Saturday 21 April 2018

Timing of payments is key to solving Anglo debt problem


WHEN Michael Noonan started talking about paying down Anglo's €30bn bailout over a longer term at the same time as the bank's management was talking about winding up Anglo faster, it was easy to dismiss the finance minister's position as nonsensical or bonkers.

But it seems that the technical brains working on Anglo's so-called 'promissory note' have indeed come up with a way to give the money to the bank faster, while taking it from the taxpayer at a slower rate.

Sources say they have even put the plan to Europe's EFSF bailout fund, the entity that would enable the minister's Houdini-style emergence from what appeared to be an unsquarable circle.

What they have proposed goes a little like this. As things stand, Anglo has a €30bn IOU from the Government, which will be paid down over about 20 years. It carries a penal interest rate and punishing repayments, sucking €3bn to €4bn from the national finances every year.

The idea being floated is to give Anglo bonds from the EFSF, instead of these promissory notes. The bonds could have whatever maturity best suits Anglo's needs and the EFSF would pay them down accordingly.

The financial wizardry is coming up with an EFSF bond that has the same value to Anglo as the current promissory notes -- a complex but eminently do-able process for Europe's top number crunchers.

The beauty of these EFSF bonds is that unlike the current promissory notes, these would be mainstream financial instruments. Anglo could trade them on the open market or present them to the European Central Bank in exchange for liquidity.

This would mean the end of the tens of billions of exceptional liquidity support (ELA) that Anglo is currently getting from the Central Bank of Ireland by leveraging the promissory notes.

The ECB is very keen to see an end to this programme, so it would be also a neat solution for it.

The State's obligation to Anglo wouldn't just go away, of course. Ireland would have a debt to the EFSF equal to the value of the EFSF's support of Anglo. But it wouldn't necessarily have to be paid out over the same term.

The EFSF could give Anglo the money over seven years and the Government could repay the EFSF over, say, 30 years. The ultimate interest cost to the State could be higher, but the breathing space it would give Ireland's annual budget could be a sizable benefit.

It's by no means a done deal. Some sources say efforts are being largely focused on the EFSF bond solution. Another source says it was discussed with the EFSF a while back but is no longer "live".

The source won't say if this is because the plan was dropped or if there has simply been a lull in negotiations.

The Department of Finance wouldn't comment at all, beyond saying that the promissory note was being worked on. The European authorities are guiding that a breakthrough isn't imminent and the EFSF won't say whether it would be open to such an arrangement (which could well need approval from other EU member states and could lead to an avalanche of similar requests).

What is clear, though, is that there is hope. Under the current arrangement, Anglo's promissory note is a circular issue -- the payments the State makes are high, but it's paying them to a State-owned bank, so it's immaterial.

But that doesn't mean a new arrangement can't be created with a third player in the frame, turning a pointless circle into a far more meaningful triangle.

Indo Business

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