Q&A: What the deal means
structure known as ELA. Nama will also be involved, “buying” some of the IBRC collateral held by the Central Bank by issuing Nama bonds and thus taking control of IBRC assets. Nama will, later this year, try to sell these assets.
So does this mean the debt disappears?
No, far from it. It will become cheaper, though, and won’t need to be repaid as quickly as the promissory notes. This is being achieved by the State issuing a batch of long-term bonds with a life of up to 40 years to replace the promissory notes.
These bonds will have an average interest rate of 3 per cent, whereas the headline interest rate on the promissory notes was 8.2 per cent. It should be remembered, however, that the real interest rate on the notes was considerably lower because both IBRC and the Central Bank benefited from the way the Statemade its repayments.
But does this not just mean that the debt is hanging over our heads for longer?
Yes, we now won’t see the back of it for four decades, with the last payment due in 2053. Wherethe Government steals its victory, however, is in agreeing that no repayment of the principal (the actual amount borrowed) needs to be made until 2038.
This eases pressure on the State’s finances over the next few years. The Taoiseach likes to use the example of replacing an expensive short-term overdraft with a cheap long-term mortgage.
But surely long-term loans are ultimately more expensive?
Here,we get some help from inflation, the process by which prices rise in most economies. By the time we come to repay the bonds, inflation should have significantly eaten into their value, thus making them cheaper. The complicated structure of this deal has also been designed to minimise the overall cost.
Where does the IBRC liquidation fit into all of this?
Many would wish Anglo and Irish Nationwide had been liquidated, or wound up, at the very start of the financial crisis, saving us all a lot of stress and money.
Instead, both banks were originally allowed to limp on because the then government was persuaded that letting them go would destabilise the whole financial system too much. In the event, State bankruptcy ensued anyway.
So what’s the logic of liquidation now?
It could be argued that IBRC’s liquidation was not strictly necessary for a deal to be done on the promissory notes, but that it came as a convenient consequence, albeit not for the staff and customers involved.