It has been a fairly bizarre 24 hours in Ireland, starting with leaks of an IBRC liquidation, then an all-night legislative sitting to pass emergency legislation, and ultimately ending with the ECB “unanimously taking note” of what seems to be a fairly credible and helpful deal on the promissory notes (details of the deal are below). As the dust settles, Ireland is left with a significantly reduced cash outflow over the next ten years, and a reduced national debt in current value terms. So we can chalk it up as a win for Ireland, notwithstanding the odd circumstances. Unambiguously Ireland is in a healthier position than it was before this deal.
This short-lived but dramatic saga began late on Wednesday afternoon, with media reports that Anglo Irish Bank (or more correctly IBRC) would be liquidated as part of a bank rescue solution.
Later that evening the government, as rumoured, published legislation to liquidate the failed bank, but it gradually emerged that this move was not part of an agreed solution to the promissory note problem, but a quick response to the earlier rumours. In other words, once the media started to report that Anglo would be liquidated if a deal was reached with the ECB, it very quickly became a self fulfilling prophecy as then a liquidation became inevitable to protect the bank against attempts by creditors to seize assets ahead of others in the queue.
The emergency legislation and Anglo liquidation out of the way, all eyes then moved to Frankfurt to see whether a deal would be agreed or not. Then we had a further twist as instead of explicitly announcing a deal, ECB head Mario Draghi instead limited himself to saying that the ECB Council "unanimously noted" the arrangements. It was not until Taoiseach Enda Kenny spoke in the Dail, sometime later, that the deal was announced and the details released.
The deal is very much in line with what was expected, but a short summary of the main provisions is below:
The promissory notes will essentially be cancelled and replaced with a number of long-term bonds, which will not need to be paid back until 34 years from now, on average. In the meantime, Ireland will of course need to pay interest on those bonds, but the amount of interest paid on the bonds will be far less, over the next eight years or so, than the €3.1bn per year repayment that would otherwise have had to be paid as part of the promissory note arrangements.
By agreement with the ECB, the Central Bank will take ownership of the special government bond issued to pay the 2012 installment of the promissory note.
The interest rate to be paid by NAMA/the Irish government on the bonds will be about 3%. This is higher than the very low rate that Anglo was paying to the Central Bank on the money it had borrowed, but in general terms is still very low for a 34-year loan.
As a result of all this, there will be a reduction of €20bn in the amount of money that the NTMA will need to borrow from the markets over the next decade.
The bottom line
There is no doubt that Ireland is better off as a result of the deal. Before the deal, the taxpayer was faced with an annual cash payment of €3.1bn for each of the next ten years. After the deal, the cash needed (to pay the interest on the new bonds) will be about €1bn. That is clearly good news and reduces Ireland’s funding needs over the next few years, when it is most stretched financially. From 2023 onwards, however, the amounts that would have been paid back under the promissory notes were due to fall, to around €2bn in 2024 and to about €1bn in each of 2025 to 2030, before falling away after that.
So if we think that the bill on the “new” bonds that replace the promissory note will be about €1bn, each year until 2038 and then falling slowly after that, we can see that the cash burden on the taxpayer is lower under the new arrangement each year until 2025, is about the same from 2025 to 2030, but is actually higher from 2030 onwards. Then in the period from about 2038 to 2053 the entire amount of the bonds will have to be repaid.
Importantly, it is in the next few years that Ireland badly needs the improved cash flow. To many policymakers, the years 2038 to 2045 can look after themselves! And on a more serious note, the value in today’s money of liabilities that don’t have to be repaid until 2053 is far lower than its current face value.
So the bottom line is clear. In today’s money terms, the cost of this debt has unambiguously fallen.
Could Ireland have got more?
Asking whether we are now better off than before the deal is not the only way of assessing today’s developments. We perhaps also need to think about what other deal might have been done.
Could the loans have been extended over an even longer period? Possibly, but 40 years is a very long period indeed, and it's hard to see it making much difference if it was extended to, say, 50 years.
Would the ECB have agreed to simply write off all of the debt? This was never a runner, realistically. Firstly it is almost certainly illegal under European law. Secondly, writing off debt is much more “visible” to taxpayers in other countries (most notably Germany), and thus much more controversial, than extending the duration of the debt. The impact is actually much the same in financial terms, but the political impact is very different.
Could the interest rate on the bonds have been set at a much lower rate? This might well have happened, and it would have been very helpful. The 3% rate on the bonds is significantly higher than the rate of around 1% that Anglo was paying on the money it had borrowed from the Central Bank, although it is much lower than the rate at which the government would be able to borrow money on the open markets, for such a very long period (if indeed it was possible to borrow the money in the first place).
One other consideration is that the debt is now directly owed by the Irish taxpayer, whereas before this deal it might, perhaps, be argued that the promissory note was owed to Anglo, and as Anglo was owned by the taxpayer, it wasn’t a “real” debt. That never seemed like a very credible argument, but it is certainly even harder to make that case now, given that the debt will be in the form of government guaranteed bonds.
Also, it should be noted that the EU has given a commitment to "break the link" between governments and their banks, which was interpreted to mean that European taxpayers might contribute to writing off some past debts run up by the Irish government to rescue its failed banks. Today's deal is a very separate process to that, as it involves the European Central Bank, and not European governments. The government should not necessarily give up on persuading other EU governments to take more measures by, for example, buying the stakes that the government owns in some Irish banks.
The strange twists and turns of yesterday and today will soon be forgotten, but the deal to reduce the burden of the promissory note is significant. It distinctly reduces Ireland's debt burden. We will never know, probably, whether a better deal could have been done if a different negotiating strategy was used, but we do know that Ireland is better off after this deal than it was before.
All that said, there is still a very large gap between government spending and government revenue, even after this deal (which is more about easing cash flow than reducing the accounting measure of the deficit), and austerity policies will need to remain in place – this deal is no panacea to Ireland’s fiscal woes. But the deal is a significant step on the road to recovery, and should not be underestimated - for example the Taoiseach has already announced that the amount of austerity required in the next two budgets will be €1bn less as a direct result of this deal.