Tuesday 12 November 2019

We have been well and truly burned

The Government hailed the promissory note deal as a panacea for all our ills – but Stephen Donnelly says we're still paying through the nose

Stephen Donnelly

SO, what just happened with the promissory notes? In essence, the Government just negotiated a deal on your behalf which moves your 20-year mortgage to a 35-year interest-only mortgage, with the full amount due at the end. And the interest rate will be lower for the next few years. Sounds good. But here's the thing: The mortgage is for someone else's house. And they burned the house down in 2008. And instead of paying it to some dodgy back-street lender who had no way to make you pay it, you now owe it to the Revenue Commissioners.

The Government insists you should be grateful, because you'll pay less for the next few years. They're hoping you'll forget about the other details. I was discussing the new deal with fourth, fifth and sixth class students in Bray on Friday morning. They thought those other details were pretty important. So they should – they're the ones who will pay for Anglo and Irish Nationwide. They're the ones who will pay for someone else's burnt-out house. Why? Because this Government insisted to Europe that the IOU should be honoured. And because this deal gives them good news for today's voters. By the time the students in Bray get to vote, this Cabinet will be enjoying their pensions.

Last Wednesday, Anglo and INBS were liquidated. They owe about €40bn, with the Central Bank of Ireland (CBI) owed the most. To pay this, they have two main assets – a collection of loans worth about €14bn (largely on properties in Ireland, London and New York) and an IOU from the Irish people for about €25bn (the promissory note). Nama will probably buy the property loans. The Central Bank will not be paid back, so it gets the promissory note in compensation. Now, instead of owing €25bn to Anglo and Irish Nationwide, we owe it to the Central Bank. As we pay it over, the Central Bank will destroy it.

Liquidating Anglo and Irish Nationwide was part one.

The Irish Cabinet was in conclave, and at 2.30pm came the urgent text message to get to the Dail chamber ASAP. The Taoiseach was on his way with something important to say.

You could smell the glee from a hundred yards. The chamber quickly filled with TDs, and then the Cabinet skipped solemnly down the central isle. They practically floated to their seats.

The Taoiseach, looking like Mayo had just won the All-Ireland, filled us in. Recalling the deep injustice of the bank bailout, he outlined the new deal. Mr Noonan played his usual deadpan, but even from the cheap seats we could see that, inside, he was loving it. He didn't give enough detail to work out what the deal was worth. But he used some very large numbers, which pleased his back-benchers no end. The Tanaiste used his speech to insult people, which felt like a wasted opportunity to shore up his weakened leadership of the Labour Party. Still, he seemed to enjoy himself.

So what of the deal? How you assess the success or failure of the Government depends where you start. If you stick just to the promissory notes, and the growing fear that no deal was to be done, then they've done pretty well.

Based on what we know so far it's worth about €4bn, coming from reduced interest payments for 10 or more years. That's a chunk of cash, and the Government couldn't be blamed for feeling pleased. And there's a second advantage. Because of how the troika target is calculated, the budget deficit will be €1bn lower for a few years. That could be used for job-rich investment. But to fully assess the deal, we need some context on how we owe this money in the first place. The previous Government committed €35bn to Anglo and INBS.

And €31bn of this was in the form of the promissory notes, which were issued in 2010.

Why? It wasn't to protect Irish deposits, which could have been done for a lot less. It wasn't to keep the two banks operational, as it was clear they would be closed. And it wasn't to protect the other Irish banks, which were already guaranteed. It was done for one reason – to protect banks in the rest of the eurozone.

These countries feared that if Anglo or INBS were allowed to fail, then investors in their own banks might leave now that precedent had been set in Ireland.

We stumped up €35bn to protect our eurozone neighbours. In that context, they should take on their share of the €35bn. Using GDP, Ireland's share would be €2.5bn. Let's double that, as we did allow Anglo to happen. So a fair sharing of the burden might be for us to pay €5bn, and the other eurozone countries to pay €30bn. In that light, Thursday's deal for €4bn fails any test of fairness.

Thursday's deal has a variety of winners are losers. Here's my list:


• Bondholders: more than €22bn was held in senior debt in Anglo and INBS in September 2008. Those bondholders should have incurred large write-downs. Instead, they were paid back in full, plus profits.

• The European Central Bank: they get every cent of their money back. They get rid of those pesky promissory notes. And they leave Ireland with a €31bn bill for stabilising the eurozone.

• Anyone who gains from the reduced costs in the next few years: €4bn is a lot of money, and hopefully will be put to good use.

• The Government: at least in their own eyes. They told us (once elected) it would be immoral for the Irish people not to pay other people's debts. Job done. They're absolutely delighted with themselves.


• Anyone who believes exchanging a €25bn IOU to a dead bank for €20bn of sovereign debt is a dumb move.

l Future generations: in explicitly not looking for any write-down, the Government has ensured that children not yet born will pay later, so we avoid paying today.

• Future governments: a different Government, willing to say that these debts are not ours, might have achieved a significant write -down on the IOU. As it has now been converted to sovereign bonds, this is no longer possible.

• Voters: at least those who voted for Fine Gael or Labour in the belief that they were going to burn bondholders, etc. The Government has confirmed that these voters were confused. Apparently it was never suggested that Anglo would not get another cent of our money, or that bondholders would be asked to pay for their own mistakes.

Next week, the deal will be voted through the Dail by government TDs.

Their leaders have just reduced the cost of the promissory notes by €4bn.

That is without doubt a success. They have also just guaranteed the following: generations of Irish people will pay €31bn so that those who made loans to Anglo and Irish Nationwide during the bubble get their money back.

That is without doubt an abject failure.

Stephen Donnelly is the Independent TD for Wicklow and East Carlow.

Irish Independent

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