Promissory notes debt deal a step in the right direction
Thousands who sensed a "historic injustice" attended the Dublin anti-austerity march organised by the Irish Congress of Trade Unions, one of many around the country, at the weekend. photograph: dara macdónaill
The deal reached last week, with the blessing of the European Central Bank, to restructure the infamous promissory notes relating to the former Anglo Irish Bank and Irish Nationwide Building Society is a good one.
Given the constraints imposed by the ECB’s statutes, it was probably close to what was ever achievable and will bring significant gains for the Irish economy.
The core element is that the financial “sword of Damocles”, namely the repayment of €3.1 billion annually over the next 10 years, has been removed. The replacement of the notes by long-term bonds will lower considerably the financing needs of government in the years ahead. This will ease an exit from the bailout and a return to normal market access.
The interest rate on the bonds (about 3 per cent, although this may increase if world market rates were to rise) is significantly below what the Government would otherwise have had to pay. The Coalition has been able to arrange not only cheaper financing but financing over a much more extended period. While the total debt has remained unchanged in nominal terms, in a financial and economic sense the real value of what will end up being paid has been reduced considerably.
Critics, while rather begrudgingly accepting these gains, have argued that the Government should have simply refused to pay any debt associated with the Anglo/INBS debacles. Whatever about the sense of “historic injustice” involved, there is no doubt that such an action would have constituted a default by the Government. While the promissory notes were an unusual financial instrument, the fact remains that they were an explicit commitment on the part of the sovereign Irish government
The ECB ’s statutes and practices rule out any debt write-off owed to it and it would have been naive and a waste of time for the Irish side to have persisted , as some have suggested, in asking for it. Raising seriously the spectre of default would only have been credible if the Government had intended to do it.
But the effects of a default could have been catastrophic: a rupture of relations with the ECB (on whose financing the fragile Irish banks still depend heavily); a major setback for Government efforts to re-enter bond markets; and unpredictable, but potentially very damaging, broader consequences for our reputation as a legally irreproachable location for foreign investment.
Moreover, simply announcing a default does not mean the debt goes away. More than 10 years after Argentina defaulted, aggrieved creditors are still pursuing the Argentine government, which remains shut out from international financial markets. A few weeks ago President Christina Kirchner was unable to leave Argentina on the government jet for fear it would be seized by waiting bailiffs. Do we really want to run the risk of placing our President in the same situation?
The frenzied discussions must have seemed bewilderingly complex to many members of the public who understandably want to know the practical effect for them. Budgetary savings on the interest rate bill of about €1 billion will be achieved during 2013-2015 . This is essentially due to the difference between the rates payable on the new bonds and the old promissory notes, after factoring in the implications for the profits of the Irish Central Bank, which are transferred to the budget. However, in 2013 the overall net savings will be zero, as payments have to be made to some depositors of IBRC under the State’s deposit guarantee scheme.