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Archive for January 20th, 2012

If you were paying attention yesterday and caught the two press conferences given after the bailout troika of the IMF, EU and ECB had concluded their latest “mission” toIreland, you would have been struck by the contrast between claims made at the first press conference given by Ministers Noonan and Howlin and the second where the Troika was questioned. For example, our own ministers were far more upbeat about the sale of state assets and their deployment for a much-needed jobs stimulus, the Troika downplayed the immediacy of any such stimulus, and indeed if you think about what would be involved in selling some state assets, it seems like it will be years before the funds might be available for any stimulus. There was no mention at the ministerial press conference of the fact that the IMF had downgraded its forecast for economic growth inIrelandin 2012, from 1% to 0.5%, the Government officially projects 1.3%. But it was on the question of promissory notes that it seemed to me at least that there was most divergence. To recap, we have given IBRC (the new named for the merger of Anglo Irish Bank and Irish Nationwide Building Society) €29bn of IOUs called promissory notes and we had previously agreed to pay down this €29bn with interest over the next 15 years – we’ll be handing over €3bn in cash at the end of March 2012. Minister Noonan and others in Government have previously inspired hope in the hearts of the nation thatIrelandmay be able to win changes to these IOUs/promissory notes which would mean we weren’t handing over so much money.

Here’s the history of this Government’s statements on promissory notes:

15th June 2011 – Minister Noonan is in the US and causes worldwide drama when he announces intentions to seek the burning of bondholders at Anglo and INBS. In an extensive interview in Washington with RTE’s Richard Downes, the minister doesn’t mention “promissory notes” once.

1st September 2011 – Back after the summer holliers, Minister Noonan faces a hearing at the Oireachtas Committee for Finance, Public Expenditure and Reform. He is asked by Sinn Fein’s Pearse Doherty “The Anglo Irish Bank promissory note is one of the areas of banking that is causing a major problem for us because it impacts on our budgetary situation and deficit reduction. Has there been any discussion at European level, particularly with the ESFS which now has an expanded role, on examining the ELA to Anglo Irish Bank and restructuring it? The promissory notes could be dragged out over a longer period instead of the ten year period we have. The promissory notes are in place to pay back the Irish Central Bank and the European Central Bank. Is there a way to use the expanded role of the ESFS to deal with that issue and extend the maturity date? The knock-on effect would be that instead of giving Anglo Irish Bank €3.1 billion every year over the next ten years, the timeframe would be extended which would reduce the immediate impact on us and our budgetary situation because the money comes directly from borrowings.”

The minister responds (with my emphasis) “The promissory note on Anglo Irish Bank is an issue that arises from time to time. It is a pretty big imposition that one must pay €3 billion a year. I share the Deputy’s views. It would be helpful if we could reschedule the promissory note. I have not raised the issue in specific terms with any of the authorities yet but I have raised it in general terms with the troika – pointing out the difficulty of meeting the €3 billion payment every year and what it does to the fiscal figures.

When one looks at the structure of the promissory note, one of the difficulties is that it was drawn up when interest rates were lower and we were either still in the markets or just coming out of them so one is factoring in an interest rate of slightly below 6%. If one were to redesign it now over a 25 year or 30 year period, taking recent bond yields, one would have to factor in an interest rate of approximately 9%. As soon as one starts doing that, one changes the arithmetic to the point that one could have a capital hole emerging in Anglo Irish Bank which would have to be back-filled again. The difficulty in redesigning the promissory note in terms of financial engineering is to do it in a manner that does not create a further capital requirement in Anglo Irish Bank because of the changing interest rate. We have been trying to work it out but I do not know whether we will arrive at a solution.

I do not wish to go to the European authorities just to kick the ball around. If I go to them I would like to go with a proposition and to ask whether we can do something or if they could help us to do it. We are considering proceeding along the lines suggested by the Deputy. The difficulty is to design a solution without causing more trouble. I would like to close off Anglo Irish Bank. We have taken matters so far. We have taken out the deposit base. It still has a banking licence. It should be run down completely in the next nine years, by 2020. The bank is deleveraging its assets. Members will have seen the advance publicity on the loan book in theUnited States. We are pulling it back and making progress. I do not wish to open up an issue again whereby we are coming back seeking more capital for Anglo Irish Bank. I will not do that. If that is the price of redesigning the promissory note, we will stay with the existing promissory note. That is the problem we face.”

17th September 2011 – for the first time that I can recall, Minister Noonan speaking in Wroclaw in Poland, mentions “promissory notes” in the context of tangible negotiations with the ECB. He says “I would like to open a conversation with the authorities here [the ECB, presumably] to get a less expensive solution to the promissory notes” Remember this is more than six months after Michael Noonan got his feet under the ministerial desk. There was a lot of talk in Wroclaw before the meeting between Minister Noonan and then-ECB president Jean-Claude Trichet about renegotiating the promissory notes. The Irish Examiner reported “The issue of promissory notes issued by the previous government was a primary one, he said, and he hoped to convince them to change the terms of these IOUs by lowering the 8.663% rate or lengthening the repayment period.” Reporting after the meeting suggests that the ECB was “cool” on proposals to change anything about the promissory notes, and Minister Noonan said the ECB had been “pretty non-committal” The Irish Independent reported “the Government is also understood to have had no meaningful conversations with Anglo management about how changes to the promissory note could impact on the bank. The situation isn’t “urgent”, Mr Noonan stressed, since the main issues won’t develop until an interest rate holiday on the notes ends in 2013 and an interest payment of €1.8bn is required”

26th September 2011 – in Washington (again), Minister Noonan now places the issue of promissory notes firmly in the frame. The Irish Times reported “he [Minister Noonan] said the Government may seek a restructuring of the promissory notes used to recapitalise the bank, which could result in savings of billions of euros”

27th September 2011 – Sinn Fein’s Pearse Doherty (again) asks Minister Noonan to set out the costs of repaying the promissory notes. The Minister replies in a non-specific way which gives rise to Sinn Fein making credible claims that the cost of the promissory notes might rise to €75bn including interest. The Minister makes no reference whatsoever to discussions to change the terms of the promissory notes.

28th September 2011 – An Taoiseach Enda Kenny makes a statement on promissory notes in the Dail and says (my emphasis) “An alternative being pursued by the Minister for Finance is to examine what can be done with the promissory note signed off by the previous Government in respect of which the interest rate is more than 8% and which begins to be payable in 2013. If that can be dealt with by extending the maturity or whatever, the savings to the country will be substantially more and they will be in the public interest”

11th October 2011 – with the bailout troika arriving inDublin for the fourth mission, you might have thought that this would be the ideal time for Minister Noonan to make progress on renegotiating the promissory notes. The Irish Examiner reported “ministers will plead with the EU/ECB/IMF troika to cut the multi-billion euro interest payments looming on the Anglo bailout”

20th October 2011 – the Troika completes its fourth mission and Minister Noonan issues a press release to mark the occasion. Not a dickybird on Anglo’s promissory notes.

2nd November 2011 – The Government approves the payment of USD 1bn (€730m) to Anglo senior unsecured unguaranteed bondholders. In the Dail, Minister Noonan says “However, we still have unfinished business with our partners to find the most cost-effective way of resolving the IBRC over the long term. Technical discussions between officials are under way at present on the IBRC promissory notes. For these reasons, I have decided not to take unilateral action on burden sharing on IBRC senior debt. Therefore, the IBRC has today repaid senior debt of $1 billion, which is around €700 million”

22nd November 2011 – Enda Kenny is asked in the Dail if he raised the issue of Anglo’s promissory notes in his (first) bilateral meeting with German chancellor Angela Merkel. Enda replies with a simple “yes” and gives no further details – “Question No. 22 concerns raising the issue of the Anglo Irish Bank promissory note and the answer to that question is “yes””

16th December 2011 – the Irish Times reports “the government has quietly downgraded its campaign to persuade the European Central Bank to change the terms of the €30 billion of promissory notes it issued to bail out Anglo Irish Bank, according to an authoritative Government source.”

19th January 2012 – Minister Noonan issues a press release on the conclusion of the fifth Troika review. Again, not a dickybird about promissory notes, though he seems to have claimed that last Thursday 12th January, the Troika agreed to prepare a policy statement on the promissory notes which would be presented to the Troika principals (EU, ECB and IMF). When asked about the promissory notes at the Troika press conference, IMF Mission Chief for Ireland, Craig Beaumont said the government had merely “requested discussions”. Bloomberg reports that “IMF SAYS WORKING ON TECHNICAL NOTE ON ANGLO IRISH NOTES” The IMF does not mention promissory notes in its press release on the conclusion of its review mission.

So in summary, it has been four months since Minister Noonan’s meeting with the ECB and others in Wroclaw where he, to use his own words “had a ball to kick around” and has proposals. It is two months since Enda Kenny discussed the matter with Angela Merkel. It is more than two months since Minister Noonan said that “technical discussions” were ongoing. And yet the Troika yesterday downplayed any progress in the matter saying that Minister Noonan had merely “requested discussions”.

Time to call the Minister’s bluff?

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