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.