Deal on Anglo debt likely, says Honohan

Wed, Mar 28, 2012, 01:00

CENTRAL BANK governor Patrick Honohan has said that a deal to avoid the cash payment of €3.06 billion due this weekend on the bill for the Anglo Irish Bank and Irish Nationwide promissory notes was likely to be successful.

Mr Honohan told the Oireachtas Joint Committee on Finance, Public Expenditure and Reform that annual payments on the promissory notes over the coming years have become “a source of risk to financial stability”.

The Central Bank has been “working vigorously” with the European Central Bank and other parties to come up with a mechanism to reduce the annual cost of the notes ahead of the payment on March 31st, he said.

The plan to settle the €3.06 billion payment with a long-term government bond instead of cash in a deal expected within days would be a “very considerable step forward” and “a very definite gain” on the ability of the State to repay its debts, the governor said.

“It puts off for a long number of years the actual need to refinance those payments,” said Mr Honohan and, even relative to the bigger amount due on the €31 billion promissory notes, was still “a considerable improvement”.

Mr Honohan said there would be “no net cash outlay” to the State under the deal being worked on to settle the €3.06 billion cash payment with the bond.

The money will “circle back” into the exchequer on the bond to cover this month’s payment, he said. “The net cost would be quite low in terms of alternatives.”

The Government wants to issue debt to IBRC on an existing bond rather than issuing a new bond, he said.

It is planning to use a government bond due in 2025 with an interest rate of about 6.8 per cent.

The governor said that finding a way of funding the annual cash payments over a much longer period would help reduce the risk to the financial stability of the State.

The Central Bank was working with the ECB and other parties on a mechanism that was at “an acceptable cost to Ireland” and whose design is “beyond criticism” under EU treaty rules ahead of the March 31st payment date, he said.

“While some technicalities still need to be resolved, it now seems likely that this effort will be successful,” said Mr Honohan.

The Government and the troika are also in “technical discussions” on a wider bank restructuring to avoid fire sales of excess bank assets, which must be disposed of to return them to self-sufficiency.

The Central Bank is studying ways of “enhancing the security of the arrangements surrounding the provision of liquidity to IBRC and ensure that avoidable deleveraging costs to the system as a whole are not incurred in the disposal of non-core assets”, he said.

“This is a large ambition and the design of a full solution that would achieve the objectives and respect the constraints of all the parties has not yet been finalised.”

Irish Bank Resolution Corporation, the former Anglo Irish Bank and Irish Nationwide, which is winding down the lenders, uses the notes as collateral to borrow emergency loans from the Irish Central Bank.

Funding banks through emergency loans was “not something that a central bank will normally do for any longer than is necessary”, Mr Honohan said.