Finance accused of ‘crass stupidity’ in BoI sale

The Department of Finance has defended its decision to sell €1bn in contingent capital notes (CCN) amid criticism that it was a bad deal for the State.

Peter Brown, head of the Irish Institute of Financial Trading, described the move as “crass stupidity.” Speaking on RTÉ’s Today with Pat Kenny yesterday Mr Brown said: “It makes absolutely no sense to me why we would sell something that is yielding the taxpayer 10% when we can go into the market and borrow at 3%. It is stupid.

“It [Bank of Ireland CCN] would yield us €67m net a year every year, if we held it. It is a distinct lack of understanding of financial market awareness. I don’t know who is advising the Government on this.” But a department spokesperson said the decision to sell the notes was sound.

“The main reason for the State selling the contingent capital is the sizeable risk in holding it to maturity...

“Our debt level is already too high and needs to be brought down to support economic growth and job creation — and the primary objective for our use of funds is the provision of public services,” the spokesperson said.

The Department of Finance added: “There are a number of important reasons for selling this contingent capital: We need to reduce our national debt in order to support economic growth and to secure our public services.

“There is no point in maintaining excessive levels of debt as suggested in order to make a relatively small cash profit, especially when this level of debt has a far greater negative impact on economic and employment growth prospects.

“The sale strengthens the State’s preference share and equity holdings in Bank of Ireland as the contingent capital ranks below the preference shares, so it will take losses before our preference shares.

“There was a relatively small potential upside from this contingent capital as it is a debt instrument.

“However, it represented a very considerable downsize risk to the State, therefore, a sale was in the State’s best interests.”

Goodbody economist Dermot O’Leary says it makes sense to remove as much of the banking risks from the Government. Under the terms of the CCN, if Bank of Ireland’s tier 1 capital falls below 8.25%, then the debt instrument is converted into equity. However, the Government should have held out for a better price, argues Mr O’Leary. The CCN was sold for 101% of par price.

“I think the Department [of Finance] was generous and left too much on the table for investors. It probably could have got somewhere between 101% and 105%.”