Playing a high-stakes game of poker

on 07/02/2013 00:00:00

But so far, Frankfurt has not said either yea or nay.

Both Coalition parties had publicly committed to not paying the €3.1bn promissory note at the end of March. It now looks as if they have kept their promise to the electorate.



But at what cost?

To recap, Brian Lenihan, the then finance minister, issued €31bn in promissory notes in Mar 2010 to cover crippling losses in Anglo Irish Bank. The agreement was that the Government would pay back €3.1bn every March until 2023.

Obviously, this would put huge funding pressure on the State. Ever since the current Government took office, it had pledged to restructure the bank debt.

The proposed deal for the promissory notes is as follows: With the agreement of the ECB, the Government will issue a €31bn bond to the Central Bank with a long-dated maturity - as much as 40 years. This will be used to replace the promissory notes.

The Government will have to repay this bond when it matures. The crucial issue will be how long the Central Bank is allowed to hold on to the bond before it starts offloading it to private investors.

Under the promissory note arrangement, the Government paid IBRC, formerly Anglo, €3.1bn plus interest every March. IBRC paid the Central Bank €3.1bn plus interest. The interest rate payments stayed within state institutions.

Under this proposed arrangement, the interest rate will become important when the Central Bank issues the government bond to private investors.

The Government will have to pay that interest bill every year. If the bond is issued at market rates the interest rate could be punitive. The Government will be hoping it is at a rate closer to what the ESM can issue on debt. It will also mean the Central Bank is issuing sovereign debt at the same time as the NTMA.

A number of issues remain unclear. The IBRC still has €16bn in assets. At what value are these transferred to Nama? If they are transferred at market value Nama would have to issue a Nama bond to the Central Bank to cover these losses.

The liquidation of IBRC resolves one issue: Its long-running dispute with the Department of Finance over its operating model.

It is believed that tensions had been mounting between the two over recent months. The department had been putting pressure on IBRC to sell assets and generate much needed cash.

How many of IBRC's 800 staff are transferred to Nama will be known over the next few days. What happens to chief executive Mike Aynsley and chairman Alan Dukes is also unclear after the board was stood down last night.

IBRC has many legal battles looming with the Quinn family as well as ex-Anglo executives, including Seán FitzPatrick. What are the implications on these cases arising out of its liquidation?

Market sources have raised concerns that the Government's proposal is similar to a deal the ECB rejected two weeks ago.

Following that setback, an ECB source told the Irish Examiner the proposal was too close to monetary financing, which is banned under the ECB's mandate.

There are concerns that because the Government has conducted a lot of its negotiating in public, it has not reached the best solution for taxpayers. It is believed the ECB would have preferred if a deal had been done through the ESM. This would have required a longer lead-in time.

And by publicly declaring a deadline of Mar 31, the Government had blocked this avenue.