, but that would seem to be too late (I believe the missionaries will be arriving the second week of October for a 1-2 week review). The bond is repayable on 2nd November 2011 and if a precedent of a EuroZone bank defaulting on a senior bond is to be agreed by our partners, then it seems from this arm-chair perspective that there would not be sufficient time to prevent paying the 2nd November 2011 bond in full.

But what is amazing is that Minister Noonan yesterday raised the possibility of changes to Anglo’s promissory notes which might, according to RTE, “would be more valuable than an agreement that losses could be imposed on senior unsecured bondholders in the bank”. Minister Noonan is reported to have said – and don’t give up reading here, it gets easier! – that the Anglo promissory notes cost us €3bn a year, enjoy “an interest-free holiday” until 2013 and are then set to cost us interest of €350m per annum rising to €2.1bn by 2025, according to Laura Noonan writing in today’s Irish Independent who goes on to quote Minister Noonan : “I would like to open a conversation with the authorities here to get a less expensive solution to the promissory notes”.

I have a feeling that many of you will be scratching your heads. Anglo’s promissory notes? What changes? Changes being worth more than savings on bonds?

Firstly in respect of Anglo, the Irish state has put very little actual cash into Anglo – €4bn in total, all in 2009.  Most of the cost of Anglo has been met with promissory notes – in other words, the Government didn’t Anglo cash, they gave IOUs totaling €25.3bn which alongside the €4bn in cash in 2009 gives an overall cost for Anglo of €29.3bn. INBS is costing us €5.4bn in total of which only €100m was provided in cash and the remainder, €5.3bn in promissory notes. Anglo and INBS take the IOUs and exchange them for cash from the Central Bank of Ireland and the cash is then use to operate Anglo/INBS (or “IBRC” as the combined entity is called) including repaying bonds. Now the last Government agreed to pay over cash to Anglo/INBS from 2010-2025 to “honour” the promissory notes. With me so far?

So what’s this talk of “interest” in respect of promissory notes. The plan as outlined last November 2010 (see below) was that Ireland would borrow the money between 2010-2025 to fund the promissory notes and the interest rate assumed was 4.7% from 2011-2025. Remember this was before the bailout drama at the end of November 2010.

Table from the Department of Finance, November 2010 (see here)

What appears to be on the cards now is some kind EU fund, the EFSF or the EFSM will lend the cash at a fixed rate of around 2.9% (that is, “at cost”). That will reduce the interest charge. By how much? Minister Noonan is indicating in the order of €3-4bn but we don’t have the calculations.

What arouses the cynicism is the fact that these changes have not been signaled before. Of course it would mean Ireland increasing its borrowing from the EU and extending the bailout/loss of sovereignty in domestic financial decision making until 2025. Will we still be enduring the missionaries in 2025?

And whatever decrease in the cost of funding Anglo does not detract from the fact that Anglo is not a bank and that the Irish nation is still footing 100% of the cost of repaying its senior bondholders (this is a reminder of the bondholder position in April 2011, though since then the balances have reduced as bonds are continually repaid).

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