“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.
NAMA Wine Lake 
All they are doing is building a flimsy Millau Viaduct from one side in the expectation that the ground will rise across the on the other side.
In Ireland’s case, we will be retained until we cannot do any damaged to the centre then the guillotine will slice leaving a nice neat edge with Port Us and Greece as the tare to be swept from the table. And you know what, the results won’t be as bad as we might be told. The sky didn’t fall when we got out from under Sterling and the only ones that got a bit of a squitching was the civil service, eventually.
While I agree NWL that most of what we are hearing is just political posturing to look like they are making some effort at negotiating. However this is not about paper agreements which are quoted as justification when required and ignored when inconvenient. Paper never refused ink.
Remember the oft claimed written policy of the ECB that is would never buy sovereign debt. It still doesn’t but gives 500 billion at 1% so that banks can buy sovereign bonds at 5%.
The Greeks have proven that is a simple game of power politics….
the damage you can cause dictates what you get.
no damage no concession…..threat of mayhem to the euro 70%….
remember the definition of diplomacy….
what you say to the attacking dog until you can find a big enough rock to clobber him.
Up to your usual high standard NWL in terms of pungency and succinctness. Surely this is not the same (testicularly-challenged) Jagdip who posts unctuous and deferential comments on Prof. Karl Whelan’s similar thread on Irisheconomy.ie?
On that blog, a tax expert Aisling blew Prof. Whelan (and Colm McCarthy) out of the water only some weeks back but there is obviously a market for continually attempting to come up with inventive ways to flog a dead horse. I have long believed that Irisheconomy.ie has gotten too cosy and it’s no wonder its church feels so deferential towards one of its high priests. I’m a Marxist (Groucho school) in all of this, i.e., I wouldn’t join any club that would have me as a member.
As you point out NWL, this issue is going nowhere soon. If we get concessions it will just open the floodgates for other countries.
Once NAMA loses political, media and public support, it is doomed. Such an agency can only maintain its freedom to act independently as long as it retains the backing of the political parties, the media and public opinion.
This being so, political debate and media attention has indeed taken on significance for NAMA’s operations. One example of this is the criticism tonight on RTE of the €1 million per working day cost of the agency (plagiarised from NWL, without even a blush), the remuneration paid to those working inside NAMA itself and its external advisors. There is also the growing skepticism relating to NAMA’s accounts and the probability of it losing in the region of a further €10 billion before it is wound up.
The fact that is that after two years it has not yet got to grips with its main function which is to dispose of its portfolio and because of this omission, it is causing a relentless downward spiral in the domestic economy.
As it becomes ever more criticised and controversial, I would expect a decision to wind up the agency more quickly than originally envisaged. The softening up process to turn public opinion has begun and appears to be influenced by politically inspired press “whispers”.
NAMA’s days are numbered. I give it 3 to 5 years. No matter how it tries to spin whatever retreat it makes from the Treasury skirmish, its credibility is shot.
While Ireland is complying with the programme, the troika will adjust our costs so that we stay in business. From a game theoretic point of view they must do this to signal the benefits of compliance to the larger countries. Similarly, Greece must now face almighty and public impoverishment for non-compliance. We are winning the programme – must book holiday in Crete for next summer.
When adjusting the costs to allow Ireland to survive the programme, the troika will decide which variables to tweak but the net effect will be the same for Ireland. Perhaps they will cut interest rates or allow longer terms or allow further bond burning or provide further capital grants for infrastructure programmes or provide substitution funding for other elements of planned government spending. But it will all be done in the context of underlying deficit reduction and a slow but steady increase in austerity measures within the limits of political viability.
In short, a forgiveness of promissory note debt would only occur should Ireland be clearly unable to avoid insolvency and even then another equivalent measure would probably be found.. Secondary debt markets now point to Irish solvency so there is little prospect of debt forgiveness for now.
“They represent bank losses which the previous Government convinced the national parliament to place onto the shoulders of citizens”
I disagree and believe that there are clear moral and practical grounds more making good on commitments to Anglo creditors.
The previous opposition (Fine Gael) supported the guarantee whose inevitable consequence was the recap of Anglo. Both the previous government and the previous opposition were directly elected by the people of Ireland. The Irish electorate bears responsibility for its choice of representatives. 1 million registered Irish voters simply chose not to vote at all – they also bear responsibility. Without the decade of voter-supported fiscal laxity, the deficit crisis would not exist and there would be no banking crisis and no troika in town. Irish people chose open policies of lax building controls, overspending and undertaxing and show no interest even now in supporting a ‘prudence’ party.
Ireland has never defaulted in its history. It is not about to selectively default now.
@NWL
(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.
How do you know that is not already happening?
Since Draghi has taken over in the ECB there has been movement with regard to cranking up the printing presses. Karl Whelan has come up with this proposal in that climate.
Given that this request is about delaying burning of money that was printed in a time of desperation I think trying to push for this concession is well, well worth the effort. Its a clever strategic move and its worth a shot.
I am not usually a “green jersey brigade” type person, especially when the term is used to advocate something that is not always in the national interest, but this proposal is in our national interest 100% and I see no good reason for predicting a negative outcome at this point. As Irish citizens we are not curious onlookers, we are involved in the game and we should be pushing for positive outcomes until the fat lady sings on this issue.
Hi the excellent Namawinelake, just on a flying visit.
And hello Eamonn, with whom I agree on this occasion.
Your initial starting point is:
“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.”
But that quote comes under Private Sector Involvement.
The Pro Notes issue does not require any private sector involvement.
What they’re saying there is there will never, not now, not anyhow be PSI in sovereign debt restructuring. As this has now been changed in the Fiscal Compact to “IMF rules apply” (sovereign default is very, very bad but it can happen ) it has already been breached.
The signatories of the July document who are still in power should, of course, all have resigned for so casually shredding their integrity.
So, because:
(1) The Pro Notes are nothing to do with PSI in sovereign default.
(2) The July agreement has already been trashed anyway
I don’t think this was a good place to start digging in to this issue.
I agree with Gavin – things change, and if the stance on promissory notes has to change, then it simply will. It’d be easy to spin it as a non-default or a non-PSI or a non-breach of the sovereign signature. I think you’re sticking far too rigidly to a very fast-moving situation.
@Eoin/Gavin/Eamonn, I hope you’re right. Of course asking for concessions is worth a shot. I simply draw attention to two facts (1) Our negotiating “partners” in general regard 120% debt:GDP as sustainable and (2) this goes against Gavin’s assertion, but I believe we have given our “sovereign signature” to the promissory notes and I try to stand in the shoes of our “partners” and imagine why they will set their faces against our requests. And I think it is legitimate to warn at this stage that unless a more confrontational position is adopted then we are set to fail because we don’t have a true negotiating position (unless you think Ireland as poster-child of austerity success will sway the stony-faced bankers in Frankfurt, or that we’re jolly nice people who have already taken one for the team in propping up our banks)
As regards Eamonn’s question, how do I/we know that negotiations haven’t already incorporated the suggested stances? Of course we don’t know but if public pronouncements have been anything to go by, we have been submissive, compliant, convenient and accommodating which suggests to me that actions such as those suggested have not been introduced to negotiations.
Maybe if we started using the more realistic GNP instead of our ‘wonderful’ GDP we might have a better change of securing assistance.
In a letter in the SBP last May, I suggested that “if GNP is used instead of GDP, Ireland’s forecast Debt/GNP percent for 2012 shoots up to about 144%. Even if account is taken of Irish corporation profits tax paid by multinationals, the ratio hits 139%. This is off the scale and puts Ireland on a par with beleaguered Greece”.
@Brian, a fair point to be sure. But our “partners” think that if we applied a corporate tax rate more reflective of EU averages and a harmonised corporate tax base then the distinction between GDP and GNP would practically disappear. We don’t want to do that because we figure the financial disadvantage of a low tax rate is outweighed by employment, sharing of technology, hubs of specialism and non-corporate tax and ripple income effects in the economy.
We can argue the toss about the above, but remember we’re arguing with folks who want us to raise our corporate tax rates, and in France’s case in particular to harmonise the tax base.
@NWL
What you say about our low CPT rate relative to the EU average is absolutely true.
However even if you double our rate (as the French might want) and take this into account, our revised Debt/(GNP+FDI CPT)% rate would still be much higher than the Debt/GDP rate. This rate would rise even more in future years as some FDIs would undoubtedly leave Ireland on account of the doubling of CPT and we would also lose the other benefits you mention.
Useful piece of realist Devil’s Advocate …. and yes, we need some ammo …
(5) Communication which suggests the people will be consulted on the matter
Oireachtas Committee has opened a public consultation on the issue … history of these is that response is v. low … dominated by special interest groups.
On the other hand, Irish Citizenry are well versed in tearing into Referenda ….. and an Oirish Referendum on this issue will certainly capture attention with our EU and EZ partners in the true spirit of European Solidarity … so lets get the debate in the Dail moving … Sinn Fein and the Technical Group might get things going …. the situation remains ‘dynamic’ and ‘open’ ….
p.s. Blind Biddy has also figured out ‘how’ to ‘trigger’ a ‘credit event’ (-;
Ah, I was wondering why this place was beginning to resemble Shrek’s swamp after Lord Farquaad banished the fairy tale creatures. I see Karl has closed the thread on Irisheconomy.ie which dealt with the promissory notes presentation by Prof Karl Whelan, Prof Brian Lucey and Dr Stephen Kinsella to the Oireachtas finance committee on Wednesday. It seems Karl has closed comments on the thread.
Karl’s presentation to the Committee is here: http://www.karlwhelan.com/IrishEconomy/Oireachtas-Feb-2012.pdf
and his opening remarks are here:http://www.karlwhelan.com/IrishEconomy/Opening%20Remarks%20–%20Whelan%20-%20Feb%2015%20-%202012.pdf
Brian’s presentation is here:http://brianmlucey.wordpress.com/2012/02/15/presentation-to-the-oireachtas-committee-on-finance-15feb2012/
Stephen’s is here:http://dl.dropbox.com/u/1484382/OireachtasFeb15V08.pdf
@ Nwl
If your position is “I think it is legitimate to warn at this stage that unless a more confrontational position is adopted then we are set to fail because we don’t have a true negotiating position” then I think you have a good point. We should try to be more confrontational on this issue if we have to be and you are correct to say that in the past we have just backed off. But this issue is very different on one vital element. No private sector debt write downs would be required, No bondholders would be affected and no banks would sustain losses.
I would also like to congratulate and thank you for this brilliant site. I find your articles very well researched and I also love your writing very entertaining. I find myself reading them in an Indian accent which makes them even more funny. The Shreks swamp comment was a beauty! LOL
Gavin writes plays. Id say he could drum something turning The Pro note negotiations into a nice sketch using the mentioned fairy tale creatures.
Seeing as this seems to be a continuation of KW’s closed thread, I think you had a pop at me!
I’m not sure why? Did you read what I wrote?
@EM I personally find your comment offensive,is this is your contribution i for one can do without it.
John gallagher and NWL
I genuinely apologise for any offense. It was not my intention at all. If the comment was taken to be racist I withdraw the remark immediately.
It was not my intention at all.
@ Ahura
Sorry to you as well i added your name in error. I was going to write something else to you.
Jesus I
am having a bad day!
Always interesting reading
@Eamonn thanks for that,it was out of place with the rest of post, appreciate you getting back,hope the day picks up!
Not looked at the ie blog for a day or so and crickey, its all got a bit beyond grumpy over there. It is though I think progress, that Karl has introduced to the politicians some idea of what the objections from other states might be, there was previously not much appetite for this on the blog and history suggests officials and Irish politicians might not be top of the class in thinking through other EZ positions before negotiating on this sort of topic. It is possible Karl’s contribution may have contained some reader’s first exposure to this.
Anyway, specifically from the briefing paper:
“What objections might Governing Council members have to restructuring the promissory notes? In reality, members of the Council have by and large avoided commenting on this issue (partly because they are rarely asked.) But it is likely that objections take the following form:
[Objection.]
The Moral Hazard/Slippery Slope Argument: If promissory note restructuring leads to a slower pace of repayment of ELA, then other countries may also seek to use ELA to bail out their banking systems and the consequences may be inflationary, violating the ECB’s primary policy objective of price stability.
[Reply.]
ELA programmes need the acquiescence and co-operation of the Governing Council. The ECB was strongly supportive of providing funds to pay off bondholders and depositors at failing Irish financial institutions on the grounds that these decisions promoted Euro-area financial stability. However, the Irish ELA programme does not represent a slippery slope to frivolous ELA programmes across the Eurozone because the Governing Council can simply choose to say no to future requests that it does not support.”
I’m not so sure the only objection to other countries doing this would be a possible inflationary consequence. I think there would be a more visceral objection based on moral hazard regardless of the likely non-appearance of inflation. Many, particularly the Germans, object in principle to printing money to finance government spending. Here the ECB allowed Ireland (via the NCB) to print money for the government to use (stupidly to repay bonds as it happens) on the basis that the money would be raised by the government according to a schedule, to be given to the NCB (via ELA repayments) to be ‘un-printed’.
Bizarrely, to many Irish observers, this can be regarded as ‘generosity’ from a German perspective.
Karl says “However, the Irish ELA programme does not represent a slippery slope to frivolous ELA programmes across the Eurozone because the Governing Council can simply choose to say no to future requests that it does not support.”
The point seems to be that accepting the IOU and allowing the NCB to print is one thing but the subsequent reluctance to ‘un-print’ is another. How is the latter going to be discerned at the point the ELA programme is presented to the ECB for approval. They could look at the purpose of the programme and see that as ‘frivolous’, but if it isn’t, and they approve it, how can they anticipate reluctance to stick to the schedule of the IOUs in advance – except in a blanket way by refusing to accept IOUs / Promissory notes?
There seems to be little prospect of these and other questions getting an open discussion since Karl is evidently not in the mood to sponsor one, and others may be reluctant to do so. If there is to be little public discussion, should we assume someone somewhere is asking awkward questions in the private ones, because although there is a possibility there will be a post Greece EZ wink wink nod nod plan to set Ireland up as what Greece could have been ….. by ‘fixing’ a few things, it might not be wise to rely on it.
Note this question to Mario Draghi about “legal tricks” and “monetary financing”:
“Question: Mr. Draghi, you warned two months ago about legal tricks that circumvent the spirit of the Treaty and that the ECB’s credibility depends on the spirit of the Treaty. All of this talk about what the ECB is going to do with its bond holdings centres around getting money to Greece. There is a hole of 50 billion euro or so, a hole in the funding, and the governments and the banks seem to want the ECB’s money. Is it still your position that the ECB needs to avoid legal tricks? And are these options legal tricks?
Draghi: Absolutely, you can rest assured that this is still my position. So, all the talk about the ECB sharing the losses is unfounded. But I cannot say what we can do about this until tonight, probably after the Eurogroup meeting. We will have to see. Let me add one thing, because perhaps I am not being completely clear. The idea that the ECB could actually give money to the programme would violate the prohibition of monetary financing.”
http://www.ecb.int/press/pressconf/2012/html/is120209.en.html#qa
Another question the Irish ‘negotiators’ should be addressing is how a deal on what could be viewed as monetary financing through a pro note ‘trick’ would be presented to the Greeks?
If the plan is not to bother thinking about this stuff and turn up at negotiations assuming no one will have thought of it, that plan perhaps should be reconsidered.
@grumpy great post,way above my pay grade,but having negotiated from both positions in many deals,strength and weakness,without a back up position,like walking out,its not really a negotiation.
Whats,the back up plan,bite the hands that feeds you?