Business Irish

Wednesday 7 December 2016

Talk of cut to Anglo promissory notes rate a 'red herring'

Published 28/01/2012 | 05:00

UCD economist says a deal can be struck to hold back payment

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UCD economist Karl Whelan has dismissed talk of cutting the interest rate on the "promissory notes" or IOUs used to rescue Anglo Irish Bank as a red herring.

His comments came at a conference on economic policy held at Croke Park in Dublin yesterday. The governor of the Central Bank Patrick Honohan and Social Protection Minister Joan Burton were among hundreds to attend the event.

Prof Whelan said that under the current arrangements, the Government must pay €3bn to Anglo Irish Bank every year for nine years from March. Finance Minister Michael Noonan has said he is seeking to renegotiate that cost with European authorities.

Mr Whelan said the minister should work to ensure that none of the money is paid off by the State until the economy has stabilised. A deal could be done because the convoluted financial engineering used to bail out the bank meant the money would ultimately be destroyed by central bankers, he said.

High-profile economists Colm McCarthy of UCD, Stephen Kinsella from the University of Limerick and Trinity's Brian Lucy were among the speakers at the event.

Unlike most academic conferences, the sessions focused on issues of pressing concern, including unemployment, the cost of the banking bailouts, the property market and the planned 'fiscal compact' that will be debated by European leaders at a summit in Brussels on Monday.

Despite the focus on policy, Ms Burton and Mr Honohan were among a small minority of policymakers to attend the event. Attendance and questions from the floor was dominated by academic economists.

Mr Whelan set out his view on how to unpick the financial engineering used to bail out Anglo Irish Bank in his presentation.

The failed bank no longer had large debts to bondholders, he said, and the amount of interest due to be repaid by the State on the Anglo promissory notes, which kept the bank afloat in 2009, was a red herring.

The State bailed out Anglo Irish Bank by creating €30bn of IOUs and handing them to Anglo. To meet banking rules, Anglo has to be paid interest on the IOUs by the State.

Anglo used the valuable notes as security for cash it borrowed from the European and Irish central banks. The cash was used to pay depositors and bondholders.

Destroy

Today the IOUs are Anglo's main assets and almost all of its debt is owed to the Irish Central Bank. The Central Bank in turn made its loans to NAMA by simply creating new money, according to Prof Whelan.

It meant the State effectively owed the money back to itself, he said, explaining that the Central Bank would destroy the cash whenever it got repaid.

That left plenty of scope to rejig the deal in the State's favour, he said. The only stumbling block was that under euro rules, Ireland needed the backing of a majority of euro area central bank governors before the existing situation could be changed, he said.

Other topics covered at the event included whether or not infrastructure projects can really help restart the economy and debate on the potential impact of European Union plans for a 'fiscal compact'.

Irish Independent

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