IRISH FINANCIAL OFFICIALS are bowing to pressure from their European counterparts to get rid of debts stemming from the Anglo Irish Bank crisis – despite the move costing taxpayers yet more money.
That view comes from University College Dublin economist Karl Whelan after news the Central Bank was ramping up sales of the €25 billion in bonds it had to offload from the government’s abandoned promissory note setup.
The Irish Times today reported that private investors were buying the bonds and about 80% of any profits made on the deals would eventually end up in the government’s coffers.
But Whelan said he believed the European Central Bank (ECB) was putting pressure on the Irish government and Central Bank to offload the debt quickly – and that was costing taxpayers extra cash.
Anything more than zero equals… something
He said the move stemmed from the ECB’s unease about how close the bond-trading scheme was sailing to outlawed money-printing policies.
“The cost right now is zero – the Central Bank owns these bonds and every year the government pays interest on these bonds that goes to the Central Bank,” he told TheJournal.ie.
The good news is that we own the Central Bank so they whole thing is completely cyclical, it doesn’t cost us a cent.”
In a blog post today, Whelan said the good news was the yield on Irish government bonds – how much the state had to pay in interest to fund its debts – had gone down and the cost was lower than it would have been a few months ago.
“But selling them at all still means the cost of these bonds goes from zero to positive,” he said.
From now on, the bonds are going to have an annual cost to the exchequer, whereas as long as the Central Bank held them there was no net cost at all. A faster pace of sales thus raises costs for the exchequer.”
Big savings on that pesky promissory note
The Irish government previously got the ECB’s go ahead to stretch out its €25 billion debt disposal over the next 20 years – a deal which was estimated to save the country about €20 billion in long-term borrowing costs.
The Central Bank was required to slowly sell the bonds onto the market at a minimum rate of €500 million a year until 2018, then at a rate of €1 billion and finally €2 billion a year from 2024.
The Times reported “market sources” as confirming that the Central Bank was running ahead of its €500 million minimum for this year.
The government took over Anglo Irish Bank in a bailout deal in 2010 before the remaining company was renamed the Irish Bank Resolution Corporation (IBRC).
The state initially pledged to pay the bank’s debts to the tune of €3.1 billion each year – equivalent to about 2% of the nation’s GDP – as set out in its now-infamous promissory note.
But instead of borrowing money to service the debt, the government struck a deal after placing the IBRC into liquidation last year to instead issue a string of bonds that it would have up to 40 years to pay off.
Ireland’s ‘most important decision’
Speaking at a business-industry dinner only last week, Taoiseach Enda Kenny said liquidating Anglo Irish Bank and Irish Nationwide was “the most important decision the government made” on its debts.
By replacing the promissory notes with more sustainable, longer-term debt, we will borrow €20 billion less over the next 10 years,” he said.
“Indeed, the 2011 interest-rate reduction on the European parts of the loans have a €10 billion saving to the state and its taxpayers.”
The ECB has said the promissory note-bond swap caused “serious monetary financing concerns”, although these worries could be “somewhat mitigated” by the Central Bank selling off the debt.
A Central Bank spokeswoman said the bank would not be commenting on the issue.
READ: Here’s how much the wind up of IBRC has cost us so far
READ: IBRC is paying us back €12.9 billion
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