This is an important blogpost which reveals the real cost of the Anglo bailout. You might think that it just confirms information already in the public domain but it goes much further than that.
To date we have shovelled €29.3bn into Anglo Irish Bank and a further €5.4bn into Irish Nationwide Building Society – a total of €34.7bn. Anglo and INBS have now merged and the new entity is called the Irish Bank Resolution Corporation, IBRC. Approximately €31bn of the funds shovelled were promissory notes and the remainder was in cash.
The management of IBRC has up to this point maintained that when IBRC is eventually wound down, there will be a surplus left over for the taxpayer and that has been quantified at €3-4bn previously.
The promissory notes are IOUs that Minister Lenihan used to recapitalise IBRC. The current plan is that €48bn will be paid to IBRC between now and 2031 (see above table, derived from this PQ) – that’s €31bn for the promissory notes and €17bn in interest. When combined with the cash injections into both institutions – which came to a total of €4bn – the overall total cost of the bailout of IBRC comes to €52bn. In addition we have shovelled €20.7bn into AIB/EBS, €4.7bn to Bank of Ireland and €4bn to Irish Life and Permanent and NAMA has given state-aid of €5.6bn to the banks. That’s a gross bank bailout cost of nearly €86bn or nearly 55% of our GDP. Now the State’s stake in AIB and BofI was worth about €8bn at latest estimates, plus we have received under €5bn in bank guarantee fees and interest – we have also received preference shares but these are included in the NTMA’s valuation of the stakes in the banks. But the net cost is still over €70bn or nearly 45% of our GDP.
THIS IS THE NEW INFORMATION.
The projection of IBRC having a surplus when it is eventually wound down depends on IBRC receiving €17bn in interest. If that interest is not received by IBRC – perhaps because the Government “reengineers” the promissory notes – then IBRC will require the shortfall to be made up in cash so as to meet its projection. So when commentators – and this blog has been as guilty of this as anyone else – refer to the interest rate on the promissory notes as meaningless as it involves one organ of state paying the interest to another organ of state, the fact is that the interest rate on the promissory notes IS SIGNIFICANT because IBRC has factored this interest into its projections – if this interest doesn’t materialise then a bailout will be needed to make up the shortfall.
The fact that IBRC is banking on receiving the promissory note interest was revealed in a parliamentary question (PQ) yesterday when the Sinn Fein finance spokesperson asked the Minister for Finance Michael Noonan for an update on the eventual outturn at IBRC and also how the promissory note interest was accounted for in the planned eventual outturn. Minister Noonan said “in relation to inclusion of interest in the projected ultimate outturn I have been advised that in calculating the projected final net asset position IBRC take into account interest from all assets including customers, securities and Promissory Notes”
Minister Noonan has refused to provide an updated estimate of the outturn citing commercial sensitivities but the tenor of the response is that it will be less beneficial than the €3-4bn previously estimated.
Here is the full text of the two PQs.
Deputy Pearse Doherty: To ask the Minister for Finance in view of the recently published report and accounts for the Irish Bank Resolution Corporation for the six months ending June 2012, which state that IBRC will be wound down by 2020, if he will explain the way in which the operation of the Anglo/Irish Nationwide Building Society promissory notes will be affected, and specifically what will happen to the €12.1billion of payments from him envisaged for the period 2021-2025..
Minister for Finance, Michael Noonan :The issue raised by the Deputy is a matter which requires consideration in the overall context of sourcing and providing the necessary capital for the effective life time of the bank. It is important in this context to be clear the recent interim accounts produced by the bank refer to “winding up of the loan book in an orderly manner by 2020” as opposed to a winding up of the bank. This difference is important for technical reasons and also to provide options as to how the overall cost of the bank can be settled in an appropriate timeframe.
I can confirm that, under current arrangements, the scheduled payments on the Promissory Notes are due to continue until 2031
Deputy Pearse Doherty: To ask the Minister for Finance the most recent projected ultimate outturn at the Irish Bank Resolution Corporation in which he is the sole shareholder; and if the management of IBRC still believes there will be a return of funds to the State.
Deputy Pearse Doherty: To ask the Minister for Finance if the most recent projected ultimate outturn at the Irish Bank Resolution Corporation in which he is the sole shareholder takes account of the circa €13billion total lifetime interest that is presently payable on the €31billion of promissory notes originally provided to IBRC..
Minister for Finance, Michael Noonan : I propose to take Questions 283 and 284 together.
The bank has informed me that the projected final net asset position for IBRC is considered both commercially sensitive and subject to material uncertainty given the current uncertainties in markets, the deterioration in asset values and the complexities, timescales and risks involved in deleveraging. Whilst significant progress has been made the final position will be driven by a number of variable factors against the assumptions in IBRC’s wind down plan. These factors include actual recovery rates achieved for assets, the performance of the domestic and global economies, and the prevailing interest rates in Europe over the duration of the plan.
The bank’s policy is that, due to the commercially sensitive nature of such information as noted above combined with the many external variables involved, it does not issue formal projections.
However, the Bank’s CEO has given an indication previously that the likely outcome for Anglo Irish Bank would be in the €25 – €28 billion region. The bank have informed me that since this time there have been a number of changes in market circumstance, the accelerated pace of asset disposal, and the acquisition of Irish Nationwide Building Society. While not issuing a revised projection as noted above, the bank remains of the view that there will be a small return to the State at full resolution, given the assumptions currently being used.
Further in relation to inclusion of interest in the projected ultimate outturn I have been advised that in calculating the projected final net asset position IBRC take into account interest from all assets including customers, securities and Promissory Notes.
UPDATE: 20th September, 2012.
Professor Karl Whelan of UCD, the economist and former employee of the Central Bank of Ireland and I think fair to say, an expert in central bank operations, has written a recent paper on the finances of IBRC and the operation of the promissory notes. The paper is here.
The one aspect of the promissory notes set out in the paper with which I can agree is the fact that IBRC is borrowing €40bn-odd from the Central Bank of Ireland, to a large extent secured by the promissory notes. The interest rate on these borrowings means that the Central Bank of Ireland generates a profit on the loans – termed Exceptional Liquidity Assistance or ELA. And this profit from the CBI is remitted back to the Exchequer each year, in the past year alone, the Exchequer has received an overall total surplus of €958m from the CBI, this includes all profits including those from ELA. It seems likely that the CBI will continue to generate a profit from the provision of ELA to IBRC, and this profit should be deducted from the gross cost of bailing out IBRC to arrive at a net cost. How much profit will the CBI make? We don’t know, though it should reduce each year as IBRC repays the ELA. But regardless of its quantum, this CBI profit from ELA lending to IBRC will defray the cost of the IBRC bailout. So the €52bn above should come down.
However, this is where I part the ways with Prof Whelan though it’s fair to say that we might be basing conclusions on different information. Prof Whelan believes that based on the current schedule of promissory note payments each year by Minister Noonan to IBRC, that IBRC will be able to repay all of its ELA lending from the CBI by 2022/23, and that consequently in 2022/23, Minister Noonan can cancel the €11bn of remaining promissory note payments scheduled for 2023-2031. Professor Whelan also believes that IBRC will be able to hand over 100% of the €3.1bn it receives from Minister Noonan each year to the CBI.
What I interpret from Minister Noonan’s answer above is that the Exchequer is scheduled to make promissory note payments to IBRC until 2031, the Minister says
“I can confirm that, under current arrangements, the scheduled payments on the Promissory Notes are due to continue until 2031”
and taking account of those promissory note payments which come to an overall total of €48bn, Minister Noonan is expecting some return or “final net asset position” from IBRC, the minister says
“I have been advised that in calculating the projected final net asset position IBRC take into account interest from all assets including customers, securities and Promissory Notes”
What return? It was a return of €3-4bn when estimated by Mike Aynsley last year but Minister Noonan now seems to be less optimistic of getting that much back. If this interpretation is correct, and Minister Noonan appears clear on the point, then IBRC will not be able to clear its ELA liability by 2022/23.
Why might Minister Noonan be saying IBRC won’t have enough to repay ELA by 2022/23? Possibly because Minister Noonan has studied the IBRC H1 2012 accounts which showed a €504m total recognised loss. Perhaps Minister Noonan is pessimistic about the performance of IBRC’s €17bn net loan book which includes the INBS mortgage book and a lot of Irish commercial property lending. Perhaps Minister Noonan doesn’t believe NAMA will make a profit and thatconsequently, €900m approximately of NAMA subordinated bonds that NAMA used to in part pay IBRC for its loans won’t be honoured. Perhaps Minister Noonan is pessimistic about the appeal in the UK courts against a decision which forces IBRC to compensate certain subordinated bondholders.
So there are some loose ends here, but I believe the essence of the statement that IBRC will cost €52bn to bail out to be correct. There will be some profit at the Central Bank to defray this. But if there is some other plan, such as repaying 100% of ELA by 2022/23, then that is not alluded to in the Minister’s answer. What is worrying is that Professor Whelan is more expert on this than Minister Noonan and probably those who drafted the response, though it appears to be that Prof Whelan does not factor in any additional losses at IBRC and assumes it break even between now and 2022/23.