Thursday 14 November 2019

Stephen Kinsella: Promissory notes deal should be on everyone's Christmas list

A MEME is an idea that spreads from person to person like a virus. On the internet memes spread across email and blogs, and change their meaning as they go. It can be fascinating watching people use ideas and phrases in new ways. Each new use subtly alters the original meaning, like Chinese whispers.

There's a funny meme running about the place at the moment in government circles. It's the 'can't pay, won't pay' meme. Opponents of the household charge used this meme as a slogan during the year to protest the imposition of a regressive poll tax on property.

The Government is now advancing the same 'can't pay won't pay' argument to cover not paying €3.1bn due in March to fund the promissory notes.

Ireland's banks required taxpayer funds to help fund their losses. In particular, Anglo Irish Bank, Irish Nationwide Building Society, and the Educational Building Society have required €30.9bn in 'promissory notes'. A promissory note is an unsecured 'promise to pay' the sum agreed at a later date. The capital injections required were funded by promissory notes issued by the State to Anglo and INBS in lieu of cash.

Promissory notes are not, strictly speaking, government debt, though they are treated as such for accounting purposes by the European Statistical agency Eurostat.

Promissory notes are debt vehicles issued by the Central Bank of Ireland, rather than the European Central Bank. They are not, strictly speaking, backed by the European Central Bank, as these notes are not eligible for refinancing operations by the European Central Bank. The liability for these notes falls on the individual issuing State.

The promissory note repayment structure calls for government borrowing of €3.1bn plus interest and other capital payments each year to repay these notes over a 10-15 year period at varying interest rates.

The promissory notes were written by the previous government to balance the books of Anglo Irish Bank and Irish Nationwide, now merged into the Irish Bank Resolution Corporation. The promissory notes sit on the 'asset' side of the IBRC's balance sheet. On the liability side sits something called Emergency Liquidity Assistance, or ELA. Think of ELA as money the Irish Central Bank created. The promissory notes were written specifically to balance the books because the Government had created money to give to Anglo and Irish Nationwide.

When the €3.1bn is borrowed by the State, it cancels part of the promissory note, and part of the ELA. In eight years' time, the total will be wound down to zero. We will have burned €31bn, because this money isn't going anywhere, and is not being used for any other purpose than balancing the books of a bank that will never, ever, lend again.

So why don't we just say 'we won't pay', or 'we will pay, one euro per year for the next 31 billion years'? The answer is the European Central Bank. The ECB doesn't like the idea of forgetting about the ELA, because then the Government would have just printed off €31bn without the ECB's permission. This is illegal under EU law. Importantly, from the ECB's point of view, if Ireland can do it, so then can Spain, Italy, and Portugal. We would set a dangerous precedent. Printing money to solve debt problems in bad banks can lead to inflation, and inflation is the one thing the ECB is set up to stop.

From the national point of view, the promissory notes represent odious debt, debt incurred without any benefit to the people of the country. This debt is worth 20pc of our national output, and 33pc of taxes this year. It is the entire health service and half the Department of Social Protection spend, that's the scale. Or to put it another way, Phil Hogan could have taken 100,000 trips to Doha on this money.

Ireland has been the best in class in terms of the bailout countries, but everyone knows the country can't pay the banking portion of its debt. Last year a complicated arrangement involving NAMA, Bank of Ireland and the NTMA was used to avoid a direct payment of the promissory notes, but this time no one will be fooled. Pat Rabbitte has talked tough on this issue, saying we won't pay in March. Central Bank Governor Patrick Honohan spoke to a German newspaper and discussed the need for an extension of the payment period from 10 years to something much longer, perhaps 30 or 40 years. While obviously not ideal, the longer payment represents a better deal for the taxpayer.

There are more elaborate payment mechanisms, and simpler ones. The best option would be not to pay at all, but this is not realistic. If this is acceptable to the ECB, a deferred payment of the promissory notes represents the best option for the Irish taxpayer. Ministers should get a deal sorted before Christmas. Can't pay won't pay indeed.

Irish Independent

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