Deferring €28bn promissory notes represents ‘best deal’

A 20-to 30-year deferral of the €28bn in promissory notes relating to Anglo and Irish Nationwide would be the most effective way of restructuring Irish bank debt, according to UCD economist Karl Whelan.

“However, given the need for agreement from the ECB governing council, this is unlikely to be obtained,” he says.

The Government is in negotiations with the troika in an effort to secure a deal on the €64bn used to bail out the banking system. Of this, roughly €34bn is in the form of promissory notes used to plug the massive capital holes in Anglo and Irish Nationwide.

Irish Nationwide was folded into Anglo, which was renamed the Irish Bank Resolution Corporation last year. Under the terms of the original promissory note deal struck between the Government and the ECB, a €3.1bn repayment is made every March.

Two payments have been made, leaving roughly €28bn in promissory note repayments to be made over the next 10 years. A restructuring of this arrangement would give the Government greater fiscal flexibility and help its efforts to make a full return to the markets.

Mr Whelan argues that, in the absence of getting a 20- to 30-year deferral, the next most favourable option would be an agreement that further payments would be suspended until nominal GDP had recovered to its pre-crisis peak and unemployment had fallen below 10%.

Among options explored in a paper by Mr Whelan is the possibility of the eurozone’s rescue mechanisms, the European Financial Stability Facility or the European Stability Mechanism, issuing a 30-year bond. The proceeds from this bond would be used to replace the promissory notes.

There are a number of drawbacks to this approach. The ESM or the EFSF have so far not placed a 30-year bond on the market, so it might not be possible to do it an appropriately low interest rate, says Mr Whelan.

The Government is also pursuing a restructuring deal on the €30bn debt of the pillar banks. One possibility is that the ESM could take direct equity states in these institutions and the Government could use the proceeds to pay down debt.

The Government had hoped a deal could be secured by October, although both Finance Minister Michael Noonan and Taoiseach Enda Kenny recently said a deal is likely to exceed this deadline.

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