23/12/2014: RTE Finance: Money Grows on NTMA Trees

Oh dear, dear... Irish State Broadcaster is clearly in the need of some cash for training... or else, they are geniuses of the unimaginable proportions. Either way, RTE has discovered nothing more, nor less than a genuine money creation principle of the Irish Government Promo Notes.

Don't believe it? Read here: http://www.rte.ie/news/business/2014/1223/668729-central-bank/

Let me summarise the logic:

• Anglo & INBS went bust (we know).
• Government created IBRC to 'close off' Anglo & INBS, funded by the Promissory Notes (government debt issued to government-owned agency)
• Government created a swap to 'close off' IBRC: NTMA issued a bunch of 'IBRC' bonds (government debt) that were swapped for IBRC Promissory Notes (government debt).
• The 'IBRC bonds' were given by NTMA to the Central Bank of Ireland which is obliged to sell them.
• NTMA, at the same time, on the sideline as a part of its normal business borrowed cash from the private markets. It stuffed this cash into Irish banks as deposits, getting paid nada on the euro and paid interest on this cash to the private markets, which amounted to a lot more than nada.
• NTMA then 'bought' back some of the IBRC bonds from the CBI, paying with cash it borrowed from the markets on which it paid interest and will continue paying interest.
• RTE described the above as a 'costless' transaction, cancelling the debt.
• In reality, debt is still there right were it was, except if before interest on IBRC bonds was payable to the Central Bank it is now payable to... drum roll... the private lenders who lent money to NTMA.

That last bit is something RTE just couldn't spot with the Hubble Telescope of Financial Wisdom they deployed in the above link.

Which brings us to the Nobel Prize-worthy breakthrough at the RTE: money grows on trees or locates itself at the end of a rainbow or something of the sorts... but in the end, money is free for the State Broadcaster that truly does get 'free' money (aka taxes)...

Oh dear...

Two twitter reactions:

26/3/2014: 13 months on, the Promo Notes deal stinger is still in...

Back in September 2013 I wrote in Sunday Times that ECB might want to consider accelerated disposal of the Government bonds held by the Central Bank post-restructuring of the IBRC Promissory Notes: http://trueeconomics.blogspot.ie/2013/10/8102013-german-voters-go-for-status-quo.html

And now, guess what... http://www.irishtimes.com/business/economy/pressure-to-offload-long-term-bonds-in-promissory-note-deal-over-ecb-unease-1.1737924#.UzJ8fqxmKCE.twitter

Per Irish Times article linked above:

"Ireland is facing pressure to offload the long-term government bonds it issued as part of last year’s promissory note deal and at a faster pace than the timetable originally outlined, amid continuing concerns from the European Central Bank about the deal.

The ECB is reviewing the controversial promissory note deal as it prepares to publish its annual report for 2013.

… A crucial aspect of the promissory note deal agreed last year after months of negotiations was the length of time the Central Bank would hold the long-term bonds that replaced the promissory notes."

I have consistently argued that promo notes restructuring represented the perfect target for debt relief for the state. One example is here: http://trueeconomics.blogspot.ie/2012/03/2132012-anglos-promo-notes-perfect.html. And I highlighted our 'deal's' sensitivity to earlier disposal of bonds here: http://trueeconomics.blogspot.ie/2013/03/2332013-sunday-times-10032013.html (see bottom of the article for box-out).

26/2/2014: IBRC Sale Requires Upfront Clarity on CCMA

Much discussion is ongoing concerning the fate of the IBRC Mortgages which are to be sold in the coming weeks/days. The problem centres on the issue of applicability of the Code of Conduct relating to mortgages arrears. By some reports, the book held by IBRC is 50-70% in arrears.

The Government has reached an agreement with the Special Liquidator on the issue. This is covered here: http://www.finance.gov.ie/news-centre/press-releases/agreement-reached-between-special-liquidator-and-phase-two-bidders-ibrc

The idea behind the agreement is a fine one and the Government objective (ensuring that CCMA applies to IBRC mortgagees) is correct one. The problem is that this agreement is voluntary and not enforceable. Thus, it simply muddies the waters.

Here is my view on this expressed earlier on twitter:

In fact the only way to deal with the #IBRC mortgages sale is by setting clear, legally-binding compliance with the code of conduct requirement. This will give certainty on regulatory constraints to bidders/buyers, reduce their concerns about potential ex-post political interference, as well as provide clear-cut enforcement avenue for regulators & supervisors at the CB. A voluntary compliance system, as advocated currently, will only create confusion on the regulatory side but will still be priced as higher risk (bid discount) by bidders. So proposed voluntary arrangement is a lose-lose for everyone, while compulsory regulatory arrangement is a win-win.

Related background:

• Liquidators for IBRC are proceeding with sales of loans books: http://uk.reuters.com/article/2014/02/26/uk-ireland-anglo-idUKBREA1P0SJ20140226
• IBRC holds 12,702 mortgages accounts of which 10,622 are PDH and 2,080 are BTL accounts
• Credible estimate I have seen is that 50% of IBRC mortgages book are in arrears, compared to about 18% for all banks.
• Total Mortgages book to be sold is around EUR1.8 billion

24/6/2013: Anglo 2008 Annual Report is out. Call your broker, presto!

All going swimmingly... nothing to look at here... move on folks...

http://www.ibrc.ie/About_us/Financial_information/Archived_reports/Annual_Report_2008.pdf
H/T to @KarlWhelan

Oh, yes, do fill your boots with them shares...

A pearl:
"Following the introduction of the Government guarantee on 30 September 2008 the Bank experienced growth in retail deposits and access to other funding markets gradually improved. However, the reputational damage to the Bank resulting from a number of recent disclosures together with  adverse ratings actions have significantly weakened the Bank’s competitive funding position at a time when global markets continue to deteriorate and overall sentiment is negative."

Thus, clearly, barring some bad publicity and bad-bad-bad-n-worse Ratings Agencies intransigence, the bank would have been just fine, thank you...

And as per future, a gem:
"We are determined as part of our long term strategy to rebuild trust and confidence. A key priority of the new Board is to ensure we regain our position in the corporate, wholesale and debt capital markets and over time enhance the quality of funding, building on our diversified international platforms. ...The Bank’s ambition is to expand its retail franchise by targeting new and existing markets with competitively priced transparent products."

The Happy Times, they are coming back...

Obviously, there is no one to blame, but bad PR and bad-bad-bad-n-worse Ratings Agencies:
"I continue to be impressed by the tremendously loyal and professional staff in all areas of the Bank who deserve great credit for their dedication and commitment. Like all stakeholders, staff members across the Group have been deeply impacted and disappointed by recent events. They share the Board’s determination to restore confidence and trust in the Bank. The Board has great faith in the ability and strength of our people and they will play a critical role in ensuring the future viability of the Bank."

In other words, neither the staff, nor the Board had any idea of these bad things that have happened... it is, therefore, 'carry on across all decks' moment... But just in case you don't get this tingling sensation of excitement for the future from above, here it is in full glory:
"...a comprehensive business plan is being developed which will ensure the Bank’s long term viability.

...We will look at evolving from our existing structure to a broader more diversified business bank. The Bank’s customer service ethos and ability to provide effective and efficient service will help us meet the needs of sole traders, SMEs and larger businesses.

The Board is resolute in its determination to ensure that the Bank emerges from its current situation as a strong and viable institution and one that stakeholders feel proud of."

QED.

NB: Judging by objectives set out above, the Board and the senior management of the bank have by now failed in achieving the goals set out by themselves for themselves back in 2008-2009. Anyone to be held responsible?.. other than bad PR and bad-bad-bad-n-worse Ratings Agencies?..

NB2: Karl's reaction - and I am in agreement with him on it:

11/2/2013: What's David Hall's Case is Now About?

In light of the recent changes to the IBRC position and the Promo Notes, there can be some confusion around the case David Hall has taken against the Minister for finance. In particular, the confusion can arise due to the claims that we have made a "deal" on the promissory note and in light of the IBRC Bill 2013 provisions (Article 17). Let me try to (speculatively, I must add) shed some light.

The promissory notes were a product of the Credit Institutions (Financial Support) Act 2008 passed by the Dail Eireann on October 2, 2008. More specifically, the Minister for Finance, in allocating capital funds to the insolvent Irish banking institutions (see more of the background on this here: ), relied upon the provisions of the 2008 Act, Section 6. However, article 6.3 of the Act clearly stated that “Financial support shall not be provided under this section for any period beyond 29th September 2010, and any financial support provided under this section shall not continue beyond that date.” Furthermore, the Minister was given such powers (limited by the above date) to appropriate “all money to be paid out or non-cash assets to be given by the Minister… may be paid out of the Central Fund or the growing produce thereof” (Section 6(12)).

Furthermore, to the point of Defense in the case, Article 6(4) of the Act stipulates that “Financial support may be provided under this section in a form and manner determined by the Minister and on such commercial or other terms and conditions as the Minister thinks fit. Such provision of financial support may be effected by individual agreement, a scheme made by the Minister or otherwise.” This section is still covered by the 29th September 2010 cut-off date, but in so far as it covers (potentially) multiannual commitments created before that date but with a maturity beyond that date, it is unclear if this section covers the duration of the original Promissory Notes. Regardless of whether it does or not, the section is constrained explicitly by Section 6(5) which states: “Where the Minister proposes to make a scheme under subsection (4) – (a) he or she shall cause draft of the proposed scheme to be laid before each House of the Oireachtas, and (b) he or she shall not make the scheme unless and until a resolution approving of the draft has been passed by each such House.”

David Hall is claiming that in a democracy and under article 17 of the Irish Constitution the Dail and our elected representatives have the power to appropriate funds from the central fund (which, like all the rest of the Government funds, is made up of receipts and our taxes).

The point here is that David Hall is saying that it is not constitutional that one person, namely the Minister for Finance, or any future Minister for Finance, could spend monies (or future moneys) through issuance of bonds, various securities, even using another Promissory Note without any upper limit being set on such payouts and without any cabinet or Dail approval or vote.

According to David Hall’s case, this constitutes the core threat to the democracy enlisted within his claim. He believes that under the constitution that TD should have to vote on such expenditure and that they cannot give away their constitutional powers.

The fact that the current Promissory Note (and only in relation to IBRC notes) has been changed and eliminated does not alter the risk of future breaches of constitutionality (if David Hall is correct in his challenge) or abuses of the public purse.

31/1/2013: Summary of David Hall's Case on Anglo Promo Notes

With the latest twist in David Hall's case on IBRC Promo Notes constitutionality, I decided to post, at last, the summary of David's case as was read out (note - this is not an exact transcript, but darn close to it) in the court earlier this week.

Needless to say, I am disappointed with the ruling issued today, in so far as it simply rejected consideration of the merits of the case, and thus, the case remain outstanding.

Here are the main points of the High Court action taken by David Hall against the legality/constitutionality of the IBRC and EBS promo notes that was presented this week in the court by the Plaintiff. I could not attend the defence statement due to ill health.

Please note, I am no legal expert, so will try to offer the below without a comment on the constitutional or legal issues.

Per Plaintiff's presentation, in a statement made by the Minister for Finance to Dail Eireann on the 30th of March 2010, the Minister announced provision of capital support by the State to the Anglo Irish Bank. The announcement referenced capital injection during that week in the specific form of the Promissory Note payable over the period of 10-15 years. The Minister for Finance, therefore, supplied capital of EUR31 billion to 3 financial institutions: ca EUR25.3 billion to Anglo, EUR5.4 billion to INBS (split as EUR5.3bn in Promissory Note and EUR100mln as a Special Investment Scheme) and EUR350mln to EBS (split as EUR250mln in Promissory Note and EUR100mln in Special Investment Scheme).

The Minister for Finance has also provided the Central Bank of Ireland with the letters of comfort, confirming that the Government of Ireland would indemnify the CBofI in the case of any losses arising from the ELA provision to the Anglo, INBS and EBS. The above financial institutions were thus enabled to borrow, using the Promissory Note as collateral, from the Emergency Liquidity Assistance funds (ELA) of the Central Bank of Ireland.

The key point of this is that the Promo Notes and SIS measures were entered into the General Government Deficit in 2010, raising the headline figure to 32% of GDP and adding to the General Government Debt in 2010, however, since the requirement for these payments did not arise until during the course of 2010, none of these expenditures estimates appeared in the forecasts made in Budget 2010 that were prepared back in December 2009. The next point it that the Government, pursuant to Article 28 of Bunreacht na hEireann, prepared and presented to Dail Eireann the 2011 Estimates of Receipts and Expenditure for the year ending 31st December 2011. Payment of the Promissory Notes was contained in Note 6 under 'Non-Voted Capital Expenditure'. Non-Voted Capital Expenditure means that the Dail did not vote on the expenditure.

Key points: The Dail Eireann did not vote in the Promissory Note expenditure in Budget 2010 or Budget 2011.

The case taken is based on the constitutional argument relating to:

Article 28.4.4 of Bunreacht na hEireann: The Government shall prepare Estimates of the Receipts and Estimates of the Expenditure of the State for each financial year, and shall present them to Dail Eireann for consideration.

Article 17.1 of Bunreacht na hEireann: 1. As soon as possible after the presentation to Dail Eireann under Article 28 of this Constittution of the Estimates of receipts and Estimates of expenditure of the State for any financial year, Dail Eireann shall consider such Estimates. 2. Save in so far as may be provided by specific enactment in each case, the legislation to give effect to the Financial Resolution of each year shall be enacted within that year.

Article 17.2 of Bunreacht na hEireann: Dail Eireann shall not pass any vote or resolution, and no law shall be enacted, for the appropriation of revenue or other public monies unless the purpose of the appropriation shall have been recommended to Dail Eireann by a message from the government signed by the Taoiseach.

Article 21.1.1 of Bunreacht na hEireann: Money Bills shall be initiated in Dail Eireann only.

Thus, Bunreacht na hEireann gives to Dail Eireann a constitutional primacy in the area of State finances and mandate the actual, real and continued involvement of Dail Eireann in the appropriation of revenue and/or public monies. Central to the democratic nature of the State is the oversight of public expenditure by the elected representatives of the People who under Article 6 of Bunreacht na hEireann are sovereign and from whom all power is derived.

As Plaintiff stated, the Promissory Notes were created and funds for their financing were allocated by the Minister for Finance, including the related letters of comfort without involving the elected legislators. Furthermore, the issue of letters of comfort purported to appropriate and has appropriated public funds in an unspecified and unlimited amount in relation to the provision of liquidity assistance in the banking sector.

Per key points 1 & 2 above, the members of Dail Eireann did not consider the making of the Promissory Notes and/or the giving of letters of comfort, did not vote on whether or not to make the Promissory Notes and/or grant such an indemnity; and did not mandate or otherwise authorise the Promissory Notes and/or letters of comfort.

Considering that the Promissory Notes and letters of comfort were extended funding commitments over the time horizon of originally envisioned 10-15 years, the making or provision by the Minister for Finance of Promissory Notes, extending over such a long period of time and over such enormous sums of public funds and/or provision of a purported indemnity to CBofI constituted an attack on the democratic nature of the State and was unlawful and is unconstitutional being contrary to Articles 6 and/or 15 and/or 17 and/or 22 and/or 28 of Bunreacht na hEireann.

As I'd say, Bang! Up to 6 articles of Constitution potentially violated by the previous Government.

Plaintiff requested in the case for the Minister for Finance to identify the precise statutory or other legal basis authorising then provision of the Promissory Note. Alas, to-date there has been no response to this request. Two acts potentially can be argued provide such basis: 

-- Credit Institutions (Financial Support) Act, 2008 and/or

-- Anglo Irish Bank Corporation Act 2009

However, per Plaintiff statement in court, neither makes adequate legal provision for the financial assistance of the extent and/or nature and/or duration committed to by the Minister for Finance. Here are the reasons - as argued by the Plaintiff - for this.

Regarding the Credit Institutions Act 2008:

-- In 2010, the provisions of the Section 6 of the Act prohibited the giving of financial support beyond the 31st of December 2015 and from the 23rd of November 2010 beyond the 20th of June 2016. Of course, the promissory Notes extend to 2025 and thus, could not therefore have been authorised by the said Act.

-- The above provisions cannot be construed as authorising the making of Promissory Notes appropriating public monies, absent a requirement for a resolution of Dail Eireann prior to the provision of same having regard to the requirements of Bunreacht na hEireann.

-- The provisions of section 6(1) Credit Insitutions Act, 2008 do not provide for or allow or permit the Minister to make such large scale and long term financial support to a third party credit institution and did not permit for the provision of support equally a sum in excess of EUR31 billion to the Notice Parties herein.

Regarding the Anglo Irish Bank Corporation Act 2009:

-- There is no lawful basis for provision of financial support through the Promissory Notes to continue to 2025 or at all and the making and provision of such Promissory Notes was ultra fires the power of the Minister of Finance with the consequence that the said Promissory Notes are null and void.

-- Neither the 2009 nor 2008 Acts can act to excuse the absence of a resolution providing for Promissory Notes voted upon by Dail Eireann in accordance with Article 17 of Bunreacht na hEireann.

The implications of the case are massive. The Plaintiff actually argues that

-- The Promissory Notes and the associated letters of comfort are unconstitutional and, if that is proven to be the case, these instruments are illegal and have no real validity. 

-- The repayment of the Notes in March 2011 was illegal

-- The swap for direct Government debt of the note in March 2012 was illegal

-- The Minister for Finance actions constitute the unlawful delegation or transfer of constitutional power from Dail Eireann to the Minister.

Beyond this, the Plaintiff case argues that the creation of the Notes was in contravention of the Article 123 of the Treaty of the Functioning of the European Union by:

-- Extending financing from the public purse to third parties (as prohibited by Article 123 (2) of the Treaty) and clarified by the Council Regulation (EC) No 3603/93 of 13 December 1993.

-- Violation of Article 123 in provision by the Central Bank of Ireland of ELA to the IBRC.

-- Absence of lawful basis for the issue of the letters of comfort

The Plaintiff stated in court that in the absence of the Promissory Notes, the Irish Central Bank has accepted that the IBRC is insolvent and that the provision of ELA to an insolvent credit institution is illegal. Thus, the provision of Promissory Notes to the Anglo Irish Bank was an unlawful ruse to create the pretence of solvency so as to enable the provision of ELA. Fighting words these are. But there's more. The provision of ELA was in turn used to repay third party liabilities of Anglo Irish Bank. Further it was intended by the Minister for Finance and by the Central Bank of Ireland that the Irish people would in effect, over the period of the Promissory Notes, repay the ELA on behalf of Anglo Irish Bank. The members of Dail Eireann were expressly removed from and denied any involvement in this decision which was an egregious attack on the democratic nature of the State.

I hope to provide a summary of the State responses to the statement as delivered in court.

1/4/2012: Flightless dodo - the Hunt of Chief Noonan

I am not usually prone on updating my past posts, but the Promissory Notes 'deal' announced last week by Minister Noonan just keeps on giving more and more backlash and analysis. So:

• My original post here.
• Note the updates in the above
• FT Alphaville view here which is broadly in agreement with my view and with links I posted in the original post updates.
• Interesting information coming out of ECB on Minister Noonan's claims that the 'deal' is a part of some 'broader plan' - via the Irish Times, here.

Reiterating my view:

• Promo Notes have been paid, not deferred
• Payment of Promo Notes was originally to be based on Government borrowing cash from the Troika. Under the 'deal' it has been replaced by the Government borrowing cash from BofI
• Payment of Notes under the 'deal' cost us more in new debt and increased deficit in 2012, but will decrease interest payment in 2013 compared to original arrangement. Net effect on interest cost - nearly a wash.
• The 'deal' is NOT (see ECB official statement) a part of any 'broader deal'.
• The ECB are now clearly on a defensive - which means they will be unlikely to support any further 'deals'.

Having gone out with a brave claim to spot a bald eagle soaring in the sky and get a feather for his war bonnet, Chief Noonan came back with a smudgy mud-print of a dodo, a bill for €400mln+, and a promise to go hunting again. Next stop, trading gold for glass beads... oh, they sparkle so nice.

(Obviously - an allegorical analogy. For those rare readers lacking in humor department.)

On a serious note - I find it discomforting and sad that an excellent seasoned politician and a very promising Minister for Finance has been forced into this position of defending the failure. Let's hope his luck (and progress) change in the nearest future.

29/3/2012: Promissory Note 'deal' 2012

Trying to sort out the convoluted 'deal' announced by the Minister today and juggle two kids, plus struggle against the computer on a strike from too many files open is a challenge. I might be missing something, but here's my understanding of the thing.

1. €3.06bn will be delivered not i cash, but in a long-term Government bond of the equivalent fair value
2. We do not know maturity, but 2025 was mentioned before. Ditto for coupon rate, though Prof Honohan mentioned 5.4% coupon.
3. Current pricing in around 88% of the FV, so €3.06*0.88=€3.47bn issuance to deliver fair value. If average  over longer term horizon is taken - that would go up. If yield is higher - that will go up. It is unclear what fees will be involved as the transaction is complicated (see following).
4. As is - at current market pricing, there will be an increase in Government debt of roughly €410 million, plus the cost of transactions.
5. As described above, and as indicated by Minister Noonan, Government deficit will increase by €90mln (approximately: 5.40%*410mln=€22mln plus margin on Government bond yield over interest rate holiday under Promo Notes in 2012).
6. IBRC will receive the bonds and will repo them to Bank of Ireland on a 1 year deal. In other words, Bank of Ireland will buy the bond from IBRC then put it into ECB repo operations. LTRO being now closed, this will have to be normal repo with ECB. Bank of Ireland will repo IBRC-owned Government bond at ECB Repo rate (1%) + 1.35% margin. In effect, margin is the gross profit to the Bank of Ireland on this transaction.
7. Before Bank of Ireland formally approves the transaction, bond will be financed by NAMA against IBRC collateral (now, imagine that - NAMA holds IBRC's assets and has a working relationship with IBRC. IBRC has no collateral that is equivalent to Government bonds - hence it cannot repo anything at ECB. So by definition, the collateralized pool backing NAMA-IBRC repo will have to be stretched). A year later, BofI might reconsider and roll the deal, but one has to assume that the margin will remain either fixed or go up, plus whatever the repo rate will be then?
8. NAMA, as far as I understand, has no mandate to carry any of these operations, thus potentially acting outside its legal mandate.
9. Minister for Finance will guarantee the entire set of transactions, including Bank of Ireland exposure. In effect, Minister will guarantee Government bonds (which is silly), collateral from IBRC, NAMA exposure, Bank of Ireland exposure and so on.
10. NAMA will use own cash to finance the bridging transaction.
11. Having received the funds from the repo, IBRC will remit these to (€3.06bn) to the CBofI to cancel corresponding amount in ELA.
12. Has Net Present Value of the debt been altered? We do not know. We need to have exact data on bond maturity and the coupon rate, plus on overall profile of the rest of the notes to make any judgement here. Any change in the NPV under the above outline (1-5) is immaterial. 
13. The positive factor of so-called 'more flexible fiscal buffer' is a red herring, in my view. The idea is that we are 'saving' cash allocation of €3.06bn this year, making it 'available' for borrowing in 2013. This is rather stretching the reality - the 'cushion' has been pre-provided to us by the Troika deal and is specific to the Promissory Notes. There is no indication that it can be used for any other purposes. Even if it were to be used for any other purpose, it would be an addition to the bond issued, so our debt will increase by the amount we use from the 'cushion'. Furthermore, the deal runs out in 2013 and thereafter no 'cushion' is available. So on the net, we have just paid 400mln increase in debt, plus 90mln in deficit to buy ourselves an 'insurance' policy that should we need 3bn in 2013, we will be able to ask for it from the kindness of the EU and have it for no longer than a year. That's pretty damn expensive insurance policy.
14. The negative factor is that we now have almost 3.5bn worth of extra debt that is senior to the promissory notes it replaced and once it is repoed at the ECB it will be senior to ELA exposure. 
15. Furthermore, this debt is in the form of Government bonds. So suppose we want to return to the debt markets in 2014. We have higher stock / supply of Government bonds (albeit 3.47bn isn't much - just a few percentage points increase) that markets will price in. Higher supply, ceteris paribus, means lower price, higher yield on bonds we are to issue in 2014. 
16. Minister Noonan and a number of other Government parties' members have mentioned 'jobs creation' capacity expansion as the result of this deal. The only way, in theory, this deal can lead any jobs creation is if the Government were to use €3.1bn allocation available for Promo Notes under the Troika deal for some sort of public spending programme. Which, of course, means our debt will increase by the very same amount used.

Brian Hayes on Today FM described the 'deal' (H/T to Prof Karl Whelan) as 'A creative piece of financial engineering.' Presume safely that Brian Hayes has a firm idea that this description is a 'net positive' for the Government.

Following the announcement by the Minister, there were no questions allowed by Dail members and the Minister moved on to the really important stuff - straight to press briefing in the Department of Finance. He might have opted for the right move, however, since the Dail, without any interrruption vigorously engaged in a debate on this important topic:

On that note, the last word (for now) goes to Prof Whelan: "Ok, after exchanges with very wise @OwenCallan I have decided that this deal defers the 3.1bn payment by only one year. Worse than hoped for" (quoting a tweet).

Welcome to the wonderland of wonderlenders.


Updates:

Adding to the above, it is worth postulating directly - as I have argued consistently, ELA is the only debt we can - at least in theory - restructure and promo notes are a perfect candidate for such a restructuring. By converting a part of these into Government debt we are now de fact increasing probability of a sovereign default or restructuring.

Karl Whelan has an excellent post on the 'deal' - here.

ECB statement on Ireland's 'deal' is here. This clearly states that there is no deferral of any payment on Promo Notes and that the Noonan's 'deal' is a one-off. Thank gods it is - because at a cost of €400mln in added debt, plus €90mln in deficit, repeating this exercise in PR spin would be pretty expensive.


Update 30/03/2012:


Today Irish Times is reporting that:

"Minister for Finance Michael Noonan said the big benefit was the money would not have to be borrowed to pay this year’s instalment on the promissory notes, the State IOUs paying for the bailouts."

A truly extraordinary statement, given the state will borrow the money (some €410mln more in principal and €90 mln more in interest than actually it had to borrow) using a Government bond to pay said IOU!

The Irish Times headline reads: "Government wins backing on €3.06bn payment". Yet there is no any 'backing' from anyone on this deal, because the deal does not change the payment itself. Read the above-linked ECB statement on the 'deal'.

In another extraordinary statement, the Irish Times (this is their own claim) says: "Further talks on a long-term deal on the remaining repayments as part of a wider restructuring of the banks will continue between the Government and the troika of the EU Commission, the ECB and the International Monetary Fund." Is there ANY evidence that any such negotiations are ongoing? Where is this evidence? Please, produce!


And an excellent piece from Namawinelake on the above: here.

21/3/2012: Anglo's Promo Notes - perfect target for debt restructuring

This is an unedited version of my Sunday Times article from March 18, 2012.

At last, courtesy of the years of economic and financial mess, Ireland is waking up to the problem of our debt overhang. For those of us who have consistently argued about the unsustainability of our fiscal and real economic debts predicament, this moment has been long coming. The restructuring of some of the debts carried by the Government directly or indirectly, on- or off-balancesheet is a matter of when, not if. Enter the debate concerning the Promissory Notes.

Per international research, State debt in excess of 90-95% of the real economic output is unsustainable. In real economics, as opposed to fiscal projections, debt becomes unsustainable when it exerts a long-term drag on future growth.

At the end of 2011, official Government debt in Ireland has reached 107% of our GDP or 130% of GNP, according to NTMA. The Irish economy is now operating in an environment of records-busting exports, current account surpluses, and healthy FDI inflows, and yet there is no real growth and unemployment remains sky-high. By comparatives, Irish economy is a well-tuned, functional car stuck in the quicksand – engine revving, power train working, wheels engaging, with no movement forward. This is a classic scenario of a debt overhang crisis – the very same crisis that Belgium has been struggling with since 1982, Italy – sicne 1988, Hungary – since 1991, and Japan – since 1995.

Something has to be done to deal with this problem in Ireland no matter what our Government and the EU say in public.

Uniquely for a euro area country, Ireland’s debt overhang did not arise solely from fiscal or structural economic shocks, but was strongly driven by the country response to the financial crisis rooted in a number of forces, including policy and regulatory errors by the EU and ECB. Also, Ireland has undergone the most severe adjustments in its fiscal position to-date compared to all other ‘peripheral’ economies, proving both our capability and commitment to reforms.

Lastly, in contrast with all other countries, Ireland’s economy is capable of getting back to sustainable levels of economic activity. Irish economy needs a supporting push out of the quicksand of banks-linked debt overhang to deliver on its sovereign debt commitments, and become once again a net contributor to the sustainable fiscal system within the euro area.

The IBRC Promissory Notes are a perfect focal point for such a push for a number of reasons.

First, the magnitude of the Promissory Notes allows for significant room to reduce Irish Government’s future liabilities, combining €28.1 billion of debt, plus 17 billion in interest repayments. These represent 29% of our GDP. Eliminating this liability will restore Ireland back onto sustainable fiscal and growth paths. Restructuring the Notes will not constitute a sovereign default. Although their value is counted in Irish Government debt, they are not traded in the markets. The Notes are, de facto, Irish Government IOUs to the Central Bank of Ireland with IBRC acting as an agent.

Second, Promissory Notes underwrite €28 billion of €42 billion IBRC debts to the ELA programme run by the Central Bank of Ireland. ELA funds are not borrowed by the Central Bank from the Eurosystem or the ECB, but are created by the Central Bank under its mandate. There is no offsetting physical liability the Central Bank needs to cancel by receipt of payments from the Government. The Notes also do not constitute Central Bank funding for the Government as they finance stabilization of the Irish (and thus European) banking system. Lastly, the ELA funding extended to the IBRC is already in the financial system. Removing requirement on the Irish state to monetize the Promissory Notes will not constitute an inflationary quantitative easing.

The Government is correct in focusing much of its firepower on the IBRC’s Promissory Notes. Alas, efforts to-date suggest that it is not setting its sights on the real solutions needed. This week, Minister Noonan has identified the direction in which the talks are progressing: restructuring the Promissory Notes repayment time schedule, plus possibly reducing the interest rate attached to the notes via converting the notes into ESM debt.

The problem with this approach is that a transfer of liabilities to ESM will convert Promissory Notes into a super-senior Government debt. This is likely to have a negative effect on Ireland’s ability to borrow funds from the markets in the future and make such borrowing more expensive.

In addition, lowering interest rate on the Promissory Notes carries two associated problems with it. The move can only have an appreciable effect on Exchequer finances after 2014, when interest on the notes ramps up to €1.8 billion from zero in 2012 and €500 million in 2013.

Delaying repayment of notes instead of reducing the principal amount owed on them will not provide significant relief to the Exchequer in the future and will make the period over which the debt overhang occurs even longer than 20 years envisioned under the current Notes structure. This will pose serious risks. History of business cycles suggests that between now and 2025 when Notes repayments will fall significantly, we are likely to face at least two ‘normal’ or cyclical recessions. During these recessions, Notes repayments will coincide with rising deficit pressures and national income contractions that will exacerbate the Promissory Notes already adverse impact on Irish economy. Extending the period of notes repayments risks compounding more recessionary cycles in the future.

Furthermore, delaying notes repayments can risk increasing the overall future demand for debt issuance by the state. Currently, Ireland is facing two debt-refinancing cliffs during the life of the Promissory Notes: €45.6 billion refinancing over 2013-2016 and €62.4 billion over 2017-2020. If Notes repayments are delayed, their financing will stretch further into post-2020 period, just when the subsequent roll-overs of Government bonds will be coming due.

In more simple terms, current proposals for Promissory Notes restructuring are equivalent to making quicksand pit shallower, but much wider.

Ireland needs and deserves a direct restructuring of the ELA. The most optimal outcome of such a restructuring would be de facto cancellation of ELA requirement for repayment of IBRC-borrowed €42 billion. Once again, such a move would have zero inflationary impact on the economy as on the net no new money will be created in the euro system over and above the amounts already present.

There remains, however, one sticky point. Allowing Ireland to restructure its ELA can, in theory, lead to other Central Banks following the suit. This problem of moral hazard can be easily mitigated by ECB by ring-fencing Irish ELA restructuring solely for the purpose of winding down IBRC. Making ELA writedown conditional on shutting down Anglo and INBS, plus potentially Permanent tsb will disincentives other countries from using their own ELAs to rescue solvent banks. Irish restructuring can be further isolated by tying ELA writedown to progress already achieved by Ireland in tackling fiscal deficits and restructuring its banking sector. Put simply, with such a proviso in place, no other Euro area country would want to dip into its National Central Bank vaults if the associated cost of doing this will amount to over 50% of its GDP.

Ireland’s crisis is unique in its nature and its resolution provided a buffer to cushion the credit crisis blow to the entire euro area banking sector. Ireland both deserves and needs a breakthrough on the debts assumed by taxpayers in relation to the insolvent IBRC. Even more importantly from Europe’s point of view, the ECB needs a positive example of a country emerging from the deep crisis within the euro system. Ireland is the only candidate for success it has.

Source: NTMA and author own calculations.

Note: In computing second round of rollovers, only Government bonds are included and taken at 95% of the principal amount. All other debts are excluded.

Box-out:

In the wake of last week’s Quarterly National Household Survey release, the Government was quick to point to the improvement in the number of employed on a seasonally adjusted basis as the evidence the employment policies success. Overall numbers in employment rose in Q4 2011 by 10,000 or 0.56% compared to Q3 2011, once seasonal adjustments were made. Furthermore, per seasonally adjusted data, full-time employment was up 8,700 – accounting for 87% of this jobs creation. Alas, this is not the entire picture of the job market health. Year on year, seasonally adjusted employment was down 17,800 or 0.97%. More ominously, unadjusted employment was up just 2,300 in Q4 2011 compared to Q3 2011 – an addition of statistically insignificant 0.1%. Interestingly, full-time unadjusted employment figure fell by 700 jobs (-0.1%), while part-time employment rose 3,000 (+0.7%). At the same time, number of part-time workers who are underemployed has jumped 5,800 in a quarter and 28,100 year on year. Two reasons can help explain the above disparities. First, Government training programmes have been aggressively taking people out of unemployment counts, increasing employment numbers. In the case of Job Bridge, for example, these are unpaid ‘internships’ with questionable rate of post-internship transition to work so far. Second, since Q1 2011, CSO has used a new model for seasonal adjustments, which may or may not have an effect on seasonally adjusted headline numbers. Lastly, seasonal adjustments can increase, not reduce quarterly data volatility at the times when trends change. Particularly, with flattening out of the employment figures after years of steep declines, seasonal adjustments can introduce a temporary bias into subsequent data. In short, making conclusions about the actual changes requires more careful reading of the numbers than a simplistic headline figure referencing. With all annual indicators pointing to a shallow decrease in employment, the Government would be best served to have some patience and see how subsequent quarters numbers play out before jumping to conclusions on the success of its policies.

12/3/2012: Why the 'trackers deal' is bad news for Irish mortgagees

The news galore surrounding the Promissory Notes (usually reported cheerfully with the customary references to unnamed sources as to the eminence of the 'deal') and so-called 'lobbying' by the Irish Government to restructure more broadly (un)defined 'banks debts' is continuing to gain momentum day after day, with no actual real signs of anything tangible being done. 


But the real news here is what is being 'rumored' and 'discussed', not the actual feasibility of the 'deal'.


Per reports and Ministerial statements, Ireland is lobbying ECB / EU Commission /EU in general (whatever that means) to allow the country to alter the burden of the IBRC Promissory Notes and, crucially, as per last night news - restructure loss-making tracker mortgages on the balancesheets of its banks.


Minister Noonan stated yesterday on RTE that the discussions on the promissory notes also included the possibility of 'shifting' loss-generating (for banks) tracker mortgages off banks balancesheets into IBRC. The problem, of course, is that these mortgages account for ca 53% of all mortgages held/issued by the Irish banks in relation to the residential property. The rates of default on tracker mortgages is lower than that for ARMs


The banks are complaining loudly that their funding costs exceed the tracker mortgages returns due to low ECB financing. So the real issue here is that the banks are facing state-imposed 'reforms' that are in effect forcing them into future losses on tracker mortgages. The current losses are due not to the actual tracker mortgages problems, but due to the banks prioritizing bonds and debt repayments (raising cheap funding to do so) while complaining about losses on tracker mortgages.

Alas, something is seriously off in this argument for the following reason. Irish banks largely fund themselves at ECB rate via LTROs and normal repo operations. What 'funding costs' they have in mind, beats my understanding of their operations. So the whole issue is a red herring. The banks simply make too small of a margin on these mortgages to use them to cross-subsidize market funding access. That's the real story - the story of the potential loss, not actual loss.


How bogus the issue is? Bank of Ireland doesn't even bother to identify specific losses or any issues relating to tracker mortgages in its latest interim report.


So overall, the issue is a bogus concern for mortgagees covering up the real desire of the Government to provide yet another rescue line of taxpayers' funds to the banks. In other words, the move of tracker mortgages will do absolutely nothing to alter the conditions of loans repayments or costs of these mortgages to the mortgagees. Nor will it reduce the mortgagees debt. Instead, it will simply shift lower margin products off banks balancesheets, allowing the banks to gouge their ARM holders with higher margins over the ECB rate without direct comparative (transparent) pricing to tracker mortgages. More opacity, higher margins, no help for tracker mortgagees, shifting more burden of banks bailouts onto ARM mortgagees - that is, in the nutshell, what Minister Noonan's game plan appears to be.

20/1/2012: Deputy Peter Mathews v Minister Noonan

Here are some extracts from an excellent contribution by Peter Mathews TD (FG) from yesterday's topical debates in the Dail (full record available here). This was comprehensively overlooked in the media reporting which focused solely on the non-event (save for Vincent Browne's questions) of the Torika 'approving' Ireland's 'progress'. My comments in italics.


Deputy Peter Mathews: 
      Next Wednesday, 25 January, is the due date for the redemption of a bond issued originally by Anglo Irish Bank Corporation, now the Irish Bank Resolution Corporation. 
      We are at an important financial crossroads in the history of our country. Anglo Irish Bank has been insolvent and supported by financial engineering, promissory notes and the emergency liquidity assistance of the European Central Bank and funds from our Central Bank.  The debt that lies embedded in what was Anglo Irish Bank was not created by the citizens of this country.  It has been meted out onto their backs by a mixture of incompetence and mismeasurement over a certain period under the past Administration.
      We are at a moral crossroads.  We should bring to the attention of the creditors holding the bond the facts that the bank is insolvent and that, in effect, it is not a case of our not wanting to pay but of our not being able to do so...

      Consider the debt of €1.25 billion.  The attention of the creditors will be in sharp focus because the banking system, the Irish-owned banks, are in debt to the ECB and our Central Bank at a level of approximately €150 billion.  It is the forbearance and tolerance of citizens that keeps the financial edifice and engineering of the eurozone and the greater financial system of the developed world in place.  We have been doing considerable work, facing enormous challenges.  Through the great work of the Minister for Finance, Deputy Noonan, and the Taoiseach, we are bearing the load of trying to bring about a fiscal adjustment in line with the troika agreement signed in November 2010.  All that work is important and must be done but the legacy debt is outside the responsibility of the people of this State.

      One and a quarter billion euro is almost half the budget [measures] introduced in December.  It is eight times the sum that will be raised from the household charge and twice that which will be raised by the VAT increase.  The debt crisis in Ireland and other countries cannot be solved by adding more debt...  Loading more debt on this country to pay legacy debt is like suggesting a drink problem can be solved by another whisky.

Minister for Finance (Deputy Michael Noonan): 

      I thank Deputy Mathews for raising this very important issue.  The repayment of the bond in question is an obligation of the bank and will be repaid by the bank.  It is important to be clear that it is the bank and not the Exchequer which will meet this obligation. [Need anyone point the following to the Minister, that the 'bank' has no own assets or capital over and above that which has been committed to it by the State and that the Promissory Notes are being financed by the Exchequer?]

      The Government has committed to ensuring that there is no forced or coerced involvement by the private sector burden sharing on Irish senior bank paper or Irish sovereign debt without the agreement of the ECB.  This commitment has been agreed with our external partners and is the basis on which Ireland's future financing strategy is built.  While the cost to the Irish taxpayer has been and will remain significant, the Government clearly recognises the need to work as part of the eurozone in order to ensure a return to the funding markets in the future.  The only EU state where private sector involvement will apply is Greece.

      The following was agreed by all 27 member states at the euro summit last October:

      15. As far as our general approach to private sector involvement in the euro area is concerned, we reiterate our decision taken on 21 July 2011 that Greece requires an exceptional and unique solution.

      16. All other euro area Member States solemnly reaffirm their inflexible determination to honor fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms.  The euro area Heads of State or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole.

      This was agreed by the Heads of State and Government at their meeting in October, and Ireland was included in the 27 states that agreed to it. [Minister Noonan fails to note here that it was on insistence of his own Taoiseach that article 15 does not include Irish banking sector resolution-related debts. And he deflects the arguments made by Deputy Mathews on feasibility of repaying these debts.]

      It is not correct to state that only taxpayers have borne the burden of rescuing the Irish banks.  Holders of equity in the banks have been effectively wiped out in burden sharing while holders of subordinated debt have incurred a €15.5 billion share of the burden to date, including €5.6 billion since this Government took office less than a year ago. [Again, Minister Noonan is dis-ingenious in his comments. Equity holders and bond holders are contractually in line for these losses. Taxpayers are not. In effect, Minister suggests that there is some sort of equivalence between treating harshly contracted parties to an undertaking and treating harshly an innocent by-stander. There is no such equivalence.]

      To impose burden sharing on senior bondholders, or to postpone the repayment of this bond at this point in time, is not in Ireland's best interest.  What is in the Irish people's best interest is that we regain our financial independence and that we place ourselves in a position to re-enter the financial markets at the earliest possible date...  We do not need to scupper our recovery, scupper the goodwill generated or alienate our partners by taking unilateral action which in the medium to long term will prove wholly counterproductive. [This is an outright conjecture by the Minister that is unfounded in fact. It is not in the interest of the Irish people to simply regain access to financial markets. It is only of such interest if we can regain it at a lower cost than alternative funding provided. Furthermore, his statement assumes that not repaying Anglo bondholders will cause the detrimental impact on 'goodwill' and the 'financial markets'. This remains to be tested and proven.]

      If we were to postpone or suspend payments to creditors of IBRC, this would have a significant impact on both the bank and, ultimately, the State. The senior debt, unsecured as it is, is an obligation of the bank. If the bank does not meet such an obligation, it would lead to a default and, following that, most likely insolvency. Insolvency would result in a very significant increase in the cost to the State to resolve the IBRC. [What cost? The Minister scaremongers the public, but cannot name a single tangible expected cost. Why is the interest of the bank aligned with the interest of the State, Minister?] ... Further, the financial market's view of Ireland as a place to do business or invest would be seriously undermined. [Is Minister Noonan seriously suggesting that Ireland's reputation as a place to do business or invest dependent so critically on a bust bank with worst history of speculative decision-making ability to repay its insolvent borrowings? Would IDA confirm they are directly referencing Irish taxpayers willingness to cover private sector losses in any undertaking, no matter how risky, as some sort of the 'investment promotion' positive for Ireland? Can Minister Noonan confirm that he has done the analysis of the effects that bonds repayments by Anglo, and the resultant increases in the sovereign debt have on sustainability of our Government's reputation in the bond markets? Does he not know/ understand that any investor looking at his statements will immediately price into their valuation of Government bonds the possibility that the Irish Government can at will, out of the blue simply hike its own debt pile in the future to suit some other risky private sector fiasco? What does that risk alone do to our 'reputation'?]

Deputy Peter Mathews: 

      While I will not get into a long debate, Greece will be the beneficiary of at least a 60% write-down of its debt obligations. The Greeks got the attention of their creditors by going out in the streets and having riots and by people being killed. We have knuckled down to correcting a fiscal imbalance and, at the same time, we have stayed silent. We have been straitjacketed by the legacy debt. Our loan losses in the banking system were €100 billion. While I know the shareholders and some of the subordinated bondholders suffered, the remaining losses were in the banks without being declared. The ECB stepped in to redeem bondholders to date, which was a mistake. We are compounding the mistake by going along the same route now.

      We have got to be honest about it and open up the discussion. We are not defaulting; we are opening a discussion. I made the point that we cannot pay. I use the word "we" euphemistically or collectively in regard to the bank and the State. We cannot pay because of the guarantee that extends over the bank. It is a case of us lifting the telephone and asking, "Can we have your attention, please?"  We cannot pay and we want to open a discussion and explain to exactly how the creditor liabilities of our banking system remain, and how they should be written down. There is further writing down to do. We have a €60 billion to €75 billion of write-down to organise and negotiate.

      To use an analogy, we have a steeplechase race with about four miles to go.  We have big jumps ahead.  Normally, a steeplechase horse will start with about 12 stone on its back.  Ireland's legacy debt of private debt, non-financial corporate debt and national debt when it peaks out at €120 billion is the equivalent of 24 stone on the back.  It is not a possible race to run.

Deputy Michael Noonan: 

      I do not disagree with Deputy Mathews' analysis.  However, we are in a situation which we inherited from our predecessors, who entered into solemn and legally enforceable commitments in respect of Anglo Irish Bank, as it was then.  Of course, Deputy Mathews is correct that we should do everything possible to reduce the debt burden on the taxpayers of Ireland and to enhance Ireland's capacity to repay its debts.  We are working on that and making some progress. [So that's it, folks. The Last Refuge of the Scoundrel = the arguments the Minister puts forward for expropriating personal property and income through higher taxation and reduced services for which we paid and continue to pay is: We are where we are. This alone should be very re-assuring to the future investors here.]