Finance was warned on new 'bonds for public'
Department of Finance mandarins were concerned as recently as December that Irish bank deposits were so fragile that launching a new government bond aimed at the public could cause them serious "liquidity'' problems.
The civil servants were concerned that if the so-called "solidarity bond'' was too attractive, customers would pull their money from the banks and transfer into the new product.
In order to prevent this, the Department of Finance civil servants made it clear the solidarity bond would not be open ended and could be closed at any time. This would be to "allay bank liquidity concerns'' according to memos seen by the Irish Independent.
The solidarity bond is supposed to allow the public to lend money directly to the Government in exchange for a guaranteed return.
"If the proposed bond offers even a modest return, funds are likely to flow into it from bank deposits, with liquidity consequences for the banks,'' wrote a senior official in the department shortly before Budget 2010 was unveiled.
"With the banks paying effectively zero on most savings products, people will grasp at any alternative product that offers even a half-decent better return than the banks,'' said the official.
The measure eventually made it into the Budget speech but no detail has been released yet by the NTMA about what size the solidarity bond will be or its interest rate.
Advice provided to Finance Minister Brian Lenihan was finely balanced, with one official pointing out that it would give the Government an alternative source of funding, beyond the traditional bond market.
But equally the official warned of annoyance among the banks. "Another issue is that the banks may be unhappy with the development as they could see this as unwelcome competition for funds."
The seriousness of the situation meant that advice was sought on the issue from the Central Bank and the Financial Regulator, although the final go-ahead was given in December. The bond is likely to be sold via the internet, telephone and at local post offices. The proposal was initially proposed by ICTU, although alternative proposals such as an infrastructure bond and a diaspora bond were also mentioned.
The Government believes the banks are also competing with various state savings products, including savings bonds, savings certificates, prize bonds and post office deposit accounts.
According to earlier memos written in November, the bond will have an annual coupon (interest rate) of 2pc, with a bonus payment of 25pc after 10 years. The bonus payment is designed to lock-in the investor.
Several countries, most notably Japan, use their own citizens as sources of bond finance, but there has been little tradition of this in Ireland.