What happened yesterday?
It seems that some un-named source told Reuters and Bloomberg that there was a plan to liquidate Irish Bank Resolution Corporation – IBRC, the entity that houses Anglo and Irish Nationwide Building Society. Rumours flourished and around 5pm, RTE started reported its understanding that IBRC was to be liquidated and that emergency legislation would be introduced in the Oireachtas because it is to be a special liquidation. KPMG were appointed liquidators yesterday afternoon and the IBRC board was dismissed. At around 8.30pm, a copy of the Bill was given to the parliamentary parties and at around 10.30pm it was given to the Opposition. The Dail and Seanad worked on the Bill to which no amendments were admitted, and in the end it was supported by Fine Gael, Labour, Fianna Fail and a couple of Independents. The President, who had rushed back from Rome, signed it into law earlier this morning.
So we’ ve got a deal with the ECB?
Not at all, though we might get more clarity on that today. All we’ve done so far is some domestic rearrangement of banking assets and liabilities. Sources this morning say ECB approval of a scheme may take another three weeks.
In outline what will happen?
IBRC which has about €16bn written-down value of loans to developers and businesses and mortgage holders (INBS) will transfer the loans to NAMA. NAMA will issue NAMA bonds. NAMA will manage the loans until 2020 by which time it hopes to have generated enough to redeem the bonds. Most of the 1,000 IBRC staff will move to NAMA which has a true present staff of about 700 at present. I would expect about 300 redundancies, but it should be stressed that is sourced here and here alone.
How does the cost of what is proposed compare to the existing arrangements
Good question. We don’t know the ECB leg of the deal so we can’t say right now, but we can say that using NAMA bonds to take assets off IBRC means that the State will save because NAMA just pays 0.75% on those bonds and hopes to recover that through its operations.
Are there risks of hidden losses?
Oh yes, questions remains about what will happen to the bonds at IBRC. IBRC has at least three sets of litigation where it is defending actions from bondholders who want full payment. Minister Noonan last night referred to all bonds being repaid and it remains unclear if this means that IBRC will have to foot an additional €460m-plus loss. We await details of redundancy and pay-off costs.
Are we better off?
We will probably be better off, but we still await details of the ECB leg of the scheme. However we are converting promissory notes which the ECB fears we will renege on, to a direct commitment to the ECB which we can’t renege on without a clear sovereign default.
What’s in it for Ireland? What’s in it for the ECB?
We get to use NAMA bonds to fund assets at IBRC and NAMA bonds are cheap and NAMA will expect to make sufficient profit to cover their cost. The ECB sees the wacky promissory notes replaced with a firmer commitment from Ireland.
What effect will the new arrangements have on our debt, deficit and budget adjustment
NAMA bonds don’t form part of our debt so I would expect our debt to drop by €16bn or 8% from 122% to 114%. We will pay interest only on whatever instrument we replace the promissory note with and for illustration, if we replace it with a 4% 10-year bond, then on the estimated €10bn, we will pay €400m interest compared with about €1.8bn this year for the promissory note. We will make similar savings in 2014 and 2015, though the savings reduce after that. This consequently means we can potentially cut the adjustment this year by €1.4bn and the Budget in December would be €1.7bn of adjustments rather than €3.1bn.
What happens to IBRC staff and premises?
Most staff will transfer to NAMA. The estimate on here is that there will be about 300 redundancies from the 1,000 staff presently employed. Look out for termination packages. Remember this is a bust bank. The IBRC premises will probably be kept for the short term, but would expect moves to Treasury Buildings in next six months.
What happens to the Quinn litigation?
Nothing. NAMA steps into shoes of IBRC, and NAMA is harder than IBRC. In any event, the Quinn litigation will now die down until after the Fitzpatrick trial next year.
Why was there a mad rush yesterday?
I don’t know. Min Noonan said it was because there was a threat to the assets of IBRC. Those assets are loans and it is unclear to me why those loans would have been jeopardized by a litigation. I am doubly suspicious because it has been the intention, apparently, to liquidate IBRC for several months, so there was always going to be such a rush AT SOME POINT. Given the Keystone Cops yesterday, I just don’t believe Minister Noonan that if there had been such long-prepared plans that it would have been so chaotic.
What next?
There are scores of questions that remain unanswered. The ECB may answer some today. But what most of you are looking for is an illustration of the cost including interest of the present scheme by year compared with the proposed scheme. That will be worked towards on here.
UPDATE: 7th February, 2013. This evening there are a raft of references to help us understand the scheme. To start off, the Fianna Fail finance spokesperson Michael McGrath asked An Tanaiste the following
Michael McGrath: The Tanaiste might say in his response how long the Irish Central Bank will be allowed to hold these long term Government bonds, which is the key issue at the heart of all of this. As long as the bonds are held by the Irish Central Bank the true interest rate to the State is reduced
The Tanaiste: On the specific questions asked, the Irish Central Bank will only sell the bonds where such sale is not disruptive to financial stability. There is a schedule of sales, which if the sale conditions are right, will amount to €500 million up to end 2014, €500 million in the next four years, €1 billion in the following five years and €2 billion per annum thereafter. As I stated, such sales will only be in circumstances where they are not disruptive to financial stability. The interest rate will be a floating interest rate. We expect it to be between 3% and 3.5%.
Next up, we have a statement from the Central Bank of Ireland on the deposit guarantee scheme. There is a Q&A from the Department of Finance.
> Why was there a mad rush yesterday? I don’t know.
At least it’s clear. I didn’t understand why it was rushed through parliament and the explanations in the media make no sense. Glad I’m not the only one to be mystified.
http://www.welt.de/newsticker/bloomberg/article113441204/EZB-zerstoert-Irlands-Hoffnung-auf-rasche-Anglo-Irish-Loesung.html
First out of the stalls; ‘informed source’ says no deal will be reached today. No mention of the merger of last night.
Finally a plain English explanation of what actually happened. Thanks for clearing up the muddy waters
I’d say there’s a general sense of foreboding around the entire country this morning.
FG’s Brian Hayes was on Morning Ireland earlier and he seemed to know as much about this latest jig as the rest of us.
@NWL
This piece by Karl Whelan in Forbes about replacing promissory notes with bonds has become very relevant and includes a spreadsheet that might be useful to you when you dive into the costs/benefits.
http://www.forbes.com/sites/karlwhelan/2012/11/21/why-ireland-would-benefit-replacing-the-promissory-notes-with-a-long-term-bond/
via Karl: net financing needs over the next decade — €6 billion instead of €33 billion.
Section 8 of the Bill is pretty depressing reading if one has regard at all for the rule of law and individual rights.
@NWL
“..Why was there a mad rush yesterday?
I don’t know…”
It seems the rush came about due to some of the clauses within some of the bonds issued by the bank whereby if it became clear the bank was in the process of liquidation then full repayment of these bonds to the current owners fell due. So this was nothing according to this analysis about protecting the assets but rather protecting the bondholders (again !).
I’m a complete sceptic as to whether this is in fact the case as no clause in anything can supersede the reality of the business having the necessary cash to pay its debts as they fall due. So I too am at a loss to know what all the fuss was about.
Yours confused..
At 30 June 2012 the IBRC balance sheet surplus of assets over liabilities was €2.7bn, with a loan book (after bad debt provision) of €15.6bn. This net asset figure of €2.7bn has probably decreased since than. What if Nama’s offer for the loan book is sufficiently low to shift IBRC’s balance sheet position from net asset to net liability? Who is at the lower end of the pecking order then? But if Nama’s offer is around the same as the balance sheet figure, then the balance sheet remains in a solvent state and everybody gets paid, unsecured and all.
You reckon par on cutting the debt is correct?
Did we not miss an opportunity with the liquidation to protect the assets of IBRC and let the liabilities take their chances as in any commercial liquidation?
I’m speculating, but maybe the rush was because a creditor believed they could initiate litigation and obtain a claim/judgement on the assets? If the company was liquidated prior to the initiation of that case then the case would be without foundation. If it wasn’t then the creditor might win their case -which even if you wound up IBRC would mean the state is liable years down the line when settlement occurs – and the assets owned by the people of Ireland would diminish in value due to that claim.
Obviously, it’s just speculation
P. Doherty’s speech during Anglo Debate: http://www.youtube.com/watch?v=NxPmI7Rc2l8&feature=player_embedded
This seems to contradict ‘NAMA bonds don’t form part of our debt so I would expect our debt to drop by €16bn or 8% from 122% to 114%’ this
‘The ECB sees the wacky promissory notes replaced with a firmer commitment from Ireland’
You cant have it both ways surely? The ICB has to replace ELA with funds from floating a government bond in the next 5 years?
This deal is cut for election hopes not financial ones, more debt for longer, forebearance.
In my opinion the old model of inflation doing the heavy lifting is redundant, population growth in Europe has plateaued and governments will need to start paying back capital with interest just like those that bought houses during the boom on interest only hoping price increases with wages would lighten their load, exact opposite happened – remember Japan!
Can i ask where the “drop by €16bn or 8% from 122% to 114%” figure comes from? €42 bln in ELA funding, assuming no hair cut on transfer of € 15.5 bln assets to NAMA. Do we need more or less €27 bln in NAMA bonds (that are linked to the ELA) ? Would the gov not move 27 bln off balance sheet and not €16 ?
I don’t accept the validity of the above comment. Throughout history Governments have raised finance through long term (“non repayable”) Bonds. The context of “this time it’s different” does’nt wash in this respect any more than it did in respect of the housing bubble. Without debt forebearance, the whole concept of Government financing will fail and the knock on effect will throw civilisation as we know it into chaos.
“What effect will the new arrangements have on our debt, deficit and budget adjustment?
NAMA bonds don’t form part of our debt so I would expect our debt to drop by €16bn or 8% from 122% to 114%. We will pay interest only on whatever instrument we replace the promissory note with and for illustration, if we replace it with a 4% 10-year bond, then on the estimated €10bn, we will pay €400m interest compared with about €1.8bn this year for the promissory note. We will make similar savings in 2014 and 2015, though the savings reduce after that. This consequently means we can potentially cut the adjustment this year by €1.4bn and the Budget in December would be €1.7bn of adjustments rather than €3.1bn.”
There should be no change in the debt. It is the correct that the NAMA bonds don’t effect the debt, but the NAMA bonds are being used to “buy” the IBRC loans. The NAMA bonds are not replacing any government debt so the debt ratio will not fall. Something will be created to replace the Promissory Notes and the net impact of that change in the debt ratio will be nil.
There is no chance that this move will reduce the amount of budgetary adjustments to be introduced over the next few years. The adjustment amounts will be maintained and instead the deficit targets will be revised.
We are not going to gain twice from this. There will be funding gains in the medium term, possible NPV gains in the long term but the deficit reduction programme will not be altered. This is supposed to make our debt more “sustainable”. Reacting to this by running higher primary deficits would not achieve that.
Here is what appenned yesterday:
1. The Government wanted to Specially Liquidate IBRC. Not liquidate, specially liquidate.
2. Special Liquidation, which only shifts IBRC into NAMA, could never survive normal parlimentary/media scrutiny without doing serious political damage to the Government. Poper scruitiny and commentary stood a chance of provoking a backbench rebellion/Labour split.
3. When this “leak” occurred, the Government took the opportunity to stage a dramatic political pantomine, the purpose of which was to shove through a piece of legislation quickly, without debate, which could be easily sold on the night to backbenchers in the bar.
4. Quick political points will be scored in claiming that IBRC/Anglo has finally been “liquidated”.
5. When minds digest the bill and its effects, and it is discovered that Special Liquidation is not in fact a liquidation, and when backbenchers begin to feel the heat of a now more informed public, the Government will make use of the timeless adage “It’s easier to ask for forgiveness than permission”.
The price that will be paid is a further erosion of the Dails already shakey reputation. I doubt a midnight bill will be passed as smoothly as the one last night for many years.
@ Brian Flannagan
I agree this deal seems to have Karls input alright.
The news the ECB are pushing back on the length of time is then bad.
The longer the time period the better NPV saving we make according to Karls spreadsheet I believe.
NWL
I presume due to your newly increased workload you will have to place an add with job-bridge for an intern. :)
@EM
I didn’t suggest that KW had an input. In fact, he seemed very concerned about the liquidation of Anglo on RTE this morning.
@eamonn I got banned/blocked by Forbes from posting,after reading KW’s post I went off on a rant/tirade about the mere suggestion of transferring dodgy PN’s into sovereign debt w/o a quid pro quo.
That spreadsheet has been revised but its crystal ball gazing as is all economic/financial forecasting.
May as well call this lady…I still think converting the PN’s into govt. bonds w/o some gimme is BS.
http://m.youtube.com/watch?v=VxCx6KIpJVE
Maybe the quid pro quo is the ECB allowing this to go ahead, unlike a few weeks ago when they shot down a similar proposition, viz-a-viz issuing bonds and extending the repayment schedule.
Could the rush for this move be related to recent legal case about legality of the PMs. If the reported appeal was lost by the state it would be very embarrassing for both government, ECB and FF, who surprisingly supported the new bill.
http://www.rte.ie/news/2013/0207/366634-david-hall-promissory-note-supreme-court/. RTE reports on appeal in Hall case on legality of PMs. State claiming moot ness as of last night!
How about including some information on the ministerial powers granted…..a HUGE DEAL
Section 8 is something you might expect to see in Putin’s Russia or Castro’s Cuba.
If we were borrowing to fund the prom instalments, which I assume we were, this requirement also reduces significantly I assume?
[…] by pushing out the term of repayment to thirty years on a Nama bond, which the Nama Wine Lake blog reckons will take the shape of interest only payments, so that the State will save because NAMA just pays […]
There must have been a huge assumption about the value of the properties related to the loans NAMA holds, for this deal to make sense. Or maybe they just ignored the fact that NAMA too, might be a loss waiting to happen
Why pay anything? Just do 100 year zero coupon bonds?
Heres the deal via the medium of memes https://soundmigration.wordpress.com/2013/02/07/the-anglo-promissory-deal-story-through-memes/
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