Where to start then as so much has went on over the past week? So, on Thursday a ‘deal’ of sorts was hatched out whereby the Fine Gael led government was able to bring about legislation that in effect caused the IBRC (Irish Banking Resolution Company, comprising Anglo-Irish Bank and the Irish Nationwide Building Society) to be put into liquidation. IBRC had in it’s possession a promissory note of approximately €31 billion whereby the government was making payments of approximately €3.1 billion per annum, the next installment was due in March as well as another due in May as last year’s payment was delayed, all of which was acting as a massive drag on the budget, the economy and the nation as a whole. In the middle of the night, the zombie bank was gotten rid of, consigned to history, but where does this leave the country in general?
The promissory note itself came about because the government needed to inject cash into the banks that have now become a part of the IBRC, however, it was unable to finance this with money gathered through the bond market as it had effectively been blocked off from this due to insanely large coupons (interest rates) being placed on Irish government debt, that and the National Pension Reserve had already been exhausted back in 2010. Issuing the note meant the government did not have to produce €30+ billion there and then, a sum it clearly did not have and would have great difficulty getting. With this note, the IBRC would be able to use this as security to borrow from the Irish Central Bank (ICB) via the ELA or Exceptional Liquidity Assistance facility which is an exceptionally expensive way to finance debt (8.2%) with the state paying back approx. €48 billion between now and 2031. So, in 2010 the Fianna Fail government spoke to the ECB about the whole venture, plucked this ‘solution’ out of somewhere to which the ECB said it could run with this.
As an aside, it should be noted that a promissory note, or simply a ‘note’ is not a contract or an IOU as it contains a specific promise to pay on demand the sum of the note rather than acknowledging a debt owed, in effect it is just like a bank note that you may (!) have in your purse or wallet now. A simple explanation of what a ‘note’ is can be found here.
Now, the Central Bank will take the promissory notes with NAMA buying some of IBRC’s collateral held by the Central Bank by issuing some more NAMA bonds and NAMA will then sell these assets off by the end of the year (more on this issue to follow in later posts on my own site). The government will now issue bonds for a period of around 40 years at a coupon of 3% as opposed to the 8.2% it was previously. Where this is hopefully a good deal for us is that all we will do is pay interest on the bonds until 2038, thus easing the cost to the state of having to pay down any principal too, or so it is supposed to go. Further, as time goes by, inflation should make the sum a lot more manageable and who knows, by 2038 €30 billion should be worth a lot less than it is today thus making any payment of principle manageable. Both an Taoiseach, Enda Kenny and the Minister of Finance, Michael Noonan, have used the rather apple pie comparison of moving from have an expensive over draft to a mortgage instead, and that is kind of what’s happening here, or at least supposed to happen. While we may pay more money as a sum total in the long run, that really won’t matter due to the length of time this has been spread out over and inflation in the long run.
Further, we had two organisations (NAMA and IBRC) administering a book of poorly performing assets and loans which meant a duplication of services in a state that can ill afford it. IBRC costs about €320 million pa to run, while NAMA costs about €130 million. A large part of the 1,000 odd staff at IBRC will be made redundant with a number being transferred over to work for NAMA, however, while I don’t like making assumptions I do expect the board and senior management to receive cushy redundancy packages, something I do not expect for the non-senior staff (probably statutory redundancies for them).
This deal also means that the NTMA will have it a bit easier when managing the raising of finances as it should require some €20 billion less over the coming decade and we will hopefully have around €1 billion pa of austerity in each budget. Will we see some form of small, targeted stimulus from the government now that it has a stay of execution with the finances? Who knows? I suspect probably not, the serious looking foreigners you see at night eating and drinking in and around Merrion Square and St Stephens Green will want to make sure that there is no real or perceived loosening of determination to ‘reform’ the economy and the current coalition of Fine Gael and especially Labour must be very tempted to throw a few treats to the electorate if their current slide in the polls is to continue all the way to polling day. So, expect some kind of smoke and mirrors and violence with figures and accountancy rules between now and polling day with implied permission from the Troika’s representatives when you see a government minister outside the opening of a creche, a large centralised Garda station, a new specialist department in a hospital or some capital spending like the digging of a sod to signal an extension to the LUAS line telling us that we are back on track, economically speaking. The guys over at the incredibly sharp NAMA Wine Lake have went over the figures and how the government is already ‘fibbing’ and understating the room for cushioning austerity and providing some form of a stimulus, who’d have thunk it?!
So, what issues might arise from this whole ‘deal’ then? Well, the legislation winding up IBRC was a rushed affair and there already have been a number of questions asked about whether certain parts of it are even constitutional. This is something I will discuss in a further piece once I have reviewed the legislation in full, however, I would be welcome to assistance with this by way of crowd sourcing or someone’s thoughts on the matter away from the blog before posting something, email is footballcliches1@gmail.com. Further, we have a number of cases ongoing where the IBRC was a party to proceedings, most famously against the Quinns, what happens now? The IBRC had loans outstanding with a number of borrowers such as Dennis O’Brien, Applegreen and Topaz fuel groups or Arnotts Department store, will they be able to refinance their loans over the next 6 months because if not their loans go up for sale to third parties or are transferred to NAMA who have a notoriety for being a lot more ‘forensic’ with their book. Again, I will look at this in more detail over the coming days.
For me though, while I do not wish to belittle the achievement of the government, they have worked long and hard to bring this about and have to a certain extent staked their future on success, I do wonder how big a deal it is in the grand scheme of things, I mean, it barely registered on some sites that I view like the Guardian, the Telegraph or over on the Beeb. The ever interesting and prescient David McWilliams helps to place this deal (or at the time he wrote it, suspected deal) in some kind of perspective. Let’s all be honest here for a moment, what is €31 billion in the grand scheme of things? The ECB is not actually that concerned about what goes on in Ireland as we think it is or should be, it is far more concerned about what goes on in bigger countries, ones that have an impact, like Japan, China or the United States and how this may effect the whole Eurozone.
At the moment we are in the middle of a lot of deflation or stagflation where prices either decrease or stay as they are. People put off buying goods now that they think will be cheaper in the future, things become cheaper and cheaper, meanwhile more people are out of work meaning less money is around to spend, less goods are bought and deflation continues, however, our debts increase and are increasingly difficult to service. Do you know of anywhere where this may be happening right now? Now I want you all to remember that the modus operandi of the ECB is the stabilisation of inflation and prices across the Eurozone, nothing more, and certainly not stimulation of economies.
‘Europe and the European project can’t survive a decade of deflation. The first thing to go when politicians know they have to reflate the economy is central bank independence. Therefore, with money being printed everywhere and currencies such as the yen, the dollar and sterling involved in competitive devaluations, the ECB’s ideology is hardening today to protect itself from political interference tomorrow.
Therefore, Ireland is caught in the teeth of an ideological battle for the future of central banking, which is why what happens in Tokyo is much more important than anything Irish politicians say.‘
Essentially, this deal is not about Ireland, it is about the ongoing independence of the ECB. The ECB like many central banks may be seen to be part of the problem (see the Bank of England and its rather protracted response to the financial crisis. How many board members didn’t want to lower interest rates or delay it? Jenkins I find to be quite interesting on the BoE in general) and politicians will see curbing it’s independence and interfering in monetary policy as part of the solution. They’ve decided to avoid this problem by dealing with Ireland now and being pragmatic as opposed to dogmatic, nothing more.
I’ll finish up with some thoughts and observations from McWilliams who I think tells us where we are right now and where this may go in the future:
‘The ECB was created by politicians. It will be brought to heel by politicians. That is what democracies do. The last time we had independent central bankers try to threaten social peace in an era of deflation and high unemployment, central bankers lost. That was the Great Depression and the Gold Standard. The lessons are there for anyone with a grasp of history.
This brings us to the promissory note. We know that keeping a dead bank alive with real money makes no sense, but we are told that the consequences of not paying the money will be dire. But what are they, these consequences?
Here I write as a former central banker, and I can tell you the consequences are likely to be minimal. We know the ECB won’t push the little red button and detonate the nuclear option. It didn’t do that in Greece. It knows failure in Ireland will bring the Japanese solution closer, so that will be avoided at all costs. ATMs will continue to work. Life will go on and if you believe that the Irish State will be around in one hundred thousand years or one million years, we will pay back the promissory note in installments of €30,000 a year. We would still be paying it. We would have simply adjusted the terms of the IOU.
The ECB is in a bind, not us.‘
Quite.
footballcliches said:
Thanks BD for the repost. It is late in the evening here in Brisbane but I will be along here or on my own page answering any questions or decent observations that people may have or want to tease out or discuss.
LikeLike
sammymcnally said:
To default or not to default that is the question not resolved by shifting the debt around. Those political parties who criticise the government for this deal (which is reasonable under the circumstances) seem reluctant to tell us they are in favour of pressing the red button.
Many people dont believe Ireland can deal with this and the wider debt problem but more poeple dont want to risk telling the alternative.
Not sure myself – but it would help if there wasa proper poltical debate by the parties rather than the usual point scoring.
LikeLike
bangordub said:
Excellent article by Philip R Lane, Professor of Political Economy at Trinity here
http://www.irishtimes.com/newspaper/opinion/2013/0209/1224329832437.html
LikeLike
Mack said:
It doesn’t just shift the debts around, it will reduce it significantly in real in terms too. The eventual burden of repaying the capital will be eroded by growth and inflation (probably >50%) and the interest rate costs have also been significantly reduced.
The 8% rate on the promissory note is a red herring. The actual external cost under both arrangements is the 0.75% payable to the ECB. Interest paid to the Irish Central Bank is returned to the state as a surplus payment every year. The real burden of the original promissory note arrangement was the annual capital repayment, which the state won’t have to make now.
What has changed is that we don’t need to borrow an additional 3.1 billion every at bond market rates (the Irish Central Bank will purchase the new bonds, resulting in the same internal circular interest payments, at least for 15 years – when they have to start selling them). Under the old system the money to pay down the promissory note also had to be borrowed, but those borrowings did not benefit from the internal circular interest payments. Those would be made to third parties, not the Irish Central Bank and gov.
Two advantages then 1) no capital repayments for a long time & 2) internal circular interest payments for at least 15 years.
LikeLike
footballcliches said:
Mack,
Agreed, the headline coupon on the promissory notes is a bit deceptive though I would note that if the NTMA would have to go to the market to fund this let’s be honest here, if they got 8.2% on any bonds issued they might be doing well. I know some might say ‘ah but the rate on Irish debt is way lower than that now’ but the markets more than likely figured in to their workings there would be some form of resolution to this issue. If not, then I think we would’ve seen the rate go up, though this is an admittedly easy argument for me to make as its an alternative scenario we shall never know.
LikeLike
factual said:
Hard to see the Germans going for a change to inflation targeting and ECB independnce. Ergo to become competitive in Ireland we have to have price deflation which just means our debts get bigger in real terms. Sinn Féin’s economic analysis has been presient in all of this.
LikeLike
Fear Feirsteach said:
What is the nature of your relationship with Sinn Féin – if indeed there is one?
LikeLike
bangordub said:
Factual, I didn’t understand one word of that and I really tried to. Could you try that again for me?
LikeLike
factual said:
BangorDub: basically most countries can diminish their debt by inflation. The size of the loan in $ remains constant but because we have devalued a $ through inflation, its size in real terms falls – the number of days work needed to pay off the debt. But we can’t do that as we have given that power to the ECB (which is run on strict low-inflation policies by the Germans).
We in Ireland can’t inflate our prices without becoming unompetitive; we are in a recession and prices/wages are falling. So for us the number of days we need to work to pay off the debt rises.
LikeLike
footballcliches said:
Hi Factual,
If I’m understanding correctly, you believe that the Germans will not be pro inflation, further they’ll act as a stop to any interference with the ECB?
On the first point, yes they are not too fond of the idea of inflation rising and no, this isn’t because of a collective history where hyper inflation in the Weimar Republic years helped pave the way for the rise of Facism. That’s a massive misreading of history on the part of many that has become collective wisdom over the years and mere,y overlooks the fact that it was the stagnation and depression of prices in the late 20s/early 30s which was in existence.
Put simply, let’s use one simple example of how inflation could negatively effect Germany in a very real, everyday manner. Germans prefer to rent their properties as opposed to buying them like ourselves. Inflation could see these fairly stable rents start to rise and squeeze people out of being able to afford properties (see London for instance). No politician is going to raise there head above the parapet and tell the electorate that this is a good thing.
In the second point, it’s all about events Factual, dear events. The independence of a central bank is not sacrosanct and if iris part of the problem politicians will fid a solution when push comes to shove, just look at history for examples.we live in a democracy, central banks are not above our writ when the time comes.
LikeLike
bangordub said:
FC,
To be honest I haven’t a clue what that was about
LikeLike
factual said:
Thank you football clichés. Interesting perspective. Many commentators hope for a change in ECB inflation targeting. But we do have to keep our own inflation down – in a fixed exchange rate regime – to remain competitive and that means we can’t easily erode the debt.
LikeLike
footballcliches said:
You know Factual, you’re right there about being in a fixed exchange economy, much like a European version of the Gold Standard that McWilliams touched on in the Indo.
You’re right that we have to have one eye on our cost base and let’s be honest here again, a lot of work has been done on this, however, what I think you and many others need to bear in mind is the human aspect of this, the most important part of it all and I don’t mean that in some kind of hippy dippy way. There is oh so much deflation, stagnation and job losses a democracy can take. People will simply vote out incumbents who do not get things back on track, just look at the poll rating for Labour and Fine Gael in the South or for DC and the ConDems over in England. People will not sit and take this, hence why it needs to be sorted or expect the tearing of the social fabric and civil unrest.
LikeLike
sammymcnally said:
Mack,
re. “It doesn’t just shift the debts around, it will reduce it significantly in real in terms too. ”
I didnt sugest that it ‘just’ shifted the debt around and I am in favour of it becuase of the improvement in terms. Those who carp about the deal dont want to admit that the only real alternative to this negotiating position(which the government has made a decent enough job of) is to at least threaten to default.
It does not seem clear whether default is the correct answer or not – and now perhaps with this deal in the bag and before Ireland needs to go to the money markets – it is probably the right time for a considered political debate by the parties.
The I-wouldnt-start-from-here arguements have run their course.
LikeLike
bangordub said:
Sammy, for once I agree with everything you are saying here. There is huge uncertainty about the future but at least there is some form of a plan at last. The default argument is gone although that would have been my preferred option
LikeLike
sammymcnally said:
BD,
re. “The default argument is gone although that would have been my preferred option”
I may not have expressed myself cleary – I think that default still should be discussed now – the fact that the debt is now sovereign doesnt change that.
It would be good for the parties to state their preferences before the adminstrators depart and if necessary have a general election to let the plain people of Ireland decide – that is if at least one established party is actually saying we should change direction – as opposed to party politiking.
LikeLike
footballcliches said:
Hey Sammy,
I’d have to agree with you there regarding a debate on default, I would only expand on this by noting that the issue will need to be couched or incorporated into a wider discussion about our national debt in general (of course, I am not saying that you are saying anything to the contrary btw).
Will there be write offs? Will we try and swap large portions of pre-existing debt with shorter terms for those with longer terms? Will any of these events if actioned be viewed as a technical default by the much maligned ratings agencies thus effectively blocking us from the markets and making the state vulnerable to predatory legal action from the eventual owners of the defaulted debt such as vulture funds? How will this effect the eurozone and the ECB in general too? All of this needs to be discussed out in the open as opposed to behind closed doors and with some kind of honesty, as opposed to the self-interested back door briefing of the ECB or more aptly, that we require civil servants, ministers and others to challenge what they hear from the ECB as opposed to taking their thoughts as gospel.
As for the contention about party politiking, I can only wish this would be the case but I won’t hold my breath. Of course, it could be argued by those who are politiking that they are merely holding the government to account and asking pertinent questions and this would be a good defence to the charge being leveled against them, after all, if we ask them for a ‘rational’ and joined up solution to the problem and we don’t like what we hear we could be conversely accused of also politiking as we are dumping on the opposition’s proposed solution as it doesn’t correspond to our own, but I’m going off on something of a tangent here.
The real issue here is a discussion needs to be done in the public and I would too would love for some form of referendum or vote to be brought for consideration to the public, but I wonder if the political will and momentum is there. It would have been a very real prospect back in 2010 but after all that has been done and the way people have probably been acclimatised to austerity they may be some kind of fatigue among the electorate on the issue. I am not saying there is no anger out there btw, far from it, but the public in general may have moved from being of the pro-active variety on the whole matter to now merely wanting this to go away at any cost.
LikeLike
factual said:
I have a feeling that we benefit from not being alone in the EZ and from the fact we are “doing the right thing” compared to them. Other countries in the EZ (Greece, Italy, Spain) are having debt issues that will need generosity from the rich countries in terms of how debt is treated. What seems to be happening is that debt is being written off in all but name. And fairness requires that Ireland – which is “doing the right thing” – should not be treated less generously than the southern EZ countries.
LikeLike
footballcliches said:
Hi Factual,
A tough one. If we were alone then this could be contained a whole lot easier, as we are in such massive company it means the problem is systemic and could bring the whole thing down. Each country has very different problems from the other whether it’s Greece and the government cooking the books while the banks were actually quite conservative, Spain which has massive political interference in its savings banks (the cajas), Italy which is the 4th largest bond market on the planet but with an ageing populace and a stagnating economy that has been like this for years or Ireland where we allowed the banks to lower their financial due diligence standards in a race to the bottom.
If I could recommend any reading out of interest I would point you in the direction of Michael Lewis’ book ‘Boomerang’ http://en.wikipedia.org/wiki/The_Big_Short or you can see it for free over at Vanity Fair; it’s an easy enough read and somewhat insightful. http://www.vanityfair.com/contributors/michael-lewis
LikeLike
footballcliches said:
I can’t believe I put up a link to the Big Short! Argh, iPad!
LikeLike
otto247 said:
Apologies if this a naive question.
Has anyone (Mack?) any model for the value of assets remaining under NAMA/state ownership as a result or rescues & liquidations? What are their historical values and what are their projected values in, say 10 years under different growth scenarios?
If there are still substantial holdings and if this deal takes sufficient pressure off the Irish economy that growth prospects are improved then does that allow a greater potential realisation (and debt repayment) through future disposals?
Inflating your way out of debt in more ways that one?
LikeLike
Robert Smith said:
Interesting information on promissory note, thank you football cliches for sharing it.
http://www.nesuk.com/green-deal.aspx
LikeLike