Speech | On the Anglo Bond and the Promissory Notes

This is the text of Stephen’s speech on January 24 on the Anglo bond and promissory notes. The full debate, on a motion by the ULA, is here.

Stephen Donnelly:

The motion before the House calls on the Government not to pay tomorrow the Anglo Irish Bank bond of €1.25 billion and not to pay the promissory note of €3.1 billion at the end of March.

I will deal briefly with the issue of the bondholders.  We all know that this €1.25 billion will go to anonymous holders of Anglo Irish Bank bonds, many of whom are speculators and who are set to make a probable hundreds of millions of euro in windfall profits tomorrow.  They may have bought at 50% discount or less. We know it is anonymous because I submitted questions to the Minister for Finance, Deputy Noonan, last week, asking if he knew their identities and if not, what steps had he taken to find out who they are.  We should at least know to whom we are paying this money.  His reply to my question stated that he did not know who they were and that IBRC had not tried to find out.  This is not acceptable, particularly when the Minister, as an opposition spokesperson, informed the then Minister, Mr. Brian Lenihan, of the two websites which contained this information as to the identities of the bondholders.

I accept that the Government does not wish to pay this money, as do none of us.  The Government is making a judgment call and deciding that on balance this is the lesser of two evils.

There is a link to the promissory notes.  The Government has decided to pay and to keep the ECB happy and therefore it hopes to get a better deal on the promissory notes.

If we can secure a massive write-down in the promissory notes, then I would accept that paying the bond tomorrow is probably the lesser of two evils and that it is probably worth it.  My concern is that the Minister will say that we still have to pay all the money and on time but we can now borrow the money at a lower rate of interest.  That would not be worth it.  I advise that the Government should pause the payment of the bond, find out who are the owners of these bonds and take a few lessons from Greece but not as regards the state of its economy.  The Minister can say that nobody wants Greece here but I do not want us to be in that situation either.  However, what we could learn from Greece is that to play hardball and engage in brinksmanship in these negotiations does appear to pay dividends.  So far, Ireland has had very little in terms of restructuring of interest rates and so forth.

However, the opportunity for major debt restructuring is nearly gone.  The Fianna Fáil Government paid out a vast amount of this money to the unguaranteed bondholders and unfortunately, the current Government paid out a whole lot more last year and it will pay €1.25 billion tomorrow and there will be very little left.  Accepting this is the reality, the opportunity moves to the promissory notes.

The promissory notes are a technical instrument.  The Central Bank of Ireland created €70 billion out of nothing.  It does what central banks can do, which is, it made up money.  It deposited tens of billions of euro into an Anglo Irish Bank reserve account which the Central Bank held and which it regarded as a capitalisation.  What the Irish banks have been doing over the past year is paying that money back to the Central Bank and it has been making that money disappear.  To put this in context, between February and December of last year, the Central Bank was repaid €26 billion.  This is more than the entire recapitalisation from the BlackRock stress test.  If one follows the money, the Irish people borrowed all the money for the recapitalisation last year, we put it into the banking system which gave it to the Central Bank, and the Central Bank made it disappear.  The Irish people were left with a debt of €26 billion which they are borrowing at a very high interest rate.  That is what happened.

The Irish Bank Resolution Corporation, IBRC, the former Anglo Irish Bank and Irish Nationwide, currently owes the Central Bank a total of €42 billion in emergency liquidity assistance.  In March, we will pay €3.1 billion, mainly to IBRC, which will hand that money directly to the Governor of the Central Bank, Professor Patrick Honohan and he will tear up the cheque.  We will borrow it and pay interest on it and then it will increase our national debt and then the money will be torn up.  We are sucking €3.1 billion, plus interest, out of the system.  At reasonable market assumptions, €31 billion will cost us about €48 billion to borrow, in current cash terms.  This is a vast amount of money.

The best possible outcome would be to get agreement that the Central Bank can say it invented the money and the €44 billion is gone.  I am not saying the Government could negotiate this in the next few weeks but the best case would be for the Governor of the Central Bank to say he accepts €44 billion as a write-down that the bank is adjusting its own balance sheet and the Central Bank is now fully capitalised as a central bank.  That can happen and if we controlled our own currency we would be doing something like that.  This is what the Fed is doing and what the Bank of England is doing.  If we were to do this, not only would we not have to pay the €31 billion, for which we are borrowing €48 billion, we could pull a great deal of our money back out of IBRC.  Not including the promissory notes, the IBRC’s assets exceed its liabilities to everybody except the Central Bank, by about €12 billion.  IBRC could use its real assets, pay back everybody and still have €12 billion in assets, which the State could take back.  We would save ourselves the €48 billion we need to borrow the €38 billion, plus €12 billion from IBRC.  Just doing that would write down future general government debt by about €60 billion.  This would get us very close to being able to exit an IMF mission.  We cannot over-emphasise the potential opportunity which the promissory notes and the emergency liquidity assistance, the money the Central Bank printed and put into our banking system, is worth.

The next best case, which is another realistic negotiating option for this Government, is for the Irish Central Bank to say that €44 billion is still owed from the €70 billion but we will not talk about it for ten years.  For the monetary purists in the ECB, there would be an increase in the monetary supply and it will be decreased again, albeit in ten years.  We would not borrow the €48 billion we need now and inflation would do what it does, bringing down the total amount owed by 2.5% or 3.5% per year.

What I do not see as acceptable is a Government position that will still see the €31 billion owed, with Mr. Patrick Honohan tearing up all those cheques, and the money borrowed from the European Stability Mechanism or elsewhere at a low interest rate.  That would not be enough.  I urge the Government to be very bold with the opportunity that the emergency liquidity assistance from our Central Bank and these promissory notes give us.