DJA powerpoint

ANGLO DEBT AND THE PROMISSORY NOTES EXPLAINED

PLUS What can you do? How to get involved

Anglo & INBS Crash  2008 – Irish property bubble spectacularly bursts  September 2008 bank guarantee  2009 – Merrill Lynch states “Anglo is financially sound”  2009 – Anglo is nationalised  March 2010 – Anglo posts the largest loss in Irish corporate history (€12.7 billion for 2009)  March 2011 – Anglo then breaks its own record (€17.7 billion loss for 2010)  The INBS numbers are proportionally even worse 

Both banks insolvent

Now - The IBRC  Anglo Irish Bank = €29.3 billion  Defunct – no new deposits and no new loans  Insolvent  Under criminal investigation  Irish Nationwide Building Society = €5.4 billion  Defunct – no new deposits and no new loans  Insolvent

 €30.6 billion promissory notes – to pay for ELA 

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Letters of comfort Never brought before the Oireachtas

 €4.1 billion exchequer payments

Guarantee  The Anglo/INBS debts were originally guaranteed by the

Irish State in September 2008 as part of the blanket bank guarantee  The Irish Government made an initial payment of €4

billion to cover Anglo’s debts in 2009. This was paid out of the exchequer finances. €0.1 billion was paid to INBS  Over the course of 2009 and 2010 it became increasingly

clear that Anglo and INBS were insolvent

Averting Collapse  If the insolvent banks were to collapse their debts would

have fallen back on the Irish State and become sovereign debt - a consequence of the bank guarantee  To prevent this the Irish Government had to obtain

external funding – the Eurosystem of Central Banks was the only realistic source of this funding  Anglo did not have sufficient eligible (i.e. good quality)

collateral to obtain the required amount of Emergency Lending Assistance (ELA) from the Central Bank

Emergency Lending Assistance  To prevent their collapse the Government negotiated a

mechanism with the Central Bank of Ireland setting out the conditions under which the Central Bank would provide Anglo/INBS with sufficient Emergency Lending Assistance (ELA)  This required the implicit consent of the European Central

Bank (ECB) governing council.  Any future changes to the agreed mechanism also require the consent of the ECB governing council

Paying Back the ELA  The ELA provided by the Central Bank to the IBRC is   

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what enables the IBRC to pay-off its obligations Most of the bondholders have now already been paid using this ELA The ELA is also used to pay-off creditors/depositors and to enable the IBRC to retain its banking license Eventually the ELA has to be paid back to the Irish Central Bank This is done through promissory note repayments

Promissory Note  The Irish Government negotiated with the ECB

governing council to create a ‘promissory note’ as a liability owed to the IBRC (Anglo/INBS)  The promissory note is therefore an asset of the IBRC  This asset can be used by the IBRC as collateral to obtain the necessary ELA from the Central Bank  This is because the Irish Government is backing the promissory note with ‘letters of comfort’

The price  A promissory note is a negotiable instrument 

one party (in this case the Government) makes an unconditional promise in writing to pay a defined sum of money to the other party (in this case Anglo/INBS – now called IBRC), on specified future dates or on dates to be determined, under specific terms

 The State’s obligation is to pay down €30.6 billion

over 20 years (2011-2031)

How it works  The promissory note repayments are paid to the IBRC

– the IBRC then reduces its ELA obligations to the Central Bank  In practical terms the Irish Government has received a loan from the Central Bank to pay off the bondholders  It is ultimately a transfer of wealth from the people living in

Ireland to the bondholders that lent to Anglo/INBS  The bondholders and other creditors continue to be paid using the ELA from the Central Bank – the promissory notes represent our commitment to eventually repay the Central Bank

How much it costs  The Irish Government is scheduled to make over €47 billion of

promissory note related payments between March 2011 and March 2031. This is composed of:  

€30.6 billion capital reduction – the €30.6 billion owed €16.8 billion in interest repayments

 Much of the funding for this will need to be borrowed unless the State

is running substantial fiscal surpluses. This is very unlikely in the medium-term  These borrowings will therefore also have to be financed 

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at an assumed 4.7% interest rate on borrowings the total cost to the State will reach €85 billion by 2031 Some of which will eventually return to us due to the circular nature of the payments

What happens when the ELA is paid back to the Central Bank?  Central Bank of Ireland (CBI)

 Asset side of their balance sheet 

CBI reduces its ELA assets by €3.1 billion

 Liability side of their balance sheet  

CBI expunges €3.1billion from the system Inflationary impact if this is not done – increasing the money supply (monetisation of debt)

Socio economic implications  Over 2% of GDP will be drained out of the State each

year up to 2023 to make the promissory note repayments 

this will be through an additional €3 billion to €4 billion of fiscal consolidation (tax increases/spending cuts)

 IMF research (Leigh et al, October 2010) indicates that

each 1% of fiscal consolidation:  

reduces GDP by 0.5% to 1% and Increases the unemployment rate by 0.3 percentage points

Socio economic implications  The €3.1 billion promissory note payment due to be made

by the state on behalf of the former Anglo on March 31 2012 is: 

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greater than the total cost of running Ireland’s entire primary school system for an entire year and greater than the estimated cost to provide a next generation broadband network for all of Ireland (€2.5 billion).

 €30.6 billion is equivalent to just under 20% of Ireland’s

current GDP or €17,000 for each person working for pay or profit in the State. €47.9 billion is 30% of Ireland’s current GDP.

The issue  The interest rate is not the issue  A red herring  The real issues are:

The size of the principal 

Reduction in the principal – write down

When we are making the repayments 

Changing the schedule of repayment –holiday, postponement

Risks in promissory note suspension/postponement? “The ECB will cut off funding to our pillar banks” 2. “It will impact on the European banking system” 3. “It will undermine investor confidence in Ireland” 4. “It is a condition of the EU/IMF Memorandum of Understanding” 1.

Are these risks plausible?

Risks to suspension/postponement?  “That the ECB would cut off funding to our pillar banks”  Remove funding and the pillar banks will fall  But this would trigger the very contagion the ECB has been trying to prevent  ECB cannot give the pillar banks inferior T&C to other Euro zone banks  “Impact on the European banking system”  Promissory note payments do not involve the European banking system  No precedent created as IBRC is not a functioning bank

Risks to suspension/postponement?  “Undermine investor confidence in Ireland”  

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Not a sovereign default Ireland is already shut out of the markets and locked into an official programme of assistance until the end of 2013 Amelioration of the Anglo/INBS burden improves Ireland’s debt dynamics and makes Ireland better placed to pay its other debts

 “A condition of the EU/IMF Memorandum of

Understanding” 

The promissory note repayments are not a condition of the deal agreed with the troika

Decision makers - ECB Governing Council  ECB concerns:  Precedent regarding repayment of debt obligations – parachute drop analogy - floodgates  Adherence to rules and protocols – is flexibility legal?  Mildly inflationary – monetization of the debt  But the ECB need a success story  The Greek programme has already failed  The Portuguese programme is failing  Italy is in the firing line  Promissory note flexibility can help prevent the Irish programme from failing

The need for a success story

What can you do?  Sign our petition, and ask your friends to do the

same. Available at: www.notourdebt.ie  Write to your local TDs. We have sample letters available on our website  Organize another public or community meeting yourselves: Education and Resources pack available on our website  Get involved in our national day of action