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?
NAMA Wine Lake 
That fellow on #vinb last night, said that the ECB can shove out all connections with Anglo to thirty years out without a problem. Needs only a 1/3 of the ECB board to achieve this. So why the hell are we beating our heads. Why not simply ask what would the ECB need to get there and then do it.
@Vincent, “that fellow” was Professsor Karl Whelan who lectures in economics at UCD and has a professional career that included time in central banks. He sets out his views here.
http://www.businessandfinance.ie/bf/2011/12/commanalyde2011/timeforadealwithsupermario
Thanks for the name, and I’ll have a read of the the link later on today. Pity they don’t put the names on a strap, that’d be handy.
It would be extremly helpful in negotiating if some prosecutions had taken place or a full inquiry.
International banks put a “squeeze” correctly so on Anglo,refused to accept their paper.In wades some dumb paddies with guarantees on worthless paper,the Govt. by providing the guarantee implied that their were assets to back it up,no one belived them,that’s why it had to be guaranteed.
The govt. should have listened to the “market” instead they all donned the “green jersey”,if there was fraud involved prosecute someone.
Stupidity is no excuse.
WRT the economic forecast being cut, am I right in recalling that twas this week that Enda was banging on that Goodbodys , or some of that ilk, were wrong with their forecast growth rate and that the govt were sticking to the figures as envisioned by the Dept of Finance?
@Michael, Enda Kenny said on Wednesday 18th January
“Deputy Ross is well aware of all of the factors that influence growth rates. The growth rate set out by the Department of Finance on behalf of the Government is an average, medium-term rate which we expect to be able to meet. When the troika came here at the start of its ten day visit it outlined very clearly that the period ahead would be the most challenging in respect of three areas, namely, meeting the budgetary targets that were set out, dealing with State assets and dealing with continued movement in respect of banks.
Yields, which stood at 14% last year, have fallen below 8%. This is an indication of volatility and, in our case, some degree of rising confidence, although we obviously have a long way to go. There is probably not an economist in Europe – and Deputy Ross is a respected economist – who can give a definitive verdict on the growth rate for any country because of global volatility and the fact that changes can occur instantly. We believe the targets we have set out will be achieved in 2012 and the Minister for Finance has been consistent on that issue. It is my belief that if the political process at European level is able to deal with the eurozone crisis, both in terms of the scale of the firewall to prevent contagion and in finding an approach to fiscal responsibility and conditions that apply to countries which are able to meet their demands, we have 1,000 engines in this country to help us achieve the growth rates that have been set out. The figures are medium term and we believe they can and will be achieved. We live and operate in a period of great volatility and uncertainty in Europe and the world. It is very difficult, given all of the factors involved, to give a precise definition of what growth rate will be achieved at the end of 2012. I am sure Deputy Ross understands that clearly.”
http://debates.oireachtas.ie/dail/2012/01/18/00004.asp
Cheers Nama,
After reading the article twice, farming not economics being my forte, all I can think to myself is , ‘remember to breathe…’
Top work as usual, the timeline should be compulsory reading for anyone putting questions to Noonan on this issue.
Thanks
Michael
Have you noticed when “jobs stimulus” gets trotted out? Any minister found using this phrase in conjunction when a revenue generating exercise should be shot. E.G. looting private pension funds for a jobs stimulus.
Let’s leave it at the government collects money into a general pot and spends it. Smokers get bad press. Why not help them out a little and have ministers ascribe taxes from smokers to a jobs stimulus. And reassign the looted pension funds to pay for public sector employees tax-free pension lump-sums.
The central bank borrowed the money,not Anglo.
Anglo had liquidity and solvency issues,was bankrupt and should have been allowed fail.The central bank had insufficient capital to fund Anglo,so IT borrowed from ECB,so called lender of last resort.No one forced the Irish govt. to pump this money into Anglo,or to borrower it,on Anglo’s behalf.
If the premise for supporting Anglo,was fraudulent or criminal then,maybe,grounds for re-negotiating the loans,but just because the bills are arriving is not a very convincing argument.The Irish State,by guaranteeing these,loans implied that Anglo was in fact solvent,why else continue lending to it.
@ Namawinelake
Thanks for the post, very comprehensive. If you’ll allow me, I have 2 questions:
1) Are you suggesting Pierse Doherty is the genesis for this idea in the minds of the government?
2) What’s your position, if any, on Karl Whelans position? Sounds like a promising alternative?
@John Foody, 1) no, the genesis of a proposal to restructure the promissory notes came earlier, and you’ll probably find some proposals from economists in 2010 on the matter. I don’t recall Minister Noonan making a statement on promissory notes prior to 1st September 2011, but even if he had, it wouldn’t affect the thrust of the blogpost which is that we have been trying to negotiate the terms of the promissory notes for at least four months. Having said that, I notice that Pearse Doherty has been active in pushing this subject. Unlike Peter Mathews the banking expert or Michael McGrath the Fianna Fail finance spokesperson or indeed economist Shane Ross, and 2) As a respected economist, academic and former central bank worker, his proposal should be examined. I think the ECB can still veto any change to the promissory note terms, and despite the anger domestically, I don’t think the ECB sees the pips being squeezed in Ireland yet and given the ECB’s support for Greece restructuring which might see that country with a 120% debt:GDP, I don’t think they’ll bat an eyelid at our own debts which will “only” max out at below 120%.
I don’t know what the last government were thinking… I know what the result of their thinking is. I see it every day at Dublin Airport. Planeloads of young people leaving.
FF and the Greens think as an officer corp and see themselves as just that, esp’ FF. It’s not that Labour and FG don’t think in that way, they do. You can see it with the mindless repetition of dimwitted propaganda months after it came rancid -see the Greek caused reduction-. But if you think of the current FF, and pretty much since the days of Charles Haughey, as colonists with the rest of us as natives. A FF Ascendency if you will.
With Fitch about to downgrade us and a warning from S&P and a continuum of borrowing to pay interest and the fiscal shortfall, there is no way that Ireland will get through this under its current debt load. Noonan needs to stop the spin and get on with the following:
Delay the payment of the Anglo promissory notes and tell the ECB that we are paying 1% not 8% interest (300 million per annum).
Get rid of Croke Park.
Lean on the banks to reduce mortgage debt and payments for distressed mortgage holders.
Pass the new bankruptcy legislation. The time limit for bankruptcy should be reduced to 12 months to match the UK.
Grow some cojones!
@wstt ah stop,put on the green jersey would ya……the debt burden is simply too great,anemic or no growth.More taxation,sorry TV lic. fees.
Seven thousand public sector workers out of work next month – but on the dole?With north of €500 million in pension lump sums – What possible solution is that?
Would it not be better to dump the Croke Park agreement and reduce salaries across the board? At least there would be some benefit in terms of production from the payments that will still emanate from the public purse.
Is the government hoping that they will all emigrate?
@WSTT, or will pay down mortgages (particularly negative equity ones) and honour any guarantees given to the children in buying their own properties. All before the Government publishes the personal insolvency legislation in April 2012. Perhaps that is just too cynical.
All this nonsense about promissory notes,trying to distract from the 1,250,000,000 yes 1.25 Billion bond payment.
Invoke nationally security,concerns about the beneficiaries and all that,at least make it extremly unpleasant to collect,ask Sean Quinn for some pointers.
Deckchairs and the Titanic……. It’s irrelevant. I expect the next stage of the crisis – the ratification of a fiscal agreement to be critical. We have to pass a referendum to ratify it (unless the government can “spin” its way out of one). I can’t believe that all the countries in the euro will ratify it, because it would lock them into a depression for years. There WILL be exceptions, and that will trigger the next crisis. This is no longer an economic issue, but a political issue.
What happens when the ratification is rejected? The banking system goes bust. Anglo’s IOUs are no longer relevant. Greece won’t repay anything, or at most 10% of its total debt. We agree to pay up to 50% of ours. If not, it will not be just the governments that will be bust. Banks in countries other than Ireland will be in trouble, which means they will be nationalised. Governments won’t have the money to pay for this, so they will assume even more debt. In essence, if one country exits the euro, all hell will break loose.
The reality is that the weak countries should be kicked out of the euro and the losses taken. The longer you support countries like Greece or pay for defunct banks like Anglo, the more the crisis will drag on and the losses will increase. Greece’s bonds need a haircut of about 90%, and even then, it is unlikely that it will pay off the rest of its debt. We have no hope of paying ours – and that includes Anglo’s bonds. The Anglo IOUs are a huge black hole that will suck in Ireland’s income for a generation.
The eurozone is dysfunctional. It can’t come together. Every European country will be in recession in 2012, and probably in 2013 as well. This time next year, one or more countries will have departed the euro and we will have a dual system whereby countries have local currencies but many transactions will still occur in euros as people won’t trust the local currencies.
Along with Greece, we will likely exit the euro, and the turmoil will go to the next level. We are bust in any case. If you can devalue your currency by 50% you have a chance to recover.
The euro was misconstructed the day it was born. The problem is a difference in competitiveness among European countries, and you don’t solve it by lending money to the less competitive countries. You have to deflate wages and prices in the PIIGS, and inflate in Germany. But Germany will never inflate because of its past experience.
There are only two answers – either default and have a large deflationary crash or hyperinflate, which just delays the collapse. Politicians are trying to find a painless solution. It doesn’t exist. So in truth there is only one solution….. Default. Raising taxes destroys confidence. And let’s face it, our government is not going to cut spending by 50% which actually would allow the private sector to expand again.
The interest rates that we are being asked to pay and have agreed to pay for the Anglo IOUs are too high, It is a recipe for a depression – a death sentence.
We are controlled by Merkel and Sarkozy – not Noonan, and there is no quick solution because they don’t agree. As Margaret Thatcher said, socialism is great until you run out of other people’s money. That’s what has happened here and we aren’t going to rectify it with a stroke of a pen
European banks will be shrinking their balance sheets over the next 23 months, which will lead to economic contraction. The Anglo crisis is in reality a European crisis which in turn has a global dimension. Noonan is just like the the clown in the circus, a comedy turn before the main event.