Summing up the Anglo bailout

The issues around the Anglo promissory notes are complex but important.

Political correspondent Mary Regan explains what the fuss is all about

COMPLEX and technical. These words were repeated by the Taoiseach yesterday when responding to questions about negotiations on the promissory notes.

The complicated nature of the arrangement to bail out Anglo and Irish Nationwide has been consistently used as an excuse by the Government not to tell the public what is being done to reduce the burden.

During leaders’ questions yesterday, Enda Kenny was asked if the €3.1bn promissory note payment would be made in full at the end of this month.

He was asked to explain the status of talks with the ECB on the issue and, if a compromise is reached with the troika, whether it will be published.

His responses to all of the questions were that the issue is too complicated to be explained in full.

“I am not going to tell the House the particular issues that arise or the nature of the discussions taking place because the negotiations are far too sensitive and technical, and they are very complex,” he said.

For something that will cost taxpayers greater sums than annual budget adjustments for at least the next decade, it’s not enough that the Government can tell us it’s too complicated to explain what is going on.

So here is a comprehensive dummy’s guide to promissory notes:


It is well known by now that the State, through the Irish Bank Resolution Corporation (IBRC), took on huge debts that were previously the obligations of Anglo Irish Bank and Irish Nationwide Building Society.

The arrangement to bail out these banks was not the most straight-forward and had to meet a number of objectives, including repaying their senior bondholders, keeping within capital rules of the Central Bank, and, most importantly, avoiding the State having to come up with the €40bn cash upfront.

So instead of bailing out the banks directly from the exchequer, which would have been a huge burden for any one year, the Government used exceptional liquidity assistance (ELA).

This is a special form of assistance usually given to commercial banks from central banks when ordinary funding (either inter-bank or regular central bank money) is not available in the medium or short term. ELA money is not borrowed from other central banks or from private bond markets, but is made or created out of nothing by a central bank in exceptional circumstances.

Does that sound too good to be true as a solution to bailing out the banks? It was.

The ECB, which governs the use of ELA, would never have allowed the Government to give it to a bank that did not have any collateral to pay it back. Anglo and Irish Nationwide didn’t have enough loans owed to them, or enough assets on their balance sheets, and were unable to access funds in the normal way. So this made it all very difficult for them to access exceptional liquidity.

So promissory notes were created as collateral which allowed the banks to access this “made up” emergency liquidity — €31bn worth.

The notes were issued to the IRBC — essentially a promise to pay it €30.6bn over 15 years which it in turn would use to pay back the Central Bank for the ELA money.

How much does it cost?

The first €3.1bn promissory note payment was made to the banks on Mar 31 2011, and Ireland is scheduled to make further €3.1bn repayments on Mar 31 every year for the next 12 years. Lower repayments kick in from 2024 until the notes are finally repaid in 2031. Every year the interest charges are added to the Irish deficit — forcing the Government to either raise taxes or cut expenditure to meet its EU/IMF deficit targets.

The total amount of payments on the notes will add up to €48bn by 2031, which is €12bn more than the original principal of €31bn.

While there has been a lot of talk about “burning” the unsecured, un-guaranteed, bondholders, the truth is the amount that this category is owed amounts to about €1bn.

The majority of money to be paid back by Anglo is going to our own Central Bank to gradually wind down the ELA — or take out of circulation the money it had created.

So in effect, when the Government pays €3.1bn every year for the next 12 years, it is paying back the Central Bank. This has led some economists to argue that reducing the interest rate will have very little impact on the long run cost to the State.

Why is the ECB involved?

None of this money has come from the ECB so we are not repaying them anything.

But the reason the Government needs its agreement to postpone payments of the promissory notes, or reduce the interest rate, is because the arrangement was made only with its agreement.

Lending by the Central Bank to institutions that are insolvent violates euro rules outlined in the EU treaty and an ELA programme can only be used by central banks if the ECB allows.

It is most likely that the ECB would see it as a bad precedent if Ireland rowed back on any repayments because other countries will then want to use ELA for their banks and not pay it back or pay it back very slowly.

They may also see a slow repayment of the ELA money that was created as a weakening of their commitment to low inflation.


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