I wonder how many of you can remember a time when the word “bondholder” was not in your vocabulary. Well it seems that the term “promissory notes” is about to acquire the same familiarity. In March 2012 and every March until nearly 2030 Ireland will need to find about €3bn per annum to pay the so-called promissory notes. There have been a couple of blogposts on here previously – here and here – which discussed aspects of the Anglo promissory notes but the aim here is to explain in simple terms what they are, what the Government position is with respect to them and what the IMF said a couple of hours ago in Dublin which seemingly contradicted claims made by Minister for Finance, Michael Noonan and others.
What is a promissory note? It’s a sheet of paper on which the former Minister for Finance, the late Brian Lenihan wrote an IOU. He gave a few of these sheets of paper to Anglo Irish Bank and Irish Nationwide Building Society, totalling €29bn-odd (€24bn for Anglo and €5bn for INBS). Not only did the sheets of paper provide an IOU but they provided for Brian Lenihan to pay Anglo and INBS interest on the value of the IOU.
Why on earth would Ireland pay interest on these IOUs, wasn’t the giving of the IOU in the first place enough? The ECB insisted that the IOUs have an interest rate, otherwise the ECB wasn’t going to allow lending to Anglo/INBS of cash against the collateral of the IOUs.
So that’s all there was to it, Brian Lenihan writing IOUs? No, in addition the late Brian Lenihan wrote so-called “letters of comfort” to the Central Bank of Ireland saying the Irish state would stand behind the promissory notes. These letters of comfort enabled the Central Bank to lend cash to Anglo/INBS using the promissory notes as collateral.
What is the interest rate on the promissory notes? This doesn’t appear to be in the public domain but it seems it is between 6-8.2% per annum.
Who pays the interest on the promissory notes? We do, or rather the Department of Finance does, it pays the interest to Anglo and INBS.
But we own Anglo and INBS 100% so aren’t we paying ourselves? CORRECT! And this is why the interest rate on the promissory notes is a red herring. By the way, Anglo borrows cash from the Central Bank ofIreland using the promissory notes as collateral but this interest which is paid to the Central Bank is also ours as we retain 100% of the profits of our own Central Bank.
Why did we create promissory notes in the first place? Anglo and INBS became insolvent – that is their assets were worth less than their liabilities – after making big losses on their property loans when the property bubble burst. The Government gave guarantees to Irish banks in September 2008 and was consequently compelled to inject funds into Anglo and INBS to make them solvent again. The Government did use cash at the start and gave Anglo €4bn and INBS €0.1bn but thereafter started writing these promissory notes with the approval of the ECB.
So we have this giant noose around our necks with these promissory notes, can we renege on them? Pass. I don’t know if the promissory notes and the letters of comfort together make for a binding obligation. On one hand, the notes were issued pursuant to a banking guarantee in September 2008 which was approved in our Oireachtas. On the other hand, the specific costs have not been agreed by the Oireachtas as provided for under our Constitution and there is an international concept of “odious debt” which argues that debt not properly incurred by a nation is not sovereign debt.
What can we do to reduce the cost of the promissory notes? Well one thing that won’t reduce the cost is getting agreement from the ECB or anyone else to lower the interest rate on the promissory notes, because as shown above, it is a red herring as we own Anglo and INBS 100%. Present projections are for the annual €3bn is to sourced from the sovereign bond market from 2014. And that bond market is presently charging 7.5% for 10-year money. We are paying just over 3.5% for bailout money, so if a second bailout was arranged at a low cost then that would probably deliver savings. Or the ECB could agree for the promissory notes to be paid over a longer period, 30 years perhaps.
What’s the difference between Anglo promissory notes and Anglo bondholders? Bondholders lent money to Anglo before 2008 for fixed periods of time, five years for example, and these bonds are coming due all the time with a particularly big one next week when €1,250m is repaid. Promissory notes are our IOU debts to Anglo.
Now you may have gotten the impression in recent months that Minister Noonan and the Department of Finance were frantically burning the midnight oil in negotiating the financing of the promissory notes. Minister Noonan was practically tapping his nose with his finger in a knowing way, as if to say it was all under control and talks were taking place behind the scenes which would imminently deliver results. Just before Christmas, the Department of Finance began downplaying the prospects on the supposed negotiations. But the Government continues to assert that it is involved in such negotiations, and those assertions have been repeated as little as four hours ago when Ministers Noonan and Howlin gave a press conference. However when the Troika was asked at its press conference about the “negotiations”, the response from the IMF Mission Chief to Ireland, Craig Beaumont was merely thatIreland had “requested” technical discussions. These seem to be two very different interpretations of what is going on, and I can’t help but remark that the IMF has less reason to obfuscate the truth than our own embattled politicians who next week will face the fury which will accompany the payment of €1,250m to senior unsecured, unguaranteed – that is, not covered by the September 2008 guarantee which has now expired in relation to pre-2008 bonds – bondholders at what was formerly Anglo.
NAMA Wine Lake 
Re promissory note coupons: If Anglo and INBS make losses ad infinitum, does it matter that the govt owns Anglo/INBS? It would never actually get back the cash it pays as a coupon. Or am I missing something?
@Charles, the Irish government has injected €29.3bn into Anglo – €4bn in cash and €25.3bn in promissory notes. Whilst a stress test in Sept 2010 gave a range of likely capital needs of €29.3-€34.3bn, the present estimates by Anglo’s management are €25-28bn. That being the case, Ireland will not give Anglo any more promissory notes, and interest paid by the Government to Anglo should be 100% available to the Government.
@ NWL,
“But we own Anglo and INBS 100% so aren’t we paying ourselves? CORRECT! And this is why the interest rate on the promissory notes is a red herring.”
This is by far the most important aspect to highlight.
In fact, when you work through this the potential savings rely on ‘deals’ with the banks’ creditors and not the PNs. If the creditors (mostly the ECB, Irish CB and snr bond holders) agree not to be paid back or paid back at a later date, then savings can be made. Delayed payments save interest payments on increased national debt (not the coupon on the PNs).
— so money from privitization will be used to pay off promissory notes,
promissory notes for Anglo, probably written under duress, in the dark, by people no longer accountable–
wow
Are you really about to let this happen?
Odious debt a definition.
“When a despotic regime contracts a debt, not for the needs or in the interests of the state, but rather to strengthen itself, to suppress a popular insurrection, etc, this debt is odious for the people of the entire state. This debt does not bind the nation; it is a debt of the regime, a personal debt contracted by the ruler, and consequently it falls with the demise of the regime. The reason why these odious debts cannot attach to the territory of the state is that they do not fulfil one of the conditions determining the lawfulness of State debts, namely that State debts must be incurred, and the proceeds used, for the needs and in the interests of the State. Odious debts, contracted and utilised for purposes which, to the lenders’ knowledge, are contrary to the needs and the interests of the nation, are not binding on the nation – when it succeeds in overthrowing the government that contracted them – unless the debt is within the limits of real advantages that these debts might have afforded. The lenders have committed a hostile act against the people, they cannot expect a nation which has freed itself of a despotic regime to assume these odious debts, which are the personal debts of the ruler.”
http://en.wikipedia.org/wiki/Odious_debt
@NWL
What is your take on the “can kicking” of the personal In insolvency/ bankruptcy legislation ?
@SouthofDub, the personal insolvency legislation will now be published in April 2012 which represents a slippage from the target of Q1,2012. At present our bankruptcy legislation lasts for 12 years (five, if preferred creditors which includes bankruptcy expenses are paid, and the word is that this will rarely happen, so in reality it’s still 12 years). The requirement under the bailout is to modernise our bankruptcy laws. The problem is that because of the poor state of the economy and the negative equity in housing problem, the shorter you make the bankruptcy period, the more people that will pursue bankruptcy, the more banks will be forced to write off losses particularly on property lending/mortgages.
So what I make of the delay is that Ministers Shatter and Noonan with input from the Central Bank want to make sure that any new legislation doesn’t result in additional losses in the banks not taken into account in the March 2011 stress tests. What concerns me is that I get the feeling the Central Bank is advancing argument against the write off of mortgage debt (which is what you would expect from a modern bankruptcy regime, and is what our neighbours in the UK enjoy). I think the delay is mostly to do with financial modelling on the likely impact of the new legislation on banks and the wider economy. The slippage doesn’t surprise me.
Although the insolvency legislation will be published in April 2011, it will be some time later before it becomes law, hopefully in 2012.
It is entirely possible that increasing numbers of “ordinary” people will, if mortgage debt is excluded from the Irish scheme, opt to go the UK for bankruptcy where the restrictions last only one year instead of 5/12 and where (I understand) pension benefits are excluded.
Maybe, we’ll have an Irish solution to an Irish problem which, as always, involves the UK. Certainly a threat to opt for bankruptcy in the UK rather than in Ireland would be a very powerful bargaining chip for someone negotiating a deal on their mortgage with a local lender.
I don’t blame people from doing that given that our mega-borrowers have shown the way.
@NWL
If you have time and inclination, it would be interesting to seek out some relevant stats on UK bankruptcy which might be of relevance to Irish candidates and situation.
@Brian, you will find comparative statistics for Ireland, Northern Ireland,the UK and US here.
https://namawinelake.wordpress.com/2011/01/01/northern-ireland’s-bankruptcy-rate-per-100000-of-population-is-350x-higher-than-the-republic’s-and-the-us’s-is-2000x-higher-why-are-we-so-different/
@NWL”The problem is that because of the poor state of the economy and the negative equity in housing problem, the shorter you make the bankruptcy period, the more people that will pursue bankruptcy, the more banks will be forced to write off losses particularly on property lending/mortgages.”
Lost me here,is that not the goal.
@John, there are two goals, one is to minimise the chance of banks needing even more capital which is what will happen if more people than projected opt for bankruptcy rather than paying what they can on their mortgages no matter how long it takes. The other goal is to allow the most indebted with no ability to service debt payments to go through a procedure which will see them financial reborn and able to contribute to the economy without them worrying about their debt overhang. Those goals are in conflict – the more people who opt for bankruptcy => the greater the losses at the banks => the greater the chances the banks will need a further bailout. And on the other hand, the fewer people who opt for bankruptcy => more people with substantial debt overhangs who won’t spend in the economy => lower economic growth.
It is obvious to me that the “state” want to bring a select number of people into the existing bankruptcy legislation before any changes are made.
@NWL the only goals achieved so far are own-goals.
Thanks for that,option one is kinda like the Anglo bond situation then.
Its barbaric,inhumane the emotional and mental health costs associated here are unconscionable.
Pass modern,humane BK laws yesterday.
@BF thousand of Irish people would love to,however,unlike the Ray’s and JF’s,they are barely hanging onto to one underwater home.
Never mind establishing residency in the UK,many have strong ties,family,job if they are lucky.Lacking the ‘capital’ to achieve this goal.
Why not just convert all debt to 30 year, zero coupon bonds? That way no interest or principal is paid for 30 years and it does not matter at what discount they sell for out the chute as most of us will not be around to have to worry about paying them off at par. If it is good enough to the US Treasury, it should be good enough for Irleand.
And, best of all, the government can make the bond holders pay income tax on the imputed interest. Win, win, all the way. Better than printing money. Oh, I forgot, you can also add in the new financial services transaction tax.
@NWL
I have a severe difficulty, and I doubt I’m unique, in the rush for new bankruptcy rules as a solution to these issues when in my view the overwhelming error in relation to the property disaster rests with the banks.
The bankrupting of individuals for banks mispricing property assets for the best part of a decade seems an odd way to go about righting the wrongs of the past.
I’ve suggested here before that banks lending money into property deals from q1 2006 to q2 2007 at less than 1% net rental yields in large parts of Dublin for buy to let and equivalent buy to live residential properties was an enormous accident waiting to happen. These lending screw ups fall under the heading of bank lending errors – aside from the obvious questioning of the legality of recourse debt in such deals – surely its not beyond the wit of Govt to finally realise that the overwhelming majority of property consumers are price takers i.e. hagglers need not apply, and had no opportunity other than not engaging at all, in accepting the banks prices, which will be proven to be c75% to 80% wrong when the dust finally settles from the peak.
Mis pricing any product by 80% should not involve the consumers good name being tarnished and yet contributor after contributor on this site and others believe it to be the solution we require. Count me out.
The solution as I’ve voiced here before is to reprice the asset at mortgage origination date using a 7% net yield metric against proxy rent equivalent house(s) and calculate what the mortgage ought to have been at the time using LTVs and deposits etc. Deduct repayments in the interim and compare model mortgage to actual and write off the difference. Its easy to understand, its goes to the heart of the issue i.e. mis pricing on the banks behalf and will not involve a glut of bankruptices which will only serve to fill the lawyers pockets, again. And at the same time tarnish the name of innocent property consumers whose only desire was to own a house and avoid the prospect of paying rent in their retirement years.
A very equitable and social solution. I’m assuming that you also have an equally appropriate solution on who picks up the consequent bank losses!!
@YB or in other words,debt forgiveness for a select few.What if the majority of my debt is credit card related or from the credit union.I simply lost the run of myself was offered free easy credit,cant or wont pay it back,what now?
@NML. If the interest rate is a red herring why have any interest rate. Why is it 8% Why not charge 0. What is the purpose or benefit of it to anyone?
If we are paying it to ourselves why not just stop paying it to ourselves. Why not just pay €3bn for ten years and be done with it. Don’t bother rolling interest and capital together. Just pay off the capital. Why does ECB want an interest rate
@Paul, the ECB insisted on an interest rate which is apparently set at a high 6-8.2%. The implication is that if the promissory notes (PNs) didn’t have an interest rate which was acceptable to the ECB then the ECB would not have given permission to our own Central Bank of Ireland to loan cash to Anglo on the security of the PNs.
Debt forgiveness in an environment where people actually have the prospect of jobs and some cash flow, can really work for the community. People start to save, and spend, again.
But where there is no job or prospect of some kind of cash flow, well then all the debt forgiveness in the world probably wont help, and bankruptcy can at least draw a line under it all.
Ireland has neither in a form fitting the crisis or even the era.
What of the Promissory note discussion,…I thought that would be floodgates
You are correct that the interest rate on the promissory note doesn’t really matter as it is circular.
What would be a major help with be a 5 year repayment holiday and/or a lengthening of the term to say 30 years.
Did anyone else notice the stage managed obfuscation by the attendant Mata Hari, asking for three questions at the same time, so that the troika could gloss over them and wouldn’t have to address the difficult ones? At least VB put her in her place! There’s always one….
NWL provided a link,watched it.The taxi driver story…”I’m one of the people”..got what it deserved,VB was having none of it.
€30,000,000,000 EURO MEDIUM TERM NOTE PROGRAMME – IRISH BANK RESOLUTION CORPORATION LIMITED
http://www.ise.ie/Debt-Securities/Individual-Debt-Securities-Data/ShowSecSpecialist/?secID=8
@John Gallagher
You misunderstand I’m referring to property and mortgages where the market lives or dies by the availability of credit and where banks price the underlying asset – letting loose in Brown Thomas on the cc is not the same – but importantly the credit card interest charge reflects the risk inherent in unsecured lending i.e. banks price the cc risk and bad debt assumptions are built into the rate charged.
This is hardly the case for property in Ireland where banks mispriced the risk versus alternate ‘risk free’ investments. Its their job to understand the risks in asset markets and they mis calculated the risk badly and they should have to bear the cost of that error. It really is that simple and no amount of guff from Govt or elsewhere will change that basic fact.
My firm belief is that a fix such as mine will not be fair. Repeat it will not be fair. Fixes are not designed to be fair they’re designed to get the problem solved for the greater good – and in that process there will be winners and losers. That’s life. If we ‘re holding out for a ‘fair’ solution to the mortgage disaster we’ll be waiting – in fact the Central Bank believes per the PCAR document that prices will not see their previous highs until 2040 – that’s 28 years away – I believe their being wildly optimistic.
So we have a choice – wait for the ‘fairness’ tooth fairy or introduce a fix and get real with the actual problem. The disaster that is Ireland Inc. was born and bred in the Board Rooms and lending departments of the countrys banks based on a flawed property pricing methodology. Until we recognise that the root of the issue is price based and fix it at its core we go nowhere.
I believe that jobs follow cash – not the other way around – in order words give the consumers some breathing space and they will spend and strange but positive things normally follow.
@YB the sooner the better,from afar there is a certain irony in the Irish attitude towards debt.
On the one hand “burn the bondholders” is gaining momentum but no progress in forgiving/burning domestic debt amongst each other.The full support of the Troika for modern BK law,but the govt. is parlyased with “what if” or “moral hazard”.
It’s not exactly pioneering work,just mirror the UK’s.
The consequences of debt forgiveness will be significant further write-offs for the Banks. The Government can decide on this in respect of Govm’t owned Banks such as AIb etc. However if the Gov’mt tried to introduce a requirement for “Debt Forgiveness” on Institutions not owned by them, they must leave themselves open to compensation claims for any losses suffered through the Courts. It sounds equitable in theory but not realistic in practise.
Regarding interest rate on promissory notes,at the time of issuance there was a belief somewhere/somehow that Anglo was viable,would it not have been anti competitive to subsidy it with interest free paper.
Why else lend the money.
[…] the Brussels Eurocrat would clearly prefer not to answer (like, why are the people of Ireland paying for the financial chicanery of German, French and British banks and lending houses?). Apparently […]
@44Brendan,modern bankruptcy law is in effect debt forgiveness/forgotten/burned/no longer exists.Its going to happen in Ireland the sooner the better.There will be no compensation claims from any bank or institution against the Govt. none.
Irish people/govt. are unable to properly negotiate,deal with burning bondholders and restructuring promissory notes due to financial immaturity.
If you can not forgive/forget each others debts via modern BK laws,why should ECB.
The Govt. is simply updating an antiquated law,how individuals react to that does not represent a compensation claim,there currently is BK laws they are draconian.
@44brendan
Debt forgiveness in a situation where the are jobs or prospects, will put families back in the economy either saving or spending. It is a community based solution.
Debt forgiveness can be made to be painful and not an easy option, by taxing the amount forgiven as income, over the long term, after the person recovers financially. A more sophisticated credit score mechanism in Ireland would help.
The only part of debt forgiveness that does not make sense is the emotion.
What happens to the other guy is irrelevant. It’s like driving, everyone needs to focus on their own road, while someone else might need a tow…or we could just leave the broken down car right in your path.
I don’t think that NAMA sees it that way. My moles tell me that the policy of CAB department in NAMA in relation to PGs and personal loans is that NAMA will require that their borrowers confirm that their COMI is in Ireland. Not very bright of NAMA, as that is for the judge to decide and anyone signing up to it could claim that it was signed under duress. In any event, a borrower can always change his/her COMI. It really shows the dearth of mental capacity of the assh*les that populate NAMA – and anyone that agrees to it, deserve the consequences.
@WSTT personal bankruptcy is constaipated in Ireland,stuck in the bowels of various departments like a bad smell.
Yet,they want to seriously engage with ECB,hedge funds regarding restructuring debts at sovereign level.
They can’t even forgive forget domestic debts,it’s ridiculous,Victorian attitude towards debt,the laws in Ireland were drafted for the landed gentry with gambling debt.
@jg, The new requirement is bound to engender further distrust from the debtors as NAMA has only two possible motives for this requirement. One – it is afraid of a media pasting as its borrowers “forum shop” their bankruptcy in the UK; or two – it doesn’t want to allow its borrowers an easy “out” by going to the UK rather than Ireland and it intends to use the more onerous Irish bankruptcy laws vindictively and as a continuing threat against its borrowers.
It’s typical NAMA, small minded thinking, more political and media driven than practical. It will further alienate those it will need if it intends to dispose of its more toxic assets. Probably thought up and advised by some overpaid but not very bright lawyer.
@WSTT if they fixed or got the market moving,may alievate some these issues.
Nothing,like a disgruntled x partner and assets in free fall,you find out who your friends are quickly.So assuming you are a half decent Irish property chap,should I stay r should I go.
Really,not offering too much domestically,never mind quick clean smooth cleansing.
@jg, Why would anyone stay and work under that level of thinking? Destructive, vicious and negative. Only the wimps will stay.
@WSTT r the very well connected,protected.
Interesting times,poverty is way way overrated.Introduce,modern humane,BK laws.
@ NWL,
We know a bit more about the interest rate than simply “it is between 6-8.2% per annum”. There are some details here.
The “interest rate” from 2013 on will be 8.2% per annum. However this is to ensure that sufficient interest is paid for account for the “interest holiday” taken in 2011 and 2012. The AER, or some similar measure is actually around 5.8%.
If I borrowed €100 for two years at 10% and paid all the interest at the end of the second year, I would be no interest in year 1 and €21 interest in year two. The “interest rate” is 0% in year 1 and 21% in year two. Of course, the interest rate is 10% but the “interest holiday” clouds things. The Promissory Notes follow a similar template but over more years.
The average interest rate is around 5.8%. The actual annual coupon rates on the four tranches are 4.17%, 4.57%, 5.13% and 8.6%.
@44Brendan
‘The consequences of debt forgiveness will be significant further write-offs for the Banks. The Government can decide on this in respect of Govm’t owned Banks such as AIb etc. However if the Gov’mt tried to introduce a requirement for “Debt Forgiveness” on Institutions not owned by them, they must leave themselves open to compensation claims for any losses suffered through the Courts. It sounds equitable in theory but not realistic in practise.’
Forgive me but utter nonsense.
The Govt/CBI issues banking liciences for banks want to operate in the country. If the Govt believes a general write off is required for mis sold and mis priced properties and their associated mortgages it can compel any licenced bank to implement such a plan or else forfeit their licence which leaves the bank without the authority to chase its debts. So it can be done – just in the same way as the Govt has raided the private pension funds of the country to fund ‘a jobs initiative’ (God help us), and in the same way the Greeks are implementing PSI on sovereign debt – whats the difference when its all done and dusted – bottom line private investors lose. Believe you me it’s all very doable as a fix, if the will was there.
@YB NWL in a very rare moment of cynicism suggested the delay may be attributed to redundancy payments/golden handshakes due shortly.It was suggested that perhaps some of this would be utilized to reduce negative equity or pay off guaranteed debt.
So when IBRC receives 3.1bn the cupon, where exactly does it go? Does it all go directly to paying the Irish Central Bank for the provision of ELA?
If we were allowed to stop paying this cupon immediately, would the only effect be that we are reducing the amount IBRC owes the Irish Central Bank by 3.1bn less a year?
If it is the case that this cupon payment is being given directly to our central bank, can we not hold it to fund next years cupon, and in effect have the same 3.1bn circulating for the duration of the p.n?
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[…] RTE Radio. Noonan spoke from Paris after meeting his French counterpart Francois Baroin. Government is apparently exaggerating its efforts to deal with Anglo What’s the difference between Anglo promissory notes and Anglo bondholders? Bondholders lent […]