2. Anglo & INBS Crash
2008 – Irish property bubble spectacularly bursts
September 2008 bank guarantee
◦ 2009 – Merrill Lynch states “Anglo is financially sound”
◦ 2009 – Anglo is nationalised
◦ March 2010 – Anglo posts the largest loss in Irish corporate
history (€12.7 billion for 2009)
◦ March 2011 – Anglo then breaks its own record (€17.7
billion loss for 2010)
◦ The INBS numbers are proportionally even worse
◦ Both banks insolvent
3. Now - The IBRC
Anglo Irish Bank = €29.3 billion
◦ Defunct – no new deposits and no new loans
◦ Insolvent
◦ Under criminal investigation
Irish Nationwide Building Society = €5.4 billion
◦ Defunct – no new deposits and no new loans
◦ Insolvent
€30.6 billion promissory notes – to pay for ELA
◦ Letters of comfort
◦ Never brought before the Oireachtas
€4.1 billion exchequer payments
4. Guarantee
The Anglo/INBS debts were originally guaranteed
by the Irish State in September 2008 as part of the
blanket bank guarantee
The Irish Government made an initial payment of
€4 billion to cover Anglo‟s debts in 2009. This was
paid out of the exchequer finances. €0.1 billion was
paid to INBS
Over the course of 2009 and 2010 it became
increasingly clear that Anglo and INBS were
insolvent
5. Averting Collapse
If the insolvent banks were to collapse their debts
would have fallen back on the Irish State and
become sovereign debt - a consequence of the
bank guarantee
To prevent this the Irish Government had to obtain
external funding – the Eurosystem of Central
Banks was the only realistic source of this funding
Anglo did not have sufficient eligible (i.e. good
quality) collateral to obtain the required amount of
Emergency Lending Assistance (ELA) from the
Central Bank
6. Emergency Lending
Assistance
To prevent their collapse the Government
negotiated a mechanism with the Central Bank of
Ireland setting out the conditions under which the
Central Bank would provide Anglo/INBS with
sufficient Emergency Lending Assistance (ELA)
This required the implicit consent of the European
Central Bank (ECB) governing council.
Any future changes to the agreed mechanism also
require the consent of the ECB governing council
7. Paying Back the ELA
The ELA provided by the Central Bank to the
IBRC is what enables the IBRC to pay-off its
obligations
Most of the bondholders have now already
been paid using this ELA
The ELA is also used to pay-off
creditors/depositors and to enable the IBRC to
retain its banking license
Eventually the ELA has to be paid back to the
Irish Central Bank
This is done through promissory note
repayments
8. Promissory Note
The Irish Government negotiated with the
ECB governing council to create a
„promissory note‟ as a liability owed to the
IBRC (Anglo/INBS)
The promissory note is therefore an asset
of the IBRC
This asset can be used by the IBRC as
collateral to obtain the necessary ELA from
the Central Bank
This is because the Irish Government is
backing the promissory note with „letters of
comfort‟
9. The price
A promissory note is a negotiable
instrument
◦ one party (in this case the Government) makes an
unconditional promise in writing to pay a defined sum of
money to the other party (in this case Anglo/INBS – now
called IBRC), on specified future dates or on dates to be
determined, under specific terms
The State‟s obligation is to pay down
€30.6 billion over 20 years (2011-
2031)
10. How it works
The promissory note repayments are paid to
the IBRC – the IBRC then reduces its ELA
obligations to the Central Bank
In practical terms the Irish Government has
received a loan from the Central Bank to pay
off the bondholders
It is ultimately a transfer of wealth from the people living
in Ireland to the bondholders that lent to Anglo/INBS
The bondholders and other creditors continue to be
paid using the ELA from the Central Bank – the
promissory notes represent our commitment to
eventually repay the Central Bank
11. How much it costs
The Irish Government is scheduled to make over €47 billion
of promissory note related payments between March 2011
and March 2031. This is composed of:
◦ €30.6 billion capital reduction – the €30.6 billion owed
◦ €16.8 billion in interest repayments
Much of the funding for this will need to be borrowed unless
the State is running substantial fiscal surpluses. This is very
unlikely in the medium-term
These borrowings will therefore also have to be financed
◦ at an assumed 4.7% interest rate on borrowings the total cost to
the State will reach €85 billion by 2031
◦ Some of which will eventually return to us due to the circular
nature of the payments
12. What happens when the ELA is paid
back to the Central Bank?
Central Bank of Ireland (CBI)
Asset side of their balance sheet
◦ CBI reduces its ELA assets by €3.1 billion
Liability side of their balance sheet
◦ CBI expunges €3.1billion from the system
◦ Inflationary impact if this is not done – increasing the
money supply (monetisation of debt)
13. Socio economic implications
Over 2% of GDP will be drained out of the
State each year up to 2023 to make the
promissory note repayments
◦ this will be through an additional €3 billion to €4 billion
of fiscal consolidation (tax increases/spending cuts)
IMF research (Leigh et al, October 2010) indicates
that each 1% of fiscal consolidation:
◦ reduces GDP by 0.5% to 1% and
◦ Increases the unemployment rate by 0.3 percentage
points
14. Socio economic implications
The €3.1 billion promissory note payment due to be
made by the state on behalf of the former Anglo on
March 31 2012 is:
◦ greater than the total cost of running Ireland‟s entire
primary school system for an entire year and
◦ greater than the estimated cost to provide a next
generation broadband network for all of Ireland (€2.5
billion).
€30.6 billion is equivalent to just under 20% of
Ireland‟s current GDP or €17,000 for each person
working for pay or profit in the State. €47.9 billion is
30% of Ireland‟s current GDP.
15. The issue
The interest rate is not the issue
◦ A red herring
The real issues are:
The size of the principal
◦ Reduction in the principal – write down
When we are making the repayments
◦ Changing the schedule of repayment –
holiday, postponement
16. Risks in promissory note
suspension/postponement?
1. “The ECB will cut off funding to our
pillar banks”
2. “It will impact on the European banking
system”
3. “It will undermine investor confidence in
Ireland”
4. “It is a condition of the EU/IMF
Memorandum of Understanding”
Are these risks plausible?
17. Risks to
suspension/postponement?
“That the ECB would cut off funding to our pillar
banks”
◦ Remove funding and the pillar banks will fall
◦ But this would trigger the very contagion the ECB has been
trying to prevent
◦ ECB cannot give the pillar banks inferior T&C to other Euro
zone banks
“Impact on the European banking system”
◦ Promissory note payments do not involve the European
banking system
◦ No precedent created as IBRC is not a functioning bank
18. Risks to
suspension/postponement?
“Undermine investor confidence in Ireland”
◦ Not a sovereign default
◦ Ireland is already shut out of the markets and locked into
an official programme of assistance until the end of 2013
◦ Amelioration of the Anglo/INBS burden improves Ireland‟s
debt dynamics and makes Ireland better placed to pay its
other debts
“A condition of the EU/IMF Memorandum of
Understanding”
◦ The promissory note repayments are not a condition of the
deal agreed with the troika
19. Decision makers - ECB Governing
Council
ECB concerns:
◦ Precedent regarding repayment of debt obligations –
parachute drop analogy - floodgates
◦ Adherence to rules and protocols – is flexibility legal?
◦ Mildly inflationary – monetization of the debt
But the ECB need a success story
◦ The Greek programme has already failed
◦ The Portuguese programme is failing
◦ Italy is in the firing line
◦ Promissory note flexibility can help prevent the Irish
programme from failing
21. What about the bond?
€1,250m of Anglo Irish Bank senior
bonds
◦ Not covered by the guarantee
◦ Not secured against Anglo‟s assets
Disingenuous to say we are not
paying it
Moral hazard and the ECB
