Update at 3.30pm: The Taoiseach has told the Dáil that the promissory note payments are gone, they have been replaced with long-term government bonds.
Kenny told the Dáil: “The first principal payment on these bonds will be made in 25 years time, 2038, with the final payment being made in 2053. The average maturity of these bonds will be over 34 years rather than the 7 – 8 years on a promissory note.” The average interest rate on these bonds will be 3 per cent, compared to 8 per cent on the promissory notes. Read more
Update at 1.25pm: It is now widely reported that the Irish government and the European Central Bank has reached an agreement on replacing the promissory note arrangement.
AT 7.11AM THIS morning the office of President Michael D Higgins confirmed that he had signed the Irish Bank Resolution Corporation Bill 2013 into law following an all-night session of the Dáil and Seanad.
As the government seeks a deal to reduce the burden of the €30.06 billion promissory note payments due in respect of the former Anglo Irish Bank, this legislation gives effect to the liquidating of Irish Bank Resolution Corporation – the entity made up of the former Anglo Irish Bank and Irish Nationwide Building Society.
But why was this done? Why did it have to be done so quickly and what impact does it have on Ireland’s bid to secure a deal on reducing the burden of the promissory note payments?
Let’s break it down…
First off, why was IBRC liquidated?
When the government took over Anglo and Irish Nationwide and rolled them into one to create IBRC it always intended to wind down this entity once it dealt with its substantial loan book, worked out its asset portfolio, and generally dealt with the massive mess left behind that had forced the State guarantee of the banks in the first place.
IBRC intended to achieve “full resolution” by 2020 but now the bank has been liquidated as part of a move by the government to reduce the immediate burden of the promissory note payments. This explainer has more detail but briefly promissory notes are IOUs amounting to €31 billion given to IBRC around 2010 to allow it to borrow funds from the Central Bank of Ireland.
Ireland committed to paying these IOUs back over more than a decade with €3.06 billion due every March for the next ten years but because the European Central Bank and its governing treaty forbids monetary financing – the printing of money – this money would have to be destroyed. This was anathema to, well, everyone really and the government has been seeking a deal that involves not making these payments but at the same time not defaulting on the IOUs.
What does the liquidation process entail?
Liquidation is a formal means by which a company is wound up and the proceeds from the sell off of its assets are distributed among creditors, these are people who are owed money.
In the case of IBRC, a special liquidator from KPMG has been appointed by the Minister for Finance to the IBRC and all of its assets including its loan book of about €16 billion will be transferred to the Nastional Management Agency (NAMA) – the State’s bad bank set up after the financial crisis – which will manage the loans until around 2020.
It is also intended that NAMA will issue bonds which have the advantage of being covered by the government guarantee and the cost of these bonds is lower with NAMA paying just 0.75 per cent interest on these bonds. The intention, subject to ECB approval, is that the promissory note arrangement will be replaced with NAMA bonds and will thus remove the annual repayments due in respect of the promissory notes and lengthen repayment schedule over a longer period.
But it also means that the State has taken on the liabilities of the IBRC and they are now official sovereign debt. This means the debt is owed by the State to the Central Bank and therefore the ECB and cannot be written down.
Why did all this have to happen in the middle of the night?
Yesterday evening at around 4.30pm Reuters and Bloomberg news agencies reported that there was a plan to liquidate IBRC under a wide proposal to get a deal on the promissory notes. This, as one source put it, led to “total chaos” in government buildings, the Department of Finance and Leinster House as once it was revealed that there were moves to liquidate the bank it had to be done.
As Minister for Finance Michael Noonan explained last night “there was an immediate risk to the bank” with fears that its creditors would go to the High Court seeking injunctions perhaps more important the markets reacting negatively to news that a State-owned bank was being liquidated. As Noonan later explained you generally don’t say you are going to liquidate a company and wait a few weeks to liquidate it. In an ideal world the government would have announced the liquidation and an ECB deal together but the leaks prevented this from happening.
The government claims that a plan – a secret plan – to liquidate IBRC has been in planning for months which was why legislation was produced so quickly yesterday. Yet still TDs only got sight of it minutes before a debate on it was due to begin at 10.30pm (The Taoiseach eventually allowed the debate to be suspended until 12am). There was much unhappiness about all of this among opposition TDs and senators.
What does the legislation say and what does it mean?
The legislation is 58 pages long with 25 sections. Some of its key points include:
So with that, some 800-850 employees at IBRC are technically out of the job this morning but many of them are expected to transfer to NAMA. The future of high-profile figures like chief executive Mike Aynsley is unclear.
I heard talk that this bill could be unconstitutional?
Generally there are a lot of questions being raised about the amount of power the bill is handing to Michael Noonan though his junior Brian Hayes said this morning that the government, on the advice of the Attorney General, is confident that the legislation is constitutional.
The section about the “common good” and “temporary interference” with property rights of person could fall foul of the constitution but this is in the preamble and not the legislation itself so will need some legal minds to determine that.
Furthermore, Independent TD Stephen Donnelly told Vincent Browne on TV3 last night that he feared portions of the bill were not constitutional. Only in the days and weeks ahead will it be established whether the legislation is legally sound or not.
So now the legislation is passed do we have a deal with the ECB?
No, the government’s hope is that the promissory note arrangement can be swapped for the bonds issued through NAMA. This would have the effect of spreading repayment (we would still be repaying the €30.06 billion) over a longer period and proving less burdensome, removing the onerous loss of €3.06 billion ever year to the thin air (As we explained before, the promissory note money is handed to the Central Bank and electronically deleted).
But all of this needs the approval of the governing council of the ECB (made up of eurozone members’ central bank governors) which is meeting today in Frankfurt and Bloomberg is reporting that some members want to discuss the proposal with their own central banks first and this could prolong the time it takes for a decision to be made.
So this is not rubber-stamped?
No. Furthermore there isn’t exactly encouraging noises coming from economists like Karl Whelan, economics professor at UCD, who told RTÉ’s Morning Ireland that what has happened now is that the money owed to the IBRC, which was owed to the Central Bank, has now been “written-off unilaterally by the Dáil”.
He said the position created now is that NAMA is in debt the ECB. He hypothesised that there could be a decision by the ECB to say that its not happy with the proposal and it is illegal as it amounts to monetary financing (which is printing money) and is illegal under EU treaties.
How confident is Michael Noonan? Well he said he simply doesn’t know if the ECB will agree to it: “I don’t know whether they’ll sign off on it,” he told the Seanad last night. His junior minister Brian Hayes told Morning Ireland he was “confident and optimistic”of a deal.
But at the moment, there is no deal.
But if the ECB does agree, is it a good deal?
That’s really a matter of opinion. If you are of the mind that the promissory notes were an abomination and should under no circumstances be repaid or that at the very least less money should be repaid than €30.06 billion is not a good deal because we’re still repaying all the money.
It also has the effect of turning the promissory notes into full-blown sovereign debt, money owed to the ECB which can never be written down. Effectively the deal rules out any prospect that might cut the €30.06 billion principal by a few billion euro.
The only benefit to all this is that it means repaying it over a longer period and the hope is that inflation and the economic recovery will contribute to lessening the overall impact. Paying out €3.1 billion now is economically harsher than it would be in 10 or 15 years time. Though of course it’s still a lot of money.
Michael Noonan says that an agreement to the proposal from the ECB would mean a “very good deal for the Irish taxpayer” but then he would say that. Economist Karl Whelan says that “extending it [the repayments] off into the future is something that can be of benefit” pointing out that Britain is still repaying World War I debts but this goes unnoticed in the grand scheme of things.
What effect does it have on the wider economy, the debt, the deficit, future budgets?
It is impossible to say for definite what impact this deal will have on any of that. But the financial blogger Namawinelake has crunched a few numbers saying that if we replace the promissory note with a 10-year bond that has a 4 per cent interest rate we will pay interest of €400 million compared with the €1.8 billion interest this year due on the interest (which is about €10 billion) applied to the €31 billion promissory note.
He writes: “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 about IBRC’s case against the Quinn family?
As you will know from this explainer the bank is chasing Seán Quinn and his family for some €2.3 billion it claims it is owed as a result of loans to the bankrupt businessman and his family during the boom. This involves a series of complex court actions in various jurisdictions including here in Ireland and eastern Europe.
Under the new law, the cases will transfer to NAMA which will continue to pursue the Quinns through the courts. However the Quinn family, which disputes the amount it owes, could potentially raise issues with this before the courts and delay actions further. Some aspects of the case against the Quinns in Ireland are already delayed by the trial of former Anglo executives.
Oh yeah, what about the cases against Seán FitzPatrick and other Anglo executives?
These are being taken by the Director of Public Prosecutions through the criminal court so are unaffected.
What about the case brought by David Hall?
As we detail here, that case goes ahead with Hall in the Supreme Court this morning contesting the legality of the promissory notes arrangement as there was no Dáil vote when the notes were issued. This case has just been adjourned until next week when the chief justice will consider it. It’s reported that a number of TDs including Luke Ming Flanagan are trying to attach themselves to the case
Will the Dáil get to vote on any agreement with the ECB?
Yes, according to Brian Hayes who said that any deal with the ECB will be put to the Oireachtas.
So what happens now?
We wait for the decision of the ECB governing council and the feeling is that that decision will be a ‘wait-and-see’ one whereby it agrees to examine the proposal and then spends a few days or weeks, probably weeks, going over it.
The upshot is that we are unlikely to get anything definitive today on this. So after a night of fast-paced drama in Leinster House, we are now facing a wait to discover just what this truly means for you and I, the Irish taxpayers.
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