Cantillon: When is the best time for Central Bank to sell Irish bonds?
Speeding up disposal of bonds it holds on foot of the Anglo promissory note cancellation not seen as good news in all quarters
The Central Bank: Is the bird in the hand represented by the money realised now worth more than two in the bush? Photograph: Matt Kavanagh
The news that the Central Bank is speeding up the disposal of the bonds it holds on foot of the Anglo promissory note cancellation has not been seen as untrammelled good news in all quarters. It has been pointed out that the interest on these bonds will no longer flow back into the exchequer via the Central Bank and thus there is an immediate cost.
This is correct, but at the same time simplistic. It ignores the fact that the bank cannot hold the bonds to maturity. The ECB – which ultimately financed the whole thing – only swallowed the deal on the basis the bonds would be sold into the market and its loans to Anglo repaid.
The point is that the bonds have to be sold and the question is really, when is the best time? As far in the future as possible would appear to be the answer, but again that is a bit simplistic.
The current high prices of Irish bonds are by any rational measure unsustainable and speeding up bond sales now to take advantage of them – with a view to perhaps slowing down sales when prices inevitably fall – makes sense.
How much sense depends on the capital gain to be had versus the interest payments that will have to be made to the new owners.
Indeed, you can take the whole argument a step further and say that the bird in the hand represented by the money realised now – in terms of the budgetary arithmetic – is worth much more than the two birds in the bush of the potential interest savings.
Over and above all this is the role that the accelerated disposals play in smoothing the path towards the refinancing of our loans with the IMF. It diffuses at least some of the anger felt in Frankfurt that Ireland in effect obtained monetary financing for itself via the deal.
Indeed, this is arguably the real motive for the acceleration and the benefits that accrue from refinancing the IMF debt also has to be thrown in the mix when taking a view as to whether or not accelerating the sale of the promissory note bonds is a good idea.