Promissory note deal will save State €800m in interest payments: Davy

The restructuring of the promissory notes will yield the State €800m in savings through lower interest rate payments between this year and 2030, according to Davy Stockbroker economist Conall MacCoille.

“This is a significant reduction in interest costs but not transformative for the budgetary arithmetic,” he said.

“So the pace of fiscal consolidation will not change markedly. ECB monetary finance has been extended, via a 14-year average holding period for the Central Bank of Ireland of the newly issued government bonds.”

He argues that the Government will stick to its planned budgetary cuts of €3.1bn in next December’s budget and €2bn the following year on the basis that the growth outlook remains uncertain and it is unclear whether the Croke Park agreement will lead to the required level of savings.

Moreover, it is still unclear what will be the final tally of liquidating IBRC assets.

Last week, the Government secured agreement on restructuring the remaining €25bn in promissory notes by replacing them with a basket of long-dated government bonds with an average maturity of 34.5 years. The Central Bank will hold onto these bonds for an average of 14 years.

“However, the Central Bank is not likely to sell the bonds at yields inconsistent with Ireland’s debt sustainability. So €25bn of long-term finance, for an average 34-year term, has been secured. This is an enormous extension in the term of Irish debt,” Mr MacCoille said.

He estimates that gross government debt will peak at 121% of GDP in 2013 and net debt will peak at 110.5% of GDP in 2014.

Under the promissory note arrangement, the Government was scheduled to make a €3.1bn payment every March until 2023. However, a total of €33.6bn of EU/IMF bailout debt is maturing by 2020 — €6.9bn in 2015, €6.1bn in 2016, and €10.3bn each year over 2017 and 2018.

Mr MacCoille said the profile on this debt needs to be lengthened.

“Extending EU/IMF funding could reduce funding needs by €43bn, more than twice the €20bn reduction in the NTMA’s funding requirement out to 2023, due to the agreed extension of ECB funding.

“The interest costs on Ireland’s EU/IMF borrowing are set around 3%-3.5% on average. These rates are currently only a little below Irish benchmark yields, with an average maturity of almost eight years.

“Nonetheless, extending this funding could substantially reduce funding needs through 2015-2020, further helping Ireland’s debt sustainability.”

Meanwhile, Standard & Poor’s yesterday upgraded Ireland’s outlook from negative to stable, improving sentiment towards Ireland.