Laura Noonan: The truth about Anglo and the €30bn black hole
DON'T know what all this promissory note lark is about? You're in good company. A crash course in promissory notes is warranted.
Back in 2010, there was a €30bn black hole in Anglo and Irish Nationwide. The Government didn't have enough money to bail them out -- so they promised to do so later.
Now we're trying to change that promise. Instead of paying the banks €3.1bn a year, we want to pay them less annually. Which will most likely mean paying for longer.
Here are some of the expert pronouncements on "pro notes" and whether they stand up to scrutiny.
• 1) The Government didn't have €30bn in cash to give to Nationwide and Anglo, so they instead gave the banks a €30bn IOU, and agreed to pay it in chunks of about €3bn a year.
The banks were able to turn that IOU into money by pledging it as collateral with the European Central Bank. That was effectively using the ECB as a massive pawnshop.
Effectively, the state owes Anglo €30bn. Anglo has to be paid interest because the €30bn IOU is like a Government bond, and sovereign bonds pay interest.
The 8.6pc interest is income for Anglo. If the bank has extra money when it's finally wound up, we, the taxpayers, get that money back.
Instead of the Government putting cash into banks, the ECB was forced to keep them afloat until we were in a position to put in actual cash.
• 2) The 8.6pc interest rate on the promissory note is a big part of Finance Minister's Michael Noonan's argument that this is a 'bad' deal and has to be restructured.
The problem is, the interest rate payable on the pro note is completely irrelevant. It is paid from the state coffers to Anglo -- another arm of the state. It's like if you regularly pay money from your current account to your savings account -- the net impact on your finances is the same. It simply does not matter.
• 3) You can change the pro note without hurting Anglo.
IBRC, the new name for Anglo, depends on the pro note for its funding, because it uses it to borrow about €30bn in cash from the ECB and Central Bank. This cash has already been doled out to bondholders, deposit holders, and others owed money by Anglo. IBRC has also factored in the regular interest (at 8.6pc) into its business plan. If the interest goes down, IBRC's profits fall, or IBRC swings to a loss. IBRC is state-owned -- its profits and losses are ours. If we cut the interest rate and IBRC loses money, that loss is borne by the taxpayer.
• 4) There's a prevalent argument that the pro-note money isn't real and therefore doesn't matter.
It goes like this: Anglo used the pro note to draw down about €30bn of 'exceptional liquidity assistance' from the Central Bank.
The Central Bank didn't have a spare €30bn so it created 'new' money especially for Anglo. When this new money is paid back, it will be destroyed.
It's simply not true. The pro notes did not prompt the Central Bank of Ireland to create special new Anglo money. And destroying the pro note money is simply not in the Central Bank's gift. When the Central Bank gave that €30bn to Anglo, the latter used that money to pay off debts it owed to other people.
When other banks got their €30bn from Anglo, they had to do something with it. In the most simple case, a bank wants to put the money on deposit. But it can't keep its own deposits in house -- it has to put them with its national central bank. So the €30bn ends up back with the European Central Bank network as a deposit. It works the same even if the bank that got the money passes it on to another bank, which then parks the cash with a central bank.
At the end of the day, the national central banks owe €30bn to commercial banks, and IBRC owes €30bn to our national central bank. It's the same €30bn. It's real money. If IBRC don't repay their €30bn, then how are the national central banks across the eurozone supposed to pay back the €30bn deposits they're holding?
• 5) Fixing the pro note will fix it all.
What's being talked about is ways to spread the payments out over a longer period of time -- not to reduce the actual amount. The best case is that we get to pay the money off over 30 years. Those lower payments won't do much to ease the budget cuts demanded by our bailout programme but will mean less cash flowing out of state coffers, which will postpone the day of reckoning when we have to tap the markets for funding again. That, in turn, reduces the chances of a second bailout.