Tom McDonnell: There is a real risk that any old deal in advance of the 31 March payment will be hailed as a victory after the failure to get a deal on the promissory notes last year. No matter how bad the deal actually is.
In that context Nama Wine Lake provides a quick overview here of what would and wouldn't constitute a deal. Just eleven weeks to go.
Showing posts with label promissory notes. Show all posts
Showing posts with label promissory notes. Show all posts
Monday, 14 January 2013
Thursday, 13 December 2012
Open debate on paying the promissory notes - the long countdown
Tom McDonnell: Various official sources (including Ministers) have been making the claim in recent days that the 2012 promissory note to the IBRC went unpaid. Sadly this is untrue.
The ECB insisted all along that it receive its ELA repayment from the IBRC on time on 31 March and this is exactly what happened. The repaid money was then destroyed/deleted/burned/expunged on time and as scheduled.
It is true that the money promised to the IBRC was initially paid to the zombie bank by the state-owned NAMA (in exchange for a 13 year government bond given to IBRC by the Irish State) rather than by the exchequer. Nevertheless it was paid using 'our' money - we own NAMA after all. Following a series of subsequent exchanges the bond is currently held by Bank of Ireland.
A slightly irritated ECB watching the shenanigans merely acknowledged that it got paid on time as expected and that it had observed certain transactions betwen various Irish state institutions.
That the promissory note was paid (by issuing a sovereign bond) is stated clearly in the Department of Finance's Medium Term Fiscal Statement. Much of the confusion may stem from the media's general failure to accurately report and explain what happened on 31 March - understandable given the byzantine nature of what occurred. Fortunately not everyone in civil society has been taken in by the official line. For example the Debt Justice Action group has a letter in today's Irish Times which draws attention to this issue.
The government's next payment to the IBRC will not be made for 108 days. There needs to be an open and honest public debate about the subsequent promissory note payments to the IBRC. All options have to be on the table.
The ECB insisted all along that it receive its ELA repayment from the IBRC on time on 31 March and this is exactly what happened. The repaid money was then destroyed/deleted/burned/expunged on time and as scheduled.
It is true that the money promised to the IBRC was initially paid to the zombie bank by the state-owned NAMA (in exchange for a 13 year government bond given to IBRC by the Irish State) rather than by the exchequer. Nevertheless it was paid using 'our' money - we own NAMA after all. Following a series of subsequent exchanges the bond is currently held by Bank of Ireland.
A slightly irritated ECB watching the shenanigans merely acknowledged that it got paid on time as expected and that it had observed certain transactions betwen various Irish state institutions.
That the promissory note was paid (by issuing a sovereign bond) is stated clearly in the Department of Finance's Medium Term Fiscal Statement. Much of the confusion may stem from the media's general failure to accurately report and explain what happened on 31 March - understandable given the byzantine nature of what occurred. Fortunately not everyone in civil society has been taken in by the official line. For example the Debt Justice Action group has a letter in today's Irish Times which draws attention to this issue.
The government's next payment to the IBRC will not be made for 108 days. There needs to be an open and honest public debate about the subsequent promissory note payments to the IBRC. All options have to be on the table.
Wednesday, 14 November 2012
The Default Option - Cancelling the Odious Debt
Tom McDonnell: We have seen again in the last few days that the troika are a not a monolith.
They disagree quite fundamentally on many issues.
It is widely understood that the debt crisis professionals (the IMF) were overruled at an early stage by the debt crisis amateurs (ECB/European Commission). Greece was originally prevented from defaulting and then not allowed to default to a sufficient degree to restore its debt dynamics to a sustainable path. A second default is now certain within the next eighteen months.
According to Der Spiegel the inevitability of the second Greek default is well understood in Brussels and Berlin as indeed it must be to any competent analyst.
Ex-IMFer Ashoka Mody has an excellent piece in today's Irish Times making the case for defaults in the European periphery. Defaults are an entirely normal (even expected) thing when it is clear that debt levels have spun out of control.
Over at the Irish Independent Stephen Kinsella makes the case - articulated repeatedly on this blog and indeed on many other blogs - that the promissory note payment to the IBRC should not be paid on 31 March. I would echo Stephen's reference to this debt as 'odious'. The government failed to get a deal last year. Months of pleading have gotten them nowhere and the working group is missing in action. TASC's position is that the promissory notes should now be immediately suspended pending a full renegotiation. It is time to start rethinking the debt default option. Reducing the debt burden is an essential component of a Greek recovery and failure to strike an acceptable deal on the legacy bank debt will delay Ireland's recovery for years to come.
It is widely understood that the debt crisis professionals (the IMF) were overruled at an early stage by the debt crisis amateurs (ECB/European Commission). Greece was originally prevented from defaulting and then not allowed to default to a sufficient degree to restore its debt dynamics to a sustainable path. A second default is now certain within the next eighteen months.
According to Der Spiegel the inevitability of the second Greek default is well understood in Brussels and Berlin as indeed it must be to any competent analyst.
Ex-IMFer Ashoka Mody has an excellent piece in today's Irish Times making the case for defaults in the European periphery. Defaults are an entirely normal (even expected) thing when it is clear that debt levels have spun out of control.
Over at the Irish Independent Stephen Kinsella makes the case - articulated repeatedly on this blog and indeed on many other blogs - that the promissory note payment to the IBRC should not be paid on 31 March. I would echo Stephen's reference to this debt as 'odious'. The government failed to get a deal last year. Months of pleading have gotten them nowhere and the working group is missing in action. TASC's position is that the promissory notes should now be immediately suspended pending a full renegotiation. It is time to start rethinking the debt default option. Reducing the debt burden is an essential component of a Greek recovery and failure to strike an acceptable deal on the legacy bank debt will delay Ireland's recovery for years to come.
Wednesday, 2 May 2012
The Promissory Notes: Deal or No Deal? No Deal
Tom McDonnell: The ECB has informed the Irish Examiner that the Irish Government has submitted no documentation to the bank pertaining to renegotiation of the terms of the promissory notes. The report is here. The quote from the ECB is here:
"Having duly looked into this matter, we would like to inform you that the ECB did not receive any documents from the Irish Government on the renegotiation of the terms of the promissory notes."
It's important to remember no deal was actually done with the ECB leading up to March 31. As the ECB stated in response to the multi institution shenanigans and gymnastics leading up to March 31:
"The ECB is not part of it, as it is the redemption of the promissory notes and a subsequent reduction in emergency liquidity assistance provided by the Central Bank of Ireland.
The ECB also clearly stated how it expected to be paid in full and on time. Unsurprising if it never even received documents from the Irish Government.
Well done to the Examiner on ferreting out this very useful bit of information.
"Having duly looked into this matter, we would like to inform you that the ECB did not receive any documents from the Irish Government on the renegotiation of the terms of the promissory notes."
It's important to remember no deal was actually done with the ECB leading up to March 31. As the ECB stated in response to the multi institution shenanigans and gymnastics leading up to March 31:
"The ECB is not part of it, as it is the redemption of the promissory notes and a subsequent reduction in emergency liquidity assistance provided by the Central Bank of Ireland.
The ECB also clearly stated how it expected to be paid in full and on time. Unsurprising if it never even received documents from the Irish Government.
Well done to the Examiner on ferreting out this very useful bit of information.
Tuesday, 20 March 2012
Nama Wine Lake on the Promissory Notes
Tom McDonnell: Here is a timely recap by Nama Wine Lake of the grotesque farce that is the Anglo promissory note debacle.
Wednesday, 15 February 2012
Karl Whelan's briefing paper for Oireachtas Finance Committee
Karl Whelan, Brian Lucey and Stephan Kinsella are appearing before the Oireachtas Finance Committee this afternoon to discuss ELA and promissory notes. Click here for links to Prof Whelan's briefing paper and opening remarks.
Wednesday, 25 January 2012
The Promissory Notes
Tom McDonnell: The IBRC promissory notes have attracted a lot of attention in recent days. Karl Whelan, Seamus Coffey, the Nama Wine Lake contributors, the Debt Justice Action Group and many others have all highlighted and explained this issue very well. Here is a brief primer (click on bottom right to view in full screen mode):
Friday, 20 January 2012
Will Ireland Need a Second Bail Out?
Tom McDonnell: Willem Buiter of CitiGroup and formerly of the Bank of England's Monetary Policy Committee reckons that Ireland should negotiate a stand-by second bailout plan in the event it can’t re-access markets in 2013 on favourable terms. Inevitably the notion was attacked as 'ludicrous' by the Government and 'unhelpful' by the Commission. Words like 'fully funded' will bring a wry smile.
While Dan O'Brien argues it would be a mistake to pursue a second bailout at this time for strategic reasons, NamaWineLake, Colm McCarthy, David MacWilliams and Constantin Gurdgiev all argue that a second bailout is inevitable and desirable. I agree that a second bailout is inevitable. This bailout should be negotiated months before the State runs out of funding.
Ireland's debt maturity profile is here:
Coupled with the still gaping hole in the public finances (see page 15) and the unsustainable price (7.5%) for 10 year bonds (Bloomberg) it is clear that Ireland's funding position for 2014 is going to be very difficult.
A lot of course depends on developments in Europe, but on the balance of probability Ireland will enter a second programme of assistance in 2013. Because of the way it is structured, the current bailout mechanism (known as the EFSF) is not able to generate sufficient funds to undertake the level of bond purchases required to stabilise markets. The EFSF is inherently unstable because is is susceptible to a degenerative spiral in which less and less financially stable countries support increasing numbers of financially troubled countries - eventually the stable core simply cannot support the troubled periphery. The EFSF is already unravelling as part of a negative feedback loop and this process of unravelling will be accelerated by the recent downgrades. At any rate it is simply not feasible to expect countries like Italy and Spain to continue to support countries when they themselves are paying higher rates themselves to borrow.
The ESM (European Stability Mechanism) will replace the EFSF either in 2012 or in 2013, and if Ireland gets a second bailout it will be under the auspices of this mechanism. It is imperative that the design of the ESM differs from that of the EFSF. One option is to give the ESM a banking licence and access to ECB funding - and then allow it to buy sovereign debt directly and under defined protocols and conditions.
As part of dealing with the thorny issue of financing Ireland's debt burden, the Anglo promissory notes have understandably taken centre stage with Minister Noonan now promising that a technical paper on the issue is being prepared. Let us hope that the process will be transparent and evidence based and let us also hope that all advice and correspondence relating to the Anglo/INBS debt between the CBI/ECB to the Irish State will be released. The ECB has been notably intransigent on this point so far. The legacy of the Anglo debt is clearly a matter of grave national importance and its imposition on people living in Ireland was a scandalous transfer of wealth. The promissory note story and mechanism is variously explained here by the newly formed "Anglo: Not Our Debt" group, here by NAMA Wine Lake, here by Karl Whelan, here by politico and here by Seamus Coffey.
Ireland's medium-term debt sustainability is on a knife edge. The NTMA is forecasting a debt to GDP ratio of 119% in 2013 - equivalent to a debt to GNP ratio in excess of 140%. This places us firmly in the same ballpark as poor benighted Greece. Relief on the promissory note repayments is a way for all of the key parties to avoid a credit event in Ireland. Ideally this should involve write-down of the €30.6 billion principal but at the very least it should entail a five year holiday on repayments and an extension of the repayment schedule. Such a scenario would help give the economy a modicum of space to recover and offers the possibility that Ireland can manage its way out of the crisis. The alternative is to remain a ward of the official lenders for the forseeable future.
While Dan O'Brien argues it would be a mistake to pursue a second bailout at this time for strategic reasons, NamaWineLake, Colm McCarthy, David MacWilliams and Constantin Gurdgiev all argue that a second bailout is inevitable and desirable. I agree that a second bailout is inevitable. This bailout should be negotiated months before the State runs out of funding.
Ireland's debt maturity profile is here:
Coupled with the still gaping hole in the public finances (see page 15) and the unsustainable price (7.5%) for 10 year bonds (Bloomberg) it is clear that Ireland's funding position for 2014 is going to be very difficult.
A lot of course depends on developments in Europe, but on the balance of probability Ireland will enter a second programme of assistance in 2013. Because of the way it is structured, the current bailout mechanism (known as the EFSF) is not able to generate sufficient funds to undertake the level of bond purchases required to stabilise markets. The EFSF is inherently unstable because is is susceptible to a degenerative spiral in which less and less financially stable countries support increasing numbers of financially troubled countries - eventually the stable core simply cannot support the troubled periphery. The EFSF is already unravelling as part of a negative feedback loop and this process of unravelling will be accelerated by the recent downgrades. At any rate it is simply not feasible to expect countries like Italy and Spain to continue to support countries when they themselves are paying higher rates themselves to borrow.
The ESM (European Stability Mechanism) will replace the EFSF either in 2012 or in 2013, and if Ireland gets a second bailout it will be under the auspices of this mechanism. It is imperative that the design of the ESM differs from that of the EFSF. One option is to give the ESM a banking licence and access to ECB funding - and then allow it to buy sovereign debt directly and under defined protocols and conditions.
As part of dealing with the thorny issue of financing Ireland's debt burden, the Anglo promissory notes have understandably taken centre stage with Minister Noonan now promising that a technical paper on the issue is being prepared. Let us hope that the process will be transparent and evidence based and let us also hope that all advice and correspondence relating to the Anglo/INBS debt between the CBI/ECB to the Irish State will be released. The ECB has been notably intransigent on this point so far. The legacy of the Anglo debt is clearly a matter of grave national importance and its imposition on people living in Ireland was a scandalous transfer of wealth. The promissory note story and mechanism is variously explained here by the newly formed "Anglo: Not Our Debt" group, here by NAMA Wine Lake, here by Karl Whelan, here by politico and here by Seamus Coffey.
Ireland's medium-term debt sustainability is on a knife edge. The NTMA is forecasting a debt to GDP ratio of 119% in 2013 - equivalent to a debt to GNP ratio in excess of 140%. This places us firmly in the same ballpark as poor benighted Greece. Relief on the promissory note repayments is a way for all of the key parties to avoid a credit event in Ireland. Ideally this should involve write-down of the €30.6 billion principal but at the very least it should entail a five year holiday on repayments and an extension of the repayment schedule. Such a scenario would help give the economy a modicum of space to recover and offers the possibility that Ireland can manage its way out of the crisis. The alternative is to remain a ward of the official lenders for the forseeable future.
Time for Plan B
Nat O'Connor: Austerity policies are not working. I was one of 59 signatories of a letter in today's Irish Times calling for Plan B.
Plan B must include productive investment in infrastructure, education and labour skills. There is some money available to spearhead this, in the remainder of the National Pension Reserve Fund and in cash balances held by the Government. Rather than using this money to further capitalise the banks and/or pay off debt, it would be more effective and more socially just for the Government to boost productive investment. Ireland's economy is operating far below its productive capacity and capital spending as a proportion of GDP is now the lowest in Europe. Therefore there is ample absorptive capacity to increase investment in areas such as the provision of next generation broadband infrastructure, retraining etc., as well as other areas that will boost employment in the short term and increase productive and innovative capacity in the medium and long term.
The private sector is not currently investing, therefore the State needs to get the ball rolling. This can be funded from part of the €15 billion or more the Government currently holds in cash and assets, as well as from tax increases on wealth and higher incomes. The Government's announcement that it is looking at the Anglo promissory notes is very welcome, and could also release some money for investment that is currently earmarked as part of the €3.1 billion to be paid on promissory notes this year.
Plan B must include productive investment in infrastructure, education and labour skills. There is some money available to spearhead this, in the remainder of the National Pension Reserve Fund and in cash balances held by the Government. Rather than using this money to further capitalise the banks and/or pay off debt, it would be more effective and more socially just for the Government to boost productive investment. Ireland's economy is operating far below its productive capacity and capital spending as a proportion of GDP is now the lowest in Europe. Therefore there is ample absorptive capacity to increase investment in areas such as the provision of next generation broadband infrastructure, retraining etc., as well as other areas that will boost employment in the short term and increase productive and innovative capacity in the medium and long term.
The private sector is not currently investing, therefore the State needs to get the ball rolling. This can be funded from part of the €15 billion or more the Government currently holds in cash and assets, as well as from tax increases on wealth and higher incomes. The Government's announcement that it is looking at the Anglo promissory notes is very welcome, and could also release some money for investment that is currently earmarked as part of the €3.1 billion to be paid on promissory notes this year.
Sunday, 4 December 2011
Bleeding Ireland Dry
Tom McDonnell: Great article by Karl Whelan here on the infamous promissory notes. Remember over 2% of our total GDP is going to be shovelled into this black hole each year for over a decade to come.
His proposal:
"It is true that the Irish taxpayer has taken on far too big a burden in ensuring that bondholders at Anglo and INBS were repaid. But quibbling about bondholders misses the elephant in the room. It is the huge burden of repaying ELA, not bondholders, that is going to bleed the taxpayer dry for the next twenty years.
It is time for the Irish government to declare that it has no intention of putting €3.1 billion towards repaying ELA in March and that it has arranged an agreement in principle with the Central Bank of Ireland that the state will repay this debt when it has fully recovered from its current crisis.
If my understanding of the legal situation is correct, then Patrick Honohan would only require the support of seven other members of the ECB Governing Council to proceed with this plan. This could easily be achieved with the support of Mario Draghi. Ireland has borne a heavy burden in the name of European financial stability. It’s time for a quid pro quo from super Mario."
His proposal:
"It is true that the Irish taxpayer has taken on far too big a burden in ensuring that bondholders at Anglo and INBS were repaid. But quibbling about bondholders misses the elephant in the room. It is the huge burden of repaying ELA, not bondholders, that is going to bleed the taxpayer dry for the next twenty years.
It is time for the Irish government to declare that it has no intention of putting €3.1 billion towards repaying ELA in March and that it has arranged an agreement in principle with the Central Bank of Ireland that the state will repay this debt when it has fully recovered from its current crisis.
If my understanding of the legal situation is correct, then Patrick Honohan would only require the support of seven other members of the ECB Governing Council to proceed with this plan. This could easily be achieved with the support of Mario Draghi. Ireland has borne a heavy burden in the name of European financial stability. It’s time for a quid pro quo from super Mario."
Thursday, 13 October 2011
Second Republicans versus Banana Republicans
Tom McDonnell: The latest Dublin Review of Books is out and this time we have a contribution from the always cogent Michael O'Sullivan. It's well worth checking out and can be read here.
He asks two questions.
How do we deal with the acute social problems that arise from our economic depression?
and
How do we change our behaviour so that the next ten to twenty years are more stable and hopefully more prosperous?
Michael argues that we need to become more strategic in our thinking and in our policymaking in the context of 'global megatrends' and the global question. He laments our 'cognitive failures' to date in this regard and suggests learning from other small open economies like Switzerland, the Nordic countries, Chile, Israel, New Zealand and Singapore.
He also makes an excellent suggestion about the need to prepare strategically for the Greek write down:
"If it has not already been set up, a working group should be established between the EU, IMF, ECB technical staff (this group may even include contributions from the BIS and OECD) and Irish officials to plan for the implications of a Greek debt restructuring on Ireland. Moreover, the group should also work to manoeuvre Ireland away from the financial periphery by proposing ways by which to elongate the maturity and lower the yield on the promissory note debt tied to Anglo-Irish bank (a leveraged EFSF may be one avenue toward funding this). Ultimately this may involve a “hit” to the balance sheet of the ECB, though the long term cost to Europe of the Irish economy should be reduced as our debt burden becomes more sustainable."
He asks two questions.
How do we deal with the acute social problems that arise from our economic depression?
and
How do we change our behaviour so that the next ten to twenty years are more stable and hopefully more prosperous?
Michael argues that we need to become more strategic in our thinking and in our policymaking in the context of 'global megatrends' and the global question. He laments our 'cognitive failures' to date in this regard and suggests learning from other small open economies like Switzerland, the Nordic countries, Chile, Israel, New Zealand and Singapore.
He also makes an excellent suggestion about the need to prepare strategically for the Greek write down:
"If it has not already been set up, a working group should be established between the EU, IMF, ECB technical staff (this group may even include contributions from the BIS and OECD) and Irish officials to plan for the implications of a Greek debt restructuring on Ireland. Moreover, the group should also work to manoeuvre Ireland away from the financial periphery by proposing ways by which to elongate the maturity and lower the yield on the promissory note debt tied to Anglo-Irish bank (a leveraged EFSF may be one avenue toward funding this). Ultimately this may involve a “hit” to the balance sheet of the ECB, though the long term cost to Europe of the Irish economy should be reduced as our debt burden becomes more sustainable."
Wednesday, 5 October 2011
Sailing rudderless into the Anglo storm
Tom McDonnell: The Greek tragedy that is the eurozone debt crisis may soon enter its fourth act. A hard write-down of Greek debt is necessary and there is now a significant probability that Greece will be allowed to default around December. Martin Wolf argues here that:
“the bare minimum the eurozone needs to cope with its crisis is an effective mechanism for writing down the debts of evidently insolvent private and sovereign borrowers, such as Greece; funds large enough to manage the illiquid bond markets of potentially solvent governments; and ways to make the financial system credibly solvent immediately.”
He suggests the sums required will be several times larger than the €440bn of the existing EFSF.
The Dexia crisis is finally forcing the core countries to acknowledge that their banking systems are in serious trouble and this creates an opportunity for Ireland. While the original intent was for the EFSF to be a sovereign bailout fund it is becoming increasingly clear that its future role will likely involve the recapitalisation of failing banks.
If and when Greece is allowed to default the EFSF will be standing by to preserve the solvency of the European banking system through large-scale recapitalization. It is at this point that the Irish Government should request the Anglo/INBS promissory note liabilities be transferred to the EFSF with Ireland then agreeing a negotiated repayment schedule at a low interest rate.
Renegotiating the promissory notes is of huge consequence to Ireland’s future prosperity. Michael Noonan hints here that he has begun the process of renegotiation. We can extrapolate from these new figures that the total cost between 2011 and 2031 will be in the region of €85 billion (assumes a 4.7% interest rate from 2013 onwards). That is €4 billion a year. The infinite spiral of cumulative interest costs is the reason why the figure is larger than the commonly cited €47 billion i.e., we have to pay interest on the €47 billion in borrowings and then pay the interest on the borrowings required for those interest payments and so on and so forth (click on table to enlarge).
Seamus Coffey explains the issues here. Turning the notes into a long-term bullet bond owed to the EFSF may offer one plausible solution. Our institutions were unforgivably unprepared for the 2008 earthquake. It would be feckless to sail in to the current storm without a worked out strategy to deal with the promissory note question.
“the bare minimum the eurozone needs to cope with its crisis is an effective mechanism for writing down the debts of evidently insolvent private and sovereign borrowers, such as Greece; funds large enough to manage the illiquid bond markets of potentially solvent governments; and ways to make the financial system credibly solvent immediately.”
He suggests the sums required will be several times larger than the €440bn of the existing EFSF.
The Dexia crisis is finally forcing the core countries to acknowledge that their banking systems are in serious trouble and this creates an opportunity for Ireland. While the original intent was for the EFSF to be a sovereign bailout fund it is becoming increasingly clear that its future role will likely involve the recapitalisation of failing banks.
If and when Greece is allowed to default the EFSF will be standing by to preserve the solvency of the European banking system through large-scale recapitalization. It is at this point that the Irish Government should request the Anglo/INBS promissory note liabilities be transferred to the EFSF with Ireland then agreeing a negotiated repayment schedule at a low interest rate.
Renegotiating the promissory notes is of huge consequence to Ireland’s future prosperity. Michael Noonan hints here that he has begun the process of renegotiation. We can extrapolate from these new figures that the total cost between 2011 and 2031 will be in the region of €85 billion (assumes a 4.7% interest rate from 2013 onwards). That is €4 billion a year. The infinite spiral of cumulative interest costs is the reason why the figure is larger than the commonly cited €47 billion i.e., we have to pay interest on the €47 billion in borrowings and then pay the interest on the borrowings required for those interest payments and so on and so forth (click on table to enlarge).
Seamus Coffey explains the issues here. Turning the notes into a long-term bullet bond owed to the EFSF may offer one plausible solution. Our institutions were unforgivably unprepared for the 2008 earthquake. It would be feckless to sail in to the current storm without a worked out strategy to deal with the promissory note question.
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