Anglo promissory notes as a bargaining chip.

andrew

A lot of people here have been wondering why Anglo promissory notes are being repaid; why are they being paid at all, and why are they being paid at the interest rate they're currently being paid.

As can be seen here, the economic argument for their repayment isn't particularly strong. Not paying these notes, or restructuring them, would not lead to any kind of European wide contigen because the money is owed to the Irish central bank. The strongest argument for their repayment comes down to the idea that just printing money in order to pay these debts is inflationary, and creates a bad precedent. Valid arguments for sure, but a once off injection of 50 Billion into an economy worth trillions probably doesn't matter that much, and it's not as if the ECB doesn't have heavily anchored inflation expectations. And bad precedents need not necessarily create bad outcomes in the future. In any case, even repaying them over a longer period would eliminate the inflation, precedent problem.

There's also the idea that perhaps they're being paid as a form of signalling. Maybe the government is paying them in order to show that Ireland can and will pay off anyone it needs to, as a way of convincing markets that it means business.

But perhaps the reason nothing has been done with these promissory notes yet is because they have existed as a political card which the trokia and/or the Irish government has kept in reserve, to play when or if they needed to create some political capital among Irish voters. They knew that if they ever really needed to get something done, something like a Fiscal Treaty, then the promissory notes were there to get them out of a tight spot. A cancellation or restructuring of the debt and then suddenly Enda Kenny is massively popular, and the trokia and Europe are seen as reasonable sound institutions which have listened to the Irish people. The Irish people then, for example, vote yes in a fiscal treaty, and everyone's happy.

I think that that's the reason there's been no action on these bonds at all yet. The trokia aren't stupid. They know that the argument for repaying them is weak. They know that it might even be unsustainable. They know that a cancellation/restructuring would be massively popular. They're just biding their time, and not using their most valuable bargaining chip until they really need to.

The implication of this is of course that the vote on the fiscal treaty is exactly the kind of political capital requiring event which would lead to a change regarding the promissory notes. While the government have insisted that this isn't the case, I think it's possible (and I wish there was a way to word this without sounding like a dickhead who thinks they know everything and has all the answers) that prior to the fiscal treaty there'll be a restructuring or cancellation of the Anglo debt, in order to generate a yes vote. What do people think?

Good loser

The promissory notes cannot and will not be written off.

The terms of the repayments may/will be extended.

Contagion is a definite danger.

Consider the Greek debt. If the Greek Central Bank was allowed create (print) its own money (euros) they could eliminate their debts effortlessly. See the problem?

andrew

Good loser wrote: »

The promissory notes cannot and will not be written off.

The terms of the repayments may/will be extended.

Contagion is a definite danger.

Consider the Greek debt. If the Greek Central Bank was allowed create (print) its own money (euros) they could eliminate their debts effortlessly. See the problem?

I agree that them being written off is significantly less likely than the terms being extended. But not so unlikey that there's a 0% chance that that happens, so that's why I mentioned it. Even perhaps some but not all of it could be written off.

How is contagion a definite danger in this case? And yeah I see the problem were Greece to do that, but how is that relevant given Greece havn't done that?

later12

Excellent post andrew, I do just have one rather nit-picking point to emphasise.

andrew wrote: »

I think that that's the reason there's been no action on these bonds at all yet.

Whilst referring to these obligations as bonds is a perfectly acceptable term in the sense that it is a term people can identify, I think it is important to stress that these promissory notes are not sovereign bond instruments: repudiating them (bad idea, as per the Karl Whelan ppt) or restructuring them in their current form carries none of the direct, adverse implications that restructuring and repudiating sovereign bonds can normally imply.

That is to say, the love triangle involving the ECB, the Government and Anglo Irish Bank is essentially a private matter whose re-assessment does not involve the financial markets directly, but which does have a huge bearing on the sustainability of the National Debt.

I know that you didn't suggest otherwise, I just think this point can't be emphasised enough. As I said, v. informative post, I would love to hear an argument to the contrary based on economic principles.

Skopzz

Good loser wrote: »

The promissory notes cannot and will not be written off.

The terms of the repayments may/will be extended.

Contagion is a definite danger.

Consider the Greek debt. If the Greek Central Bank was allowed create (print) its own money (euros) they could eliminate their debts effortlessly. See the problem?

NO NO NO!

The promissory notes CAN be written off... Noonan has already burnt € 5 billion worth of bondholder junk last year. He has the opportunity to go further. He's too busy capitulating to the illusion that we can continue when clearly we're heading down the path of Greekification.

The problem is that we cannot monetize debt because the Euro treaty prohibits it (as well as the pressure from zhe nazi German ECB board members). I mean this in the nicest possible way.

bbam

I'd say the truth is that a deal to extend them has already been done.. People like Mrs Burton and co who are calling for it will sit back and say "they" forced it through and so should be re elected next time round...

Also... if the terms are extended, isn't that a bad deal as the overall repayment will be more... It's kinda like those who consolidated car and holiday loans onto their mortgage... lower current payments but hugely more payments in total ??

later12

One might have hoped that the 31 March due date on the upcoming Anglo promissory note would mean that a deal would be reached before that date, and therefore the issue would not dominate the Fiscal Treaty referendum.

However, I noticed this snippet in the Irish Times this morning

Government sources yesterday told The Irish Times while they are confident a deal reducing the debt will be reached, it is unlikely to be finalised before the vote.

I find this slightly bewildering. The referendum will not be held until late May or June. How can the negotiations - which really must be technical, and must not be political in light of the fact we are dealing primarily with the ECB - take such a long time?

These technical negotiations are said to have been going on for months now, what on earth is taking them so long? There is some cynical fodder here for the suspicious mind.

andrew

later12 wrote: »

One might have hoped that the 31 March due date on the upcoming Anglo promissory note would mean that a deal would be reached before that date, and therefore the issue would not dominate the Fiscal Treaty referendum.

However, I noticed this snippet in the Irish Times this morning


I find this slightly bewildering. The referendum will not be held until late May or June. How can the negotiations - which really must be technical, and must not be political in light of the fact we are dealing primarily with the ECB - take such a long time?

These technical negotiations are said to have been going on for months now, what on earth is taking them so long? There is some cynical fodder here for the suspicious mind.

That's still quite a step from the 'never' stance of a few weeks back; it seems to be creeping ever closer in terms of political viability as well as temporally. It could well be pushed forward surely.

Scofflaw

andrew wrote: »

That's still quite a step from the 'never' stance of a few weeks back; it seems to be creeping ever closer in terms of political viability as well as temporally. It could well be pushed forward surely.

Article from Dow Jones which suggests it's definitely getting closer:

DUBLIN (Dow Jones)--Ireland's bailout lenders have completed much of the technical work on rescheduling EUR31 billion in promissory notes the Irish government has pumped into dead banks, and are now weighing a much wider "retro-refinancing" of the huge costs it has shouldered during the country's banking crisis, a personal familiar with the matter said Monday.

In an interview with Dow Jones Newswires, a senior Irish official said there was "cautious optimism" that a complex deal to free the government from paying the next, EUR3.1 billion installment on the promissory notes will be struck by the end of this month.

http://www.dowjones.com/products/djfxtrader/articles/INTERVIEWSeniorIrishOfficialSeesWiderRefinancingOfBankBurden.asp

cordially,
Scofflaw

Good loser

Heard today all EU countries have to consent to any deal on the promissory notes.

Can't imagine other countries not feeling entitled to a similar scheme for themselves.

If any other country gets a deal we will be contributors.

Skopzz

No EU country has to ''agree''. Noonan unilaterally burned €5bn off these bondholders last year and that proved 100% successful as evident by the fact bond yields fell afterwards. This is not sovereign debt - it's private debt... It CAN be burned by the Gov't.



However, if FG / LAB insist on taking this path, by 2016, the national debt of Ireland will be well over €200bn and even if we were to balance the books by then, get the economy growing and start making interest repayments of €3bn a year, it would still take decades before we even begin to start repaying the actual capital loan itself. Voting no will force the government to reverse this.

Head The Wall

Less of the idiotic ranting and focus on the real issue which is the current deficit which will end up costing us way more than the banking issue.

Skopzz

But the deficit doesn't need to be increased by including bank debt. The bank debt can be wiped if the promissory note is burned. I'm sure any of the readers here would accept your view as superior to any economist...

Scofflaw

Skopzz wrote: »

But the deficit doesn't need to be increased by including bank debt. The bank debt can be wiped if the promissory note is burned. I'm sure any of the readers here would accept your view as superior to any economist...

Burning junior bondholders isn't the same as "burning" the promissory notes. The latter is a sovereign default.

cordially,
Scofflaw

Skopzz

Scofflaw wrote: »

Burning junior bondholders isn't the same as "burning" the promissory notes. The latter is a sovereign default.

cordially,
Scofflaw

The promissory note can be ring-fenced, thus separating it from sovereign debt and avoid being classed as a sovereign default.

andrew

Scofflaw wrote: »

Burning junior bondholders isn't the same as "burning" the promissory notes. The latter is a sovereign default.

cordially,
Scofflaw

Isn't it the former which would be default (as per Later12's post above)

Skopzz

andrew wrote: »

Isn't it the former which would be default (as per Later12's post above)

The disparate ways in which Iceland and Ireland addressed the bank crises provide only a partial explanation for Iceland's recent, dramatic economic outperformance. Right now, there is a major bargaining chip. In other words, the debt should be written off (like Iceland did).

Hayte

Scofflaw wrote: »

Burning junior bondholders isn't the same as "burning" the promissory notes. The latter is a sovereign default.

cordially,
Scofflaw

Please correct if any of the following is incorrect.

1) Bank guarantee made in late 2008.

2) Anglo nationalised in early 2009 when the Minister for Finance delists Anglo from the Irish Stock Exchange and compulsorily acquires all of Anglo's shares.

3) Anglo posts the biggest annual loss in Irish financial history in early 2010. The bank is widely regarded to be insolvent. Because of the bank guarantee, the collapse of Anglo means that its liabilities become the state's liabilities.

4) To prevent Anglo and Irish Nationwide from collapsing, they are merged in mid 2010 and become an asset recovery bank called IBRC.

5) IBRC had such poor collateral that it was ineligible for Emergency Liquidity Assistance (ELA) from the ECB.

6) Irish government secures ELA from the Central Bank of Ireland (with the consent of the ECB) in early 2011.

7) Irish government draws some €47 billion worth of ELA from the Central Bank of Ireland and pays off IBRC creditors (including bondholders). To date, most of IBRC's creditors have been repaid in full.

8) Irish government position changes from having to indemnify IBRC (not really quantifiable but HUGE) losses to having to indemnify the Central Bank of Ireland for some €47 billion in ELA. Repayment of the ELA to the Central Bank of Ireland is through promissory note payments. More particularly, the promissory notes are the collateral deposited with the Central Bank of Ireland in exchange for credit to pay down IBRC creditors.

9) The promissory note is a liability of IBRC but is treated like a line of credit so you can also think of it like an asset (a debt security). When does a liability become an asset? Its almost a circular question at this point because of all the implicit guarantees. When is an asset not an asset? When its a liability. At this point I think everything is anything you want it to be so long as nobody else complains about it.

Its a questionable distinction at best since, as a debt security its performance is predicated on the unwavering ability of the Irish government to pay €47 billion to IBRC by 2031 (some 31% of 2011 GDP). The IBRC then pays back the Central Bank of Ireland to fulfill its ELA obligations.

I think the idea is to not entertain any of these questions, defer the problem for 20 more years and hope 20 years is a long enough time for:

a) the economy to pick up, so that the following are realistic prospects:

b) you have enough time to ram your stealth tax bills through the Oireachtas.
c) you have enough time for peeved off citizens to forget that it was you that rammed those stealth tax bills through the Oireachtas.
d) you stealth tax the living hell out of everything because the money gotta come from somewhere right?

If IBRC via the state cannot fulfill its ELA obligation then the Central Bank of Ireland doesn't become...insolvent, at least not technically. Its a national central bank so it can create money if it has to. Its just bound by EU regs that prohibit how much it can create because of the inflationary effect it would have across the entire monetary union. To prevent that sort of abuse, the monetary union is set up so you have to deliver collateral to the national central bank in exchange for credit - you gotta deposit unlimited collateral if you want unlimited credit. But the IBRC collateral is s*** so, uhhh. I don't know how to say this exactly so I'll just come out and say it:

Its either can kicking or stealth quantitative easing. That or its a confusing mix of both so nobody can ever be certain that our fair and broke nation is dogging on the monetary union.

later12

Scofflaw wrote: »

Burning junior bondholders isn't the same as "burning" the promissory notes. The latter is a sovereign default.

I think use of the term "sovereign default" in that context is at best disingenuous.

Most people would associate sovereign default with financial markets and CDS and BACs and general calamity. So lets be clear. Multilaterally agreeing to make a camp fire of these obligations carries none of the normal adverse implications that even a multilaterally agreed sovereign default ordinarily implies.

Scofflaw

later12 wrote: »

I think use of the term "sovereign default" in that context is at best disingenuous.

Most people would associate sovereign default with financial markets and CDS and BACs and general calamity. So lets be clear. Multilaterally agreeing to make a camp fire of these obligations carries none of the normal adverse implications that even a multilaterally agreed sovereign default ordinarily implies.

Multilaterally, certainly. Unilaterally it's a default on contractual obligations - but, yes, not quite the same as a default on debt owed to someone in particular, even if it might well have similar effects on our market ratings and bond spreads.

It's not "disingenuous", though, since it's the closest applicable piece of terminology, and I'm not suggesting by using the term that someone else is losing out - I have been pretty clear on the distinctive nature of the promissory notes throughout.

cordially,
Scofflaw

later12

Ah, I see; yes I agree that sovereign default is the closest useful terminology. "Default of non-traded sovereign obligation" doesn't quite trip off the tongue.

Apparently there is now some talk of exchanging the 31'st March 2012 Note with a new note until the ECB and the Irish authorities are in a position to agree on a methodology for dealing with the entire stock of promissory notes.

Hopefully whatever they conclude will allow the state maintain the core promissory note arrangement, which at least gives us a certain amount of flexibility.

jimmycrackcorm

But would it be actually viewed by the markets as a sovereign default if it is only a central bank write-off -i.e. no default on private bonds?

later12

There is no serious reason to suggest a restructuring would be seen as a sovereign credit event/ default because it is a transaction that directly excludes market participants.

Its settlement is a private affair between the Irish Government, the Irish Central Bank and and ECB.

For example, the interest schedule on this obligation has already been restructured once in the past. Just like that did not adversely affect the market, its potential second restructuring would have no adverse affect on market participants either.

In fact the only interest the CRAs might have in this obligation is if its restructuring improved the overall credit worthiness of the Irish state.

Scofflaw

later12 wrote: »

There is no serious reason to suggest a restructuring would be seen as a sovereign credit event/ default because it is a transaction that directly excludes market participants.

Its settlement is a private affair between the Irish Government, the Irish Central Bank and and ECB.

For example, the interest schedule on this obligation has already been restructured once in the past. Just like that did not adversely affect the market, its potential second restructuring would have no adverse affect on market participants either.

In fact the only interest the CRAs might have in this obligation is if its restructuring improved the overall credit worthiness of the Irish state.

That's an opinion which should come with a strong health warning that it's really just an opinion, while the attitude of the troika to suggestions of unilateral action have been both definite and negative.

And while one might make the claim that by unilaterally restructuring the promissory notes we would regain market access more readily, and therefore need not concern ourselves so much with the troika's opinion, I would say that that's a very much larger claim than it first appears.

The issue is not so much the deficit in this instance, but 2013 and the relatively large rollover of existing debt that matures then. Sufficient market access to allow the rolling over of that debt seems to be very much on the edge of possibility, with most of the room for movement on the downside - again, as per the IMF:

Finally, the report reviewed the prospects for the government regaining access to market funding. Recent market developments are favorable, with the spreads of Irish bonds falling to about 450 basis points on 2-year bonds, down from a peak of 2,200 basis points in the middle of 2011. The government is in regular contact with market participants and currently intends to return to the markets by issuing treasury bills in the second half of 2012. We think it's reasonable at this stage to expect the modest market financing projected for 2012 will be achieved, although developments will be kept under review.

There is a more substantial need for market funding in 2013. Whether the government manages to meet its financing needs next year will depend not only on continued strong policy implementation on its part, but also on developments in the Euro Area. Because of this uncertainty, the IMF staff is encouraging the European authorities to proactively take steps to reinforce the prospects for Ireland having adequate market access in 2013. Such steps could help Ireland avoid ongoing reliance on official funding and would also contribute to overall European economic stability.

I'd certainly like to see the promissory notes restructured to our advantage, but I wouldn't really hazard doing it unilaterally on a rather blithely optimistic view that the markets will instantly love us afterwards, and that with their love we would need no other - I don't think either of those claims have been shown to be good bets, never mind beyond reasonable doubt.

cordially,
Scofflaw

later12

Scofflaw wrote: »

That's an opinion which should come with a strong health warning that it's really just an opinion, while the attitude of the troika to suggestions of unilateral action have been both definite and negative.

And while one might make the claim that by unilaterally restructuring the promissory notes we would regain market access more readily, and therefore need not concern ourselves so much with the troika's opinion, I would say that that's a very much larger claim than it first appears.

I'm not talking about unilateral restructuring in the above post. Multilateral restructuring operations can be perceived negatively by the financial markets, and I am just pointing out that this is not going to be one such case.

As far as I can see, most people who are discussing the promissory notes in a serious way are not discussing or supporting a unilateral decision (at this stage). Unilaterally restructured notes would pose accounting and legal problems for the issuance of ELA to IRBC and that is not a path we want to go down.

I think these technical problems are a much bigger danger than the risk of unfavourable memories of a unilateral restructuring by the EU leaders in the event of a second Irish bailout, at which point saving the Union is likely to be a much bigger consideration than settling an old score, even for our most Teutonic friends.

Scofflaw

later12 wrote: »

I'm not talking about unilateral restructuring in the above post. Multilateral restructuring operations can be perceived negatively by the financial markets, and I am just pointing out that this is not going to be one such case.

Sure - there I agree entirely.

later12 wrote: »

As far as I can see, most people who are discussing the promissory notes in a serious way are not discussing or supporting a unilateral decision (at this stage). Unilaterally restructured notes would pose accounting and legal problems for the issuance of ELA to IRBC and that is not a path we want to go down.

But here I don't - people certainly are explicitly putting forward the idea of a unilateral restructuring.

later12 wrote: »

I think these technical problems are a much bigger danger than the risk of unfavourable memories of a unilateral restructuring by the EU leaders in the event of a second Irish bailout, at which point saving the Union is likely to be a much bigger consideration than settling an old score, even for our most Teutonic friends.

And here I'm not sure what that last remark means.

cordially,
Scofflaw

Geuze

Hayte wrote: »

Please correct if any of the following is incorrect.

9) The promissory note is a liability of IBRC but is treated like a line of credit so you can also think of it like an asset (a debt security). When does a liability become an asset? Its almost a circular question at this point because of all the implicit guarantees. When is an asset not an asset? When its a liability. At this point I think everything is anything you want it to be so long as nobody else complains about it.

Your post is very good, except the infamous PN are an asset to IBRC. They are a liability of me and you, the State, the taxpayer.

They appear on the asset side of IBRC's balance sheet.

later12

Scofflaw wrote: »

But here I don't - people certainly are explicitly putting forward the idea of a unilateral restructuring.

Yes, some people are. But as I said, it seems to me that most people who are discussing it in a serious way are not.

And here I'm not sure what that last remark means.

It was a reference to the nationalities of the representatives on the governing council who are speculated/ suggested to be those most opposed to the restructuring on economic principles.

later12

I think this is a little intriguing. Michael Noonan reports that the ECB are unhappy with the structure of the €30 billion Promissory Notes

http://www.irishtimes.com/newspaper/breaking/2012/0315/breaking153.html

The European Central Bank is "not enamoured" by the structure of about €30 billion of so-called promissory notes used by the State to bail out the former Anglo Irish Bank, Minister for Finance Michael Noonan said today.

"You could take it that the ECB were never particularly happy with the level of collateral provided by the promissory notes and would like stronger collateral," Mr Noonan said in an interview with RTÉ.

He said the ECB will be "crucial" in any decision to restructure the notes to lower the cost of the Anglo bailout, and warned that any changes requested by the ECB would have to align with Ireland’s interests and position the country so markets could see that Ireland can repay its debts and return to the market at a low price.

There has been some speculation before these comments that what might happen on the Promissory Notes was that they could be replaced by ESM funds. These comments now seem to add some fuel to that speculation.

The danger here, I would suggest, is of any such reform of the notes which might sovereignize them, for want of a better word, in that they could become more akin to sovereign bonds; this would make any future alteration to the terms of the notes a good deal more hazardous and would be a very hollow victory for the Government.

Scofflaw

later12 wrote: »

Yes, some people are. But as I said, it seems to me that most people who are discussing it in a serious way are not.

Sure.

later12 wrote: »

It was a reference to the nationalities of the representatives on the governing council who are speculated/ suggested to be those most opposed to the restructuring on economic principles.

Something of a cheap shot, perhaps, then, given that the speculation/suggestion is just that?

cordially,
Scofflaw

later12

It wasn't a cheap shot because it wasn't a shot at anyone - the Germans and Austrians are perfectly entitled to their opinion on ELA and other extraordinary monetary operations.

The ECB GC tends to aspire to unanimity and generally adheres to non public disclosure of dissent amongst its members.

I think the identity of the dissenting members is pretty well accepted, but I've no problem if someone wants to reject that. I don't particularly see why it seems to even require this elaboration.

Scofflaw

later12 wrote: »

It wasn't a cheap shot because it wasn't a shot at anyone - the Germans and Austrians are perfectly entitled to their opinion on ELA and other extraordinary monetary operations.

The ECB GC tends to aspire to unanimity and generally adheres to non public disclosure of dissent amongst its members.

I think the identity of the dissenting members is pretty well accepted, but I've no problem if someone wants to reject that. I don't particularly see why it seems to even require this elaboration.

I think I must be allergic to 'speculation'.

cordially,
Scofflaw