One of the key questions to be left hanging after the emergency liquidation of Irish Bank Resolution Corporation three weeks ago, was the manner in which the bonds that were swapped with the promissory notes would be released onto the open bond market by the Central Bank of Ireland. Minister for Finance Michael Noonan was keen to stress that it was expected the bonds would, in the main, be held for up to 15 years though there were certain relatively small minimum disposals required in the next three years.
The reason this is a key question, is because, if the €25bn of bonds were to be sold onto the open bond market tomorrow, then the State would be faced with an annual interest bill of over 3.5% on the €25bn instead of the 0.75% per annum which is the charge whilst the bonds are kept by the Central Bank and whilst the ECB keeps its main interest rate at 0.75%.
On Tuesday, in the Dail, both the Fianna Fail and Sinn Fein finance spokespersons tackled Minister Noonan about this aspect of the arrangement announced three weeks ago. It is not the first time that they have both sought to clarify the rules that would apply to the Central Bank’s holding of the bonds, but previous questions have been met with a nebulous “they will be held until the State has returned to financial stability”. Yesterday, both spokespersons sought to zero in on exactly what was meant by “financial stability”.
As expected, they didn’t really get a response unless you count “the health of the domestic and international banking system, the global economic situation and developments in markets” as providing clarification.
However Minister Noonan did let slip that “the Central Bank of Ireland is responsible for financial stability considerations.” Now, you might recall that in the past, the Governor of the Central Bank has acted in support of the ECB rather than this State. Governor Patrick Honohan admits as much himself, but he claims that it is only in the matter of interest rate decisions that his duty to the ECB takes primacy over his national duty to the State. The Governor knows full well that there is a sizable body of opinion that disputes that, and the fear will be that the ECB will dictate to the Central Bank the conditions and timing of the sale of the bonds onto the open market.
At the very least, the Government is admitting that it does not have control over the timing of the disposal of these bonds into the market. And should the ECB decide that the arrangement constitutes monetary financing – and it is the view on here that it is – then we might find the savings from the “deal” whittled away very quickly.
The full parliamentary questions and response are here:
Deputy Michael McGrath: To ask the Minister for Finance his views of what constitutes conditions of financial stability in respect of the timetable for the sale by the Central Bank of Irish Government bonds it has acquired as a result of the revised promissory note; and if he will make a statement on the matter.
Deputy Pearse Doherty: To ask the Minister for Finance further to Parliamentary Question 56 of 13 February 2013, if he will confirm what he means by conditions of financial stability; if such conditions exist today and if not, by reference to what metric will he judge when such conditions have been met, and specifically if there is an interest rate metric by reference to which these bonds will not be disposed of on the sovereign bond market..
Minister for Finance, Michael Noonan: I propose to answer questions 182 and 194 together.
The Government bonds are now held by the Central Bank of Ireland following the liquidation of IBRC.
Eight new Floating Rate Treasury Bonds have been issued to discharge the Promissory Notes liability consisting of:
• a 25 year bond of €2bn maturing in 2038 with an interest rate of 6-month Euribor plus a margin of 2.50%;
• a 28 year bond of €2bn maturing in 2041 with an interest rate of 6-month Euribor plus a margin of 2.53%;
• a 30 year bond of €2bn maturing in 2043 with an interest rate of 6-month Euribor plus a margin of 2.57%;
• a 32 year bond of €3bn maturing in 2045 with an interest rate of 6-month Euribor plus a margin of 2.60%;
• a 34 year bond of €3bn maturing in 2047 with an interest rate of 6-month Euribor plus a margin of 2.62%;
• a 36 year bond of €3bn maturing in 2049 with an interest rate of 6-month Euribor plus a margin of 2.65%;
• a 38 year bond of €5bn maturing in 2051 with an interest rate of 6-month Euribor plus a margin of 2.67%; and
• a 40 year bond of €5bn maturing in 2053 with an interest rate of 6-month Euribor plus a margin of 2.68%.
The bonds will pay interest every six months (June and December).
The Central Bank of Ireland will sell the bonds but only where such a sale is not disruptive to financial stability. The Central Bank have undertaken that a 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.
The Central Bank of Ireland is responsible for financial stability considerations. I would expect the Central Bank to take full account of the health of the domestic and international banking system, the global economic situation and developments in markets when considering financial stability considerations in relation to the disposal of these Irish government bonds.
UPDATE: 28th February, 2013. In reviewing the PQs on the Oireachtas website, it seems that Labour TD Colm Keaveney was also active in asking finance and economic questions this week, and he asked one similar to the two published above. This is the full text of the PQ and response:
Deputy Colm Keaveney asked if it is possible for the European Central Bank, acting unilaterally, to direct the Central Bank of Ireland to dispose of the long term Irish bonds created to replace the promissory notes following the dissolution of the Irish Bank Resolution Corporation onto the private market; and if he will make a statement on the matter.
Minister for Finance, Michael Noonan: The Government bonds now held by the Central Bank following the liquidation of IBRC will be placed in the trading portfolio of the Central Bank, and these bonds will be sold as soon as possible, provided conditions of financial stability permit. The Central Bank of Ireland is responsible for financial stability considerations. I would expect the Central Bank to take full account of the health of the domestic and international banking system, the global economic situation and developments in markets when considering financial stability considerations in relation to the disposal of these Irish government bonds. The Central Bank has undertaken that a 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 
So, no deal then.