Daniel McConnell: Costly liquidation of IBRC an Irish solution to Irish problem
As the Germans question the legality of the prom note deal, looks at how we will shoulder the deb
When is a deal not a deal, and when is a deal which is said to be a good deal in fact actually a bad deal?
Two and a half weeks on from the liquidation of the former Anglo Irish Bank, and Ireland's "barely legal" promissory note arrangement, the above questions are valid.
Examining the two separate elements in turn, questions over the very legality of the deal are now being asked and the full costs of the Anglo liquidation are emerging.
Looking first at the promissory note deal, Michael Noonan and the Government can claim correctly that they will not have to pay out €3.1bn at the end of "this March, next March or any March", as he himself put it.
But the deal is not a debt writedown, we will still pay, wont we?
Yes, we will pay it all in full. But rather than having to pay it now or over the next decade, the promissory notes have been exchanged for long-term Irish Government bonds with maturities of up to 40 years. The breathing space is key given the financial pressure the Government is under.
The first principal payment will not now be made until 2038 and the last payment will be made in 2053. The average maturity of the Government bonds will be over 34 years.
In cash terms, the amount committed to has risen significantly over the lifetime of the bonds. But the Government also says that inflation will reduce the effective burden of the debt over time, so effectively it is a writedown.
Is it even legal?
Well, Noonan himself said quite clearly the legality of the deal to postpone paying the debt is questionable. In an interview with Pat Kenny, Noonan said: "The legal people would say that the existing promissory note arrangement was totally contrary to something else, totally [illegal]. Some of the bank people were saying to me 'Look what you're saying is illegal', and I should've said to them, 'It's an awful lot more legal than what you agreed three years ago'."
Pat then said: "Megan Green has said: 'It's amazing how many things in the eurozone are illegal until someone does them and then it becomes ok'." To which, Noonan responded: "Yeah there's a touch about that alright."
An Irish solution to an Irish problem, it seems, full of nods and winks.
Then last week, Jens Weidmann, the head of the Bundesbank in Germany, said Ireland's promissory note transaction comes dangerously close to contravening a ban on the monetary financing of governments.
Weidmann was the first to raise the spectre that the deal could unravel, given its iffy legal status. The ECB will re-examine the issue and "has to make sure that its actions are in conformity with its rules and statutes," he said. "I'm very concerned about monetary policy being too closely intertwined with fiscal policy and crossing the line to monetary financing."
A day later, former ECB executive Jurgen Stark joined the Bundesbank criticism of Ireland, describing the new promissory note arrangement as a clear breach of the bank's prohibition of monetary financing.
Noonan insisted the deal was done and there was no going back. Mario Draghi, head of the ECB, disagreed. He confirmed the deal would be subject to a review later this year. He said the opportunity has "not necessarily" passed to object to Ireland's deal. "We will assess the compliance with Article 123 at the proper opportunity," he said, referring to the ECB's own ban on central banks financing governments. "If it does not" comply "we will see what legal remedial action needs to be taken," he said.
What's at risk?
Noonan's deal has enabled the interest rate relating to the Anglo debt to be reduced, and it means the Irish Central Bank will make a profit on the bonds, which it will feed back to State.
This amounts to monetary financing, or bank funding of the State, which is a no-no under ECB rules.
"The Irish Central Bank ultimately pays interest on the new bonds to the rest of the Eurosystem at the main refinancing rate," which is currently at 0.75 per cent, "while the Irish government's interest payments are collected as net income by the Irish Central Bank," the Bundesbank monthly report noted.
But some in the ECB are not happy about this part of the deal, and what is being discussed is that the Irish Central Bank will have to sell on these bonds sooner than it wanted, so it would not be making a profit on them. This could further reduce the benefit to Ireland of the deal.
On the liquidation of Irish Nationwide and Anglo Irish Bank, there is again much reason to be concerned about the significant costs involved.
We now know that because of the liquidation, bondholders who were not due to be paid until 2015 will now cost the taxpayer €1bn this year, wiping out any benefit of the promissory note deal.
Noonan has also admitted that he has exposed the taxpayer to a further bill, which some have estimated could run to between €2bn and €3bn, should Nama be left short by the asset valuation, currently being undertaken by liquidator Kieran Wallace of KPMG.
"There may be a further cost to the taxpayer if it is necessary to make up any difference that might arise between the consideration paid by Nama for the IBRC's assets and the valuation placed on these assets by the special liquidator," Noonan said.
"If the value of the assets sold is not sufficient to compensate Nama for the bonds it has issued, it will be necessary to reimburse Nama for the shortfall," he added.
Sources close to the process have denied the potential shortfall will run into several billions, dismissing such talk as "wide of the mark".
We also know now that rather than paying the €3.1bn a year, the taxpayer will still be paying interest of over €2.5bn or about €850m a year between now and 2016, as confirmed by Noonan this weekend. This year the amount will be €750m, then €875m in 2014 and €950m in 2015.
Ultimately, Ireland's position has marginally improved by the re-jigging of the promissory note deal.
Noonan says it is too late to undo the deal, but the ECB may have other ideas.
The real concern, however, is the liquidation of IBRC, which potentially could cost several billions more than it needed to.