Move on Anglo debt set to boost exchequer earnings

Central Bank speeding up sale of €25bn in bonds held since promissory note deal

The Central Bank is speeding up sale of €25bn in bonds held since the promissory note deal

The Central Bank is speeding up sale of €25bn in bonds held since the promissory note deal

 

The Government stands to realise an unexpected financial gain next year from moves by the Central Bank to accelerate the disposal of debts built up by the defunct Anglo Irish Bank.

The Central Bank has taken steps in recent months to speed up the rate at which it sells off €25 billion in government bonds it has held since the deal last year to scrap the Anglo promissory note scheme.

The bonds are being sold to private investors at a profit, and a large portion of the money realised will eventually end up in the exchequer, it is understood.

Roughly 80 per cent of any profits made by the Central Bank go to the Government, but the money is paid only in the following year.

The extent to which the increased bond sales improve the fiscal outlook for Government as it prepares for the Budget next month remains unclear.

Target

Although the Central Bank was scheduled to sell at least €500 million of the debt by the end of this year, market sources said the Central Bank was now well on track to beat that minimum target.

The deal to scrap the Anglo promissory notes led to the liquidation of Anglo’s successor, Irish Bank Resolution Corporation, and the conversion of notes into government bonds now held by the Central Bank.

According to the deal, the Central Bank is obliged to drip-feed the bonds into the private market, as long as the sales do not disrupt the stability of financial markets. The net result of the arrangement is a €20 billion reduction in the State’s borrowing requirement over 10 years.

But the European Central Bank in Frankfurt has publicly questioned the legality of the deal, saying its concerns might be “somewhat mitigated” if the Irish Central Bank changed its disposal strategy.

Positive investor sentiment

Market sources said the Central Bank’s sole motivation in quickening the bond sales was to take advantage now of positive investor sentiment towards Irish sovereign debt.

Irish borrowing costs have dipped to a record low this year, creating an opportunity for the Central Bank to turn a profit by intensifying the bond sales.

It moved earlier than necessary last year to sell €350 million of the bonds, realising a gain of €24.8 million. Similar, but as yet unknown, gains are being realised on the sales made so far this year.

While transactions in 2013 meant the Central Bank was obliged to sell only a further €150 million by the end of 2014, market sources said the Central Bank had been active in the bond market for months this year. The €500 million target will be “well exceeded”, it is understood.

From 2019, the €500 million minimum annual rate of disposal increases to €1 billion per year.

A further factor in the acceleration of bond sales is the Government’s push for the early repayment of IMF debt.

The Government will start this process by the end of the year, raising new Irish debt at low interest rates to pay off IMF loans which carry a higher interest rate. This would be likely to prompt questions of the Central Bank if it was not quickening the sale of bonds it holds. The Central Bank did not comment last night.