With the ECB president this morning stating that he is examining “further” the deal on the promissory notes which was reached last week, this blogpost looks at what is likely to be the weakest point, given present low interest rates, in the deal – the discretion of the central banks to stop accepting the bonds as collateral for loans.
In the Dail this week, both the Sinn Fein and Fianna Fail finance spokespersons asked Minister for Finance Michael Noonan to provide more detail on this aspect of the deal, presumably to better understand the circumstances in which one of the most advantageous aspects of the deal – the ability to issue government bonds against which the ECB is lending cash at its main interest rate, currently 0.75% per annum.
Alas, Minister Noonan has not been very forthcoming and responded one question about when the bonds would be sold to the open market, with the nebulous “as soon as possible, provided that conditions of financial stability permit” and to the other question he said the bonds would be sold when “a sale is not disruptive to financial stability. The limits of the option to exchange will be the amounts of the mandatory sales and the option lies with the Central Bank as a right but not an obligation”
This is worrying because if the ECB comes under pressure to provide a similar arrangement to other countries which might threaten to open the floodgates to monetary financing, or if some of the northern European countries get antsy about the prospects of the floodgates being tested, then we might find pressure from the central banks, the ECB and the Central Bank of Ireland, to sell the €25bn of bonds into the market.
The full parliamentary questions and responses are here. Deputy Doherty’s question is from Wednesday, Deputy McGrath’s from Thursday.
Deputy Pearse Doherty: To ask the Minister for Finance if he will confirm the maximum period for which the Central Bank of Ireland may hold any sovereign bond issued as part of the proposed bond issued as part of the proposed new scheme to substitute the promissory notes provided to the Irish Bank Resolution Corporation with sovereign and National Asset Management Agency bonds; and the factors that will affect the period for which the Central Bank has discretion in any decision to hold the sovereign bonds..
Minister for Finance, Michael Noonan: The Central Bank have undertaken that minimum of bonds will be sold in accordance with the following schedule: €0.5bn by the end of 2014, €0.5bn per annum from 2015 to 2018, €1bn per annum from 2019 to 2023 and €2bn per annum from 2024 onwards.
This schedule of mandatory sales would exhaust the portfolio in 2032. The bonds will be placed in the Central Bank’s trading portfolio and sold as soon as possible, provided that conditions of financial stability permit. The disposal strategy will maintain full compliance with the Treaty prohibition on monetary financing.
Deputy Michael McGrath: the circumstances under which the Central Bank of Ireland will be permitted to exchange a portion of the new floating rate bonds issued under the revised promissory note arrangement for fixed coupon bonds; and if he will make a statement on the matter.
Minister for Finance, Deputy Michael Noonan: The Central Bank will sell these bonds but only when such a sale is not disruptive to financial stability. The limits of the option to exchange will be the amounts of the mandatory sales and the option lies with the Central Bank as a right but not an obligation. The Central Bank have undertaken that minimum of bonds will be sold in accordance with the following schedule:-
– €0.5bn by the end of 2014;
– €0.5bn per annum from 2015 to 2018;
– €1bn per annum from 2019 to 2023 and €2bn per annum from 2024 onwards.
NAMA Wine Lake 
Regarding the option of switiching floating with fixed:
1) So the NTMA would swap some of the bonds the CBI holds for ones with a fixed coupon?
2) What is the benefit?
The NTMA say the average margin is 2.63% on the bonds and this won’t change.
But the Euribor component (which is 0.37% now) was over 4% in 2008!
Transactions like this really are an enigma – I had totally forgotten IBRC still had some NAMA Bonds placed with the CBI as collateral for example.
Well, Bundesbank President Jens Weidmann said in December 2012: http://www.wiwo.de/politik/europa/interview-mit-jens-weidmann-kompromisslose-haltung/7547164-7.html
‘We are not there to clean up when Politic fails, when it comes to financing of States…I see an approach without compromise as particularly important.’ [sic]
And Jens has sent out a clear signal on 130213 that he has concerns that the action of the Irish Govt is might be contrary to EU statute:
http://www.irishtimes.com/newspaper/breaking/2013/0215/breaking10.html
http://www.focus.de/finanzen/news/wirtschaftsticker/weidmann-hilfe-fuer-irland-koennte-monetaere-staatsfinanzierung-sein_aid_920254.html
Well, Herr Weidmann could do worse than consider becoming concerned about matters of a domestic nature in Deutschland and what is happening with German Banks. Loosened lending practice continues unabated, loans are ever increasingly being made for building in the current property bubble. Coupled with estate agents, hyperbole and overdue legislative intervention on property conveyancing, it is a disaster in the making. I.m looking across Hafencity just now, possibly the biggest bubble of them all:
http://www.businessinsider.com/uh-oh-theres-a-real-estate-bubble-forming-in-germany-2011-5
Parellel discussion on IE on this thread:
http://www.irisheconomy.ie/index.php/2013/02/15/recapitalisation-of-irish-banks-by-esm/#comment-380214
I suspect this will be mote fairly soon. At some point the realization will dawn that dumping everything on the market is the only way things will reset themselves. So what if there is an overhang of debt. If there is there is. But continuing on the route we’ve been in since Lenihan is doing nothing more than propping banks and property with the future expectation that growth will erase the bonds and coupon. But worse, it’s contradictory. Who is paying the banks expected profits be they drawn from loans to the government or lending to the population directly.
And would someone tell me why they haven’t split the banks into High St and Casino/government lender.