No, the agreement on the Anglo promissory note is a dreadful deal, but it is far, far better than many, many expected of this Government, the Department of Finance, the NTMA or Central Bank of Ireland, and what could have been negotiated.
Make no mistake about it, what this Government has achieved this week is astounding. It has arm-twisted the ECB to provide this State with what is technically called “monetary financing” but in common language, the ECB is allowing Ireland to print money, or at least to print bonds which can be exchanged at the ECB for cash loans for up to 15 years which carry a rock-bottom rate of interest, presently 0.75%. The ECB has exposed itself to a stampede of similar requests from other EuroZone countries who might seek to bail out their own banks by issuing 0.75% bonds. For this feat alone, Minister Noonan, Minister Hayes, the Department of Finance, the NTMA and the Central Bank all deserve a pat on the back. It is a genuine breakthrough.
And that is not all, after Minister for Finance, Michael Noonan previously conceding to the Troika that NAMA would redeem 25% of its bonds by the end of 2013, the scheme announced this week anticipates NAMA actually issuing new bonds. These bonds cost NAMA just over 0.75% per annum at present and NAMA assures us that it will generate enough profit over its lifetime to redeem these bonds. Again, this development represents a genuine win for Ireland and represents a victory over the ECB which wanted Ireland to reduce its NAMA bond exposure as quickly as possible.
Under both headings above, Ireland has won, but it is akin to being mugged and having your wallet stolen, but then having the Gardai ring to tell you they found your (empty) wallet. There is no debt write-down for Ireland, we are still exposed to interest rate fluctuations in future and we have saved the ECB’s Achilles Heel – that Ireland might renege on illegal promissory notes – forever by converting the promissory notes to €25bn sovereign bonds on Friday last.
So, let’s get this straight, on Friday last, this State issued €25bn of new sovereign bonds. That in itself is momentous. We then used those bonds to buy promissory notes, the legality of which is presently being tested in the Supreme Court by businessman David Hall, and he is now supported by four TDs who wish to be joined to the action – Clare Daly, Luke Flanagan, Mick Wallace and Joan Collins. Now, David Hall lost his challenge in the High Court – judgment now available online here – on a technical point where the judge opined
“the plaintiff is endeavouring to … advance a case or argument which more properly should have been brought, and may yet still be brought, by an individual member or members of Dáil Éireann. This is not a case where there is no other suitable plaintiff can be found as the developments towards the end of the hearing amply demonstrate. No member of Dáil Éireann is precluded from mounting the very challenge brought by the plaintiff in these proceedings and nothing in this judgment should be taken or construed as indicating what view the Court might take of the merits of such a claim if and when so brought. Secondly, the plaintiff has not shown that he himself has suffered any prejudice which puts him in a different position from any other taxpayer in this country. Thirdly, the delay in bringing the application must be afforded particular weight in this case having regard to the solemn undertakings entered into by the Executive which at this point have been operational for almost three years”
So, last week’s deal saw the State using its sovereign bonds to buy promissory notes which may not be legal, and which are subject to a high profile legal challenge now supported by four of the 166 TDs in the Dail. Not smart.
The quid pro quo for the two small victories over the ECB last week was the conversion of promissory notes into sovereign debt. Some people might claim that the promissory notes were already sovereign debt, but the ECB didn’t take that view. Otherwise it would not have been angling for over a year for the Government to make the switch. This was the weak point in our opponent and we should have been pummeling it. Instead, we have set our opponent free, and in so doing, copper-fastened the burden of the bank bailout to the shoulders of the nation for generations.
In that sense, the deal was dreadful, and that is ultimately the position here.
Much of what is written above might not be relevant to you. Politicians of all parties have been struggling to make the deal relevant to you, and An Taoiseach Enda Kenny has indicated that the budget adjustment in 2014 and 2015 will not be as bad as previously forecast and that there may be €2bn of cushioning from the €8.7bn adjustment in 2014 and 2015 – we are supposed to “adjust” by €3.1bn in 2014 which will follow through to 2015, and we must also adjust by €2.5bn in 2015 so 2*3.1+2.5 is the total adjustment in those two years. But €2bn out of €8.7bn is significant, even if it doesn’t mean that we have a barrel load of new austerity facing us.
However, it is arguable whether this short term benefit might have been otherwise achieved. After all, we were supposed to be paying €1.8bn this year to Anglo or IBRC in interest on the promissory notes. IBRC was paying €700m over to the Central Bank in interest on its borrowings secured on the promissory notes and was making a profit of €1.1bn on the deal. As the sole shareholder of 100% of the shares in IBRC, Minister Noonan might have directed the bank to pay the State a dividend of €1.1bn. After all, Minister Noonan has previously stated that the interest profit on the promissory note was not necessary to IBRC breaking even, and indeed returning some of the bailout funding previously provided. This direction would have yielded a saving of €3bn in 2013-2015. Better than the deal announced during the week.
So, what now?
This blog will closely follow the challenge in the Supreme Court to the legality of the promissory notes. If the courts ultimately adjudge the notes illegal, then this Government will have to go. And of course, there may be challenges to what happened last week, but regardless of challenges, we have now issued €25bn of sovereign bonds and that will be very difficult to row back from without a sovereign default.
NAMA Wine Lake 
@nwl: the ECB didn’t like those ‘pesky’ promissory notes alright; but given the current record issuance of sovereign debt and investor appetite for same, even at low yields; has Ireland made itself more vulnerable with this move of converting the PNs, if the bond market crashes as some predict?
Fantastic work and analysis, I can only aspire to this level of understanding of what is going on with the whole mess that is our nation’s finances.
One question: where do you see this all going from here now that the promissory note has been nationalised, working on the assumption that the legal action is unsuccessful of course?
“but the ECB didn’t take that view.”
Not quite true. The ECB didn’t like the promissory notes because they were not marketable so theoretically were not eligible collateral for the ECB to lend against. This is the source of the ECB’s official discomfort. The ‘stroke’ element of the new deal is to issue rather than sell bonds to pay off the promissory note. The ICB has exchanged an unmarketable sovereign promise with a high coupon for a series of marketable ones with lower coupons.
And if this government has to go- what do we replace it with? FF may be on the up but not acceptable yet As long as they have people who learned their trade in Haugheys time, they are suspect. .Sinn Fein stil have too many skeletons in the cupboard. A ragbag of the Mick Wallaces ?.No,we just have to hope that someone who values truth and honour comes along.i am not holding my breath though.
@camella cummins
What about the Socialist left wing alternative?
If it’s good enough for 20 odd million French voters why not try it here?
It is obscene that the Irish people have been made fund the losses of these two commercial banks by successive governments. Their big hope is the we will reduce the present value of the €25 billion they gave away over time with inflation. However as we are exposed to interest rate fluctuations on these bonds if inflation kicks off interest rates will increase and with it the cost of the bonds. They should have locked in the interest rates as part of this deal at 0.75% which would have been a better deal.
Are we in uncharted territory if the promissory notes are judged illegal? Or is there a precedent anyplace which might inform us of what would happen in such a scenario?
Depressingly, would the ECB care either way, now that they have their sovereign debt in place?
For those looking for change, real change and not just once every 5 years…..
http://directdemocracyireland.ie/
What are you waiting for
@NWL
“So, last week’s deal saw the State using its sovereign bonds to buy promissory notes which may not be legal, and which are subject to a high profile legal challenge now supported by four of the 166 TDs in the Dail. Not smart.”
No need to worry. There is 0% chance of any judge finding in favor of David Hall. Anyone who believes this is totally underestimating the level of interference from vested interests into judgements in this country. Powerful forces need for this action to be thrown out. The quagmire that would be created would possibly be enough to bring down a government. That being the case and given how incestuous and corrupt our country is, and given the procedure used to appoint judges, the judge will just have to find a way to throw David Halls case out of court. Those who need that to happen don’t care how the judge will have to do that. They just expect it to be done. I doubt the judge would even need to be told. He knows the very reason he was appointed was for occasions such as this.
If I was cynical, I’d say Judge Kearns has already implied what the eventual outcome will be.
From the Journal:
“He also said in his ruling that there might be “every reason to suppose” that declaring the notes invalid would have “very serious adverse implications” for Hall, Irish citizens, the State’s finances, its financial reputation and Ireland’s ability to continue its economic recovery.”
http://www.thejournal.ie/supreme-court-promissory-notes-legal-david-hall-784895-Feb2013/
Sure lads, you can’t be challenging the actions of your betters…
On the PN’s Karl W. take is always worth a read,even if we disagree fundamentally.Appears to be a wide range of opinions on the “savings” with FOT in the IT this morning at 8Bil. Anyway here’s Karl complete with in fairness a spread sheet to critique.
http://karlwhelan.com/blog/?p=797
German Press realising that the trite line of ‘Musterschueler Irland’ is wrong? Norbert Haering writes a small piece in Handelsblatt 11 Feb 2012; not available online so, translated:
Headline: Irlands Haushalt mit der Notenpresse finanziert wird?
– ECB goes to the edge of legality for it’s star pupil Ireland
– Opposed to Brussels propoganda; Ireland is not doing well, the opposite
– Because of ECB pressure on Irish Govt in 2010, they said bondholders would be paid in full
– The new ‘structure’ now allows the Irish Govt to decrease its deficit in the short term and to re-enter the finacial markets
– Then the ECB will the Irish austerity programme as a shining example
German Press in fairness is vocal about the huge property bubble here. This pending disaster seems largely ignored elsewhere in Europe. All the flashing lights are there: Banks have loosened lending practices; estate agents’ misselling is going on unchecked; proposed prospective changes to legislation will be too late.
It would remind you of Dublin 2005. ‘Buy now for your pension or you will have lost out’. Sounds oh-sovery familiar.
http://www.faz.net/aktuell/wirtschaft/europas-schuldenkrise/irland/schuldenkrise-monetaere-staatsfinanzierung-in-irland-12060497.html
Today’s Frankfurter Allgemeine Zeitung is critical of the Irish move; Mario Draghi acquiescing: nodding ashamedly, Asmussen dialogue with the Irish Finance Minister in advance of the merger legislation move on 130206. There is a sense of fear of precedent of such actions when deals cannot be struck with EU finance partners, a slight nervousness in tone, not immediately evident previously.
Buswells was packed to the gills that afternoon; the scenes in the Dail that evening were a shambles. Legislation text was not read or understood for the most part prior to the ‘vote’.
For all that; in the Spiegel Building here in Hamburg, two blocks down; they might just be writing on just that. It’s on the radar now anyway.
@DJ thanks for the links excellent stuff and very interesting,Karl W. after too long a hiatus is back with a bang,another great spreadsheet for us Excel junkies to ponder and play with….
“These calculations show that the benefits from last week’s announcements are fairly uncertain and will likely depend upon future negotiations between the Central Bank of Ireland and the ECB Governing Council as to the appropriate speed at which the bonds should be sold.”
http://blogs.forbes.com/karlwhelan/
Update on the challenge to the promissory note:
http://www.independent.ie/irish-news/courts/five-tds-barred-from-joining-case-to-challenge-31bn-promissory-note-payments-29084068.html
The five TDs can’t join David Hall’s case but they can bring their own identical challenge if the Supreme Court decides that Hall, as a mere citizen, cannot challenge the legality of the promissory note.
Don’t expect anything to happen too soon though:
“Mr Justice Fennelly previously remarked, while it was for the Chief Justice to decide whether to grant priority for any appeal, the Supreme Court has so far granted priority to some 71 appeals and was not granting any further priority hearing dates this court term except in exceptional circumstances.”
Deflect, delay, deny, …
Maybe the conspiracy theorists should be called upon again.