Ireland and the Promissory Note Deal: First Thoughts.

First of all, I would like to thank Bangor Dub for posting the below on his own site, a site which I would strongly recommend you pop on over to and give a visit or drop a line. I assure you, the bark of posters there is far worse than there bite and all newcomers are welcome to share there opinions so long as they are not libelous, racist or troll like, which is much the same as here by the way.

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 mn ecbto 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 luas openingnot, 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 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 md ecbDavid 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.

dmwThis 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.



One response to “Ireland and the Promissory Note Deal: First Thoughts.

  1. Pingback: Another Poll – Fianna Fáil Voters Abandon The Fine Gael Fold | An Sionnach Fionn·

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