“All other euro countries [the 17 excluding Greece only] solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms. The euro area Heads of State or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole.” EU summit statement in July 2011
Cast your minds back to the balmy summer days last year, and specifically 21st July 2011 when the EU held a summit which saw Greece, Portugal and Ireland secure reductions to the interest rates on the bailouts, saving nearly €10bn in the case of Ireland. Remember the conditions attached, which were set out in the Summit Statement? Do you remember the commitment to “solemnly reaffirm” an “inflexible determination to honour fully .. individual sovereign signatures”?
The reason I ask is that from listening to some contributions in the past few days, you might have gotten a different impression about Anglo’s promissory notes – technically they’re promissory notes issued by Anglo and Irish Nationwide Building Society which has merged and is now called IBRC – which were signed by former Minister for Finance, the late Brian Lenihan and which were backed up by so-called “letters of comfort” signed by Minister Lenihan and addressed to the Central Bank of Ireland and which gave various undertakings including “the policy of the Government that the Bank should not incur a loss on the provision of emergency liquidity assistance to support Irish credit institutions. Accordingly if any such loss is in prospect, the Government will [redacted] provide for the Bank to receive payment to make good any shortfall”. And you’ll remember that the promissory notes were issued pursuant to a banking guarantee which was debated and approved in the national parliament in September 2008?
You might be forgiven for getting the impression that some people think we can now welch on the promissory notes whilst forgetting about our commitment to the EU last year in return for which we received an interest rate cut – by “welch” I mean depart from the terms which include an interest rate and repayment schedule, to which Ireland, through its finance minister, has given its “sovereign signature”.
Yes there are certainly ethical and moral reasons why these promissory notes shouldn’t be paid. They represent bank losses which the previous Government convinced the national parliament to place onto the shoulders of citizens, at a time when the scale of losses was apparently unclear . There are even economic reasons why the notes shouldn’t be repaid – they involve Ireland taking on more debt to pay the notes because our tax income isn’t even sufficient to pay for our State expenditure, let alone fund the promissory notes – and our debt is consequently expected to reach 120% of GDP in 2013. Domestically some people say that’s unsustainable. Others, like the Irish Fiscal Council, apparently say it’s not. But really the domestic debate is irrelevant. It’s the external view that is relevant.
And the view of Europe generally is that Italy with a 120% debt:GDP has sustainable debt. It is the view of Europe generally that allowing Greece write down some debt so as to get to 120% debt:GDP in 2020 is sustainable. What’s magical about 120%? Nothing really except the higher the debt ratio, the more likely it is that it will be unsustainable and some macroeconomists suggest that it is above this level that a nation’s debt becomes unsustainable. Others say it should be no more than 80% or 90%. And of course the EU Stability and Growth Pact places it at no more than 60%. But regardless of what we think domestically and regardless of what macroeconomists think, the people that matter – the EU and the ECB – think that 120% debt:GDP is sustainable. And even after paying these godforsaken promissory notes we will still have a debt:GDP of just less than 120%.
“But”, the argument goes “if Ireland defers the payment of these promissory notes for a number of years, until we get back on our feet, it won’t affect the EU” so why wouldn’t the EU, and particularly the ECB, accede to a request fromIrelandto defer payment? These miserable promissory notes make up less than 0.5% of the money supply throughout the EuroZone. Surely it won’t affect anything if such a small sum of money is left owing for a small number of years?
But if the ECB agrees to Ireland’s special pleading – which incidentally it shows no sign of doing and if body language and physical approach means anything, then ECB president Draghi was very dismissive of the notion at the monthly ECB press conference last Thursday – then what about other troubled economies in the EuroZone? For example, some of the world’s top investors currently regard Spain as a basket-case in the making, even if they’re not saying so publicly. Last year, on here there was an analysis of the Spanish property and credit boom which mirrored our own, and the curiosity thatSpain had revealed such minor losses in its banks to date was highlighted. Just a couple of weeks ago, the Spanish authorities ordered banks to make a €50bn provision for additional losses on loans.
Now what happens if Spain needs to bailout its banks so as to prop up its troubled economy? Will the Spanish government be able to write promissory notes worth billions to its banks which can be used to access funding from its central bank? And what happens if Spain then decides that paying back these promissory notes is too much of a burden and asks the ECB for a deferral?
Recent positive comments by Ministers Creighton, Rabbitte, Varadkar regarding the prospects for getting some deal on the promissory notes, are all noted. As is the IBRC chairman Alan Dukes description of “the possibility” of some concession on the promissory notes as “good”. There is some unease at the apparent contradiction between An Taoiseach claiming it was the Troika’s own suggestion to write a paper on options for dealing with the promissory notes and the Troika’s more muted claim that it was Ireland that had requested “technical discussions”. All of them are to be wished well in their endeavours, however intense or light they may be, but as Dr Stephen Kinsella told an Oireachtas committee yesterday, it will not be a real success for Ireland if politicians simply achieve an interest rate reduction because the interest on the promissory notes is paid by the Government to IBRC which we own 100%.
The position on here is that, as moral and fair as Ireland’s position is, and as much as our economy is jeopardised by these notes, we have agreed to pay them and the ECB will not approve any deferral or write-down. Unless there is (1) Unilateral action (2) The threat of unilateral action (3) Communication which makes clear that unilateral action is regarded as more than a theoretical possibility (4) Communication which questions whether the promissory notes indeed carry “the sovereign signature” or (5) Communication which suggests the people will be consulted on the matter, and until then, the view on here is that these “intensive negotiations” will fail.
UPDATE: 23rd February, 2012. In an exchange in the Dail yesterday, the junior Minister at the Department of Finance, Brian Hayes seemed to concede that the imminent payment of €3.1bn on the promissory notes at the end of March 2012 will go ahead and will not be affected by any ongoing discussions or “technical papers”. The Minister was responding to questions by the Sinn Fein finance spokesperson Pearse Doherty and said “unfortunately, I am not in a position to indicate when the review of options and negotiations will be completed. The Government is aware that payment of the promissory note is due at the end of March 2012. However, given the nature of advocacy and the decision-making process in the EU, I would not expect this matter to be concluded in the short term” Now it’s not cut-and-dry as to what this means but the proximity of the reference to the March 2012 tranche payment and the Minister’s view that the matter will not be concluded in the short term does not fill you with hope.
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