In March of this year, a number of us Twitter folk including economists Karl Whelan and Brian Lucey, banking/economics analyst Lorcan Roche Kelly and the Irish Independent’s banking correspondent Laura Noonan made a €20 bet about the outcome of the Government’s ambition to defer the €3.06bn promissory note payment that fell due at the end of March. From recollection Karl, Brian as well as mise bet there would be no deferral and Laura and Lorcan bet that there would be. The winnings were all going to charity. Three months later and we’re all beginning to appreciate Paddy Power’s skill and experience with defining bets because we still can’t agree on exactly what was announced by Minister Noonan in March.
We know what immediately happened in the aftermath of the March announcement – the Government issued a new sovereign bond that matured in 2025, NAMA was directed to advance a loan for up to 90 days for €3.1bn in cash to IBRC so as to satisfy the promissory note payment, Bank of Ireland was to hold an Extraordinary General Meeting (EGM) to approve a 2.35% per annum loan to IBRC for 12 months which would used to repay NAMA, the Bank of Ireland loan was to be secured on the 2025 government bond and the ECB was to lend Bank of Ireland €3bn for 12 months at 1%. The Irish government saved itself borrowing €3bn from the Troika at 3.5% per annum and is instead paying 2.35% on the funding which was used to satisfy the commitment to pay the promissory note. It is simple enough, though the number of steps involved make it look convoluted.
Yesterday Bank of Ireland held its EGM and approved the loan at 2.35% for 12 months secured on the collateral of the 2025 Irish government bond. We learned yesterday, via the Irish Independent, that BofI will be insuring its loan to IBRC and the cost of the insurance plus the 1% interest that BofI will pay to the ECB means that BofI will make no profit on the deal, not even the €35m previously reported. “The cost of insuring the bank against default risk would wipe out the profits on the deal, he [BofI CEO, Richie Boucher] said” reported the Independent.
But bottom line it appears that the Government is getting a loan of €3bn at 2.35% for 15 months – 3 months from NAMA and 12 months from BofI. The original plan was that the Government would have funded the promissory note payment due in March with a 3.5% loan from the Troika. So the Government has saved about €45m in interest over a 15 month period – that is 3.5% minus 2.35% applied to €3bn for 15 months. Yes, eye-brows have been raised that “independent” NAMA and BofI, in which we now only have a 15% minority shareholding, are agreeing to the arrangement – in BofI’s case without any profit, apparently. But NAMA says it provided the 3-month funding on arms-length commercial terms. And as for non-state controlled BofI, their decisions are their own business, even if they look curious. So €45m for the Government – a minor win, but a win nonetheless.
We still don’t know what is to happen in 12 months time when we need repay the loan to BofI, the hope had been thatIrelandwould be back in the traditional bond markets at sustainable interest rates, but from this perspective in June 2012, that looks like a forlorn hope, becoming more forlorn with each passing week. But presumably we can borrow the €3.5bn from the Troika at 3.5% next June 2013, if no other source is available. In which case, we are back to what was planned for March this year but have still saved €45m. Officially our deficit will be worse by €90m – according to the Department of Finance though their calculations look wonky – but that is because of the interest Ireland is paying on the 2025 sovereign to IBRC which we 100% own, and it isn’t a real cost to this State in the sense we own IBRC.
As for the charity bets, I would still maintain that the promissory note was unconditionally “satisfied” in March 2012 and that there was no deferral on the promissory note commitment. We deferred the source of planned funding – the 3.5% loan from the Troika – for at least 15 months. But we have substituted the source of funding with a sovereign bond which is more secure – in our creditors’ eyes – than a promissory note.
Despite the minor win, there has been no appreciable progress in “re-engineering” the €30bn promissory notes that will be paid off over the next 13 years. There was talk of a “technical paper” which would outline options which would form the basis for canvassing the Troika, but as yet that “technical paper” has not been completed, according to An Taoiseach Enda Kenny in the Dail last week, despite its being mentioned as far back as January 2012. The Government appears keen to downplay any expectation of any imminent “deal” on the promissory notes, and the view on here is that there will be no deal, unless a collateral scrap falls from the Spanish or Greek table.
NAMA Wine Lake 
To satisfy your bet – ask the lads in the ECB if they got the money on the day they expected to be paid and to the amount they expected to be paid.
Everything else is DoF spoofery.
@WGU, what happened at the end of March (or 3rd April, 2012 to be precise) was NAMA took €3.1bn of its cash and transferred it to IBRC. IBRC transferred it on to the Central Bank of Ireland. And the central bank took the money outside and set it alight – or more accurately hit a key on a computer terminal to reduce the Emergency Liquidity Assistance that it was providing to IBRC. The ECB was delighted as the exposure by its representative in Ireland, the Irish Central Bank had its debt owed by IBRC reduced on time, with the quantum expected.
Diarmuid O’Flynn illustrates the “deal” hilariously with the help of three upturned flower pots on the bondwatch site where you can also see all bonds payable in Irish banks, including nearly €1.2bn payable next week at what was Michael Fingleton’s Irish Nationwide Building Society and Sean Fitzpatrick’s Anglo.
http://bondwatchireland.blogspot.ie/2012/06/dirty-dozen-we-june-24th-2012.html
@ NWL
In relation to the RTE story about the EU/IMF loan repayments being spread over 30 years, do you know of any calculations showing the potential savings such a move would provide to the state?
@John F, you need to know the interest rate and if it is variable or fixed and the repayment period, and the detail of the timing and quantum of principal repayments – remember we’re not paying our debt back in one day! Without that I don’t think you can assess any deal. There is talk about “creditors taking some pain” but this all seems like more blether from an administration that will next week face another hump with the payment of €1.2bn in bonds at what was Anglo and INBS.
Past experience indicates that any initiative will be generated by events elsewhere – Spain or Greece.
And I’d leave you with a question. If your bank offered to extend the term of your mortgage from 15 to 30 years but kept the interest rate the same, what would your reaction be?
It’d say piss off, unless of course I expected inflation to be significantly higher over the medium term.
One gets the feeling RTE are either complicate in or oblivious to the fact that the governments assertion of an deal eventually on the bank debt, is simply hope in the ‘kindness of strangers’.
It seems as extraordinary as the Bank Guarantee, proper debate regarding what we can do ourselves to iinsure the future of the state is basically being giving over to the phrase ‘It’ll be grand’
@NWL
If we did receive a deal to spread the payments over 30 years with a reduction in the interest rates & a deal on the PN, would that result in less austere budgets or would the reductions targets for 13, 14 & 15 still have to be met regardless.
@Guest,
This is what our projected budget looked like in March 2012
So in answer to your question, reductions to the promissory note interest rate would reduce our deficit – this is funny money though because we pay the interest to IBRC which we 100% own.
However if we are provided with funding to pay the promissory notes and that funding is cheaper than that assumed in the projected interest costs, then (a) that reduces our deficit and (b) that is real money
Pyrrhic victory is a phrase that springs to mind.
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