Q&A: What the deal means

What happened yesterday?

We learned that the Government had achieved its long-stated goal of reducing the cost of a portion of the State’s debt. This debt, which related to the former Anglo Irish Bank and Irish Nationwide Building

Society, was created in 2010 whenthe State issued promissory notes.

Why did we have promissory notes in the first place?

The government of the time was under pressure to support Anglo and Irish Nationwide (now together known as IBRC) with an injection of billions of euros that it simply did not have.

The usual route to raising the funds on the bond markets was closed to the Republic at the time and other sources of cash, such as the National Pension Reserve Fund, had already been exhausted, so the idea of promissory notes came to the fore.

The notes are like IOUs, the beauty of which (at the time) was that the State did not have to produce the ¤30-plus billion needed by the two banks upfront. Instead, it could promise to pay it in the future,

along with interest. The ECB, which held all the cards at the time, said this was OK.

How did the promissory notes work in practice?

The government gave IBRC an IOU for €31 billion, which the banks then used as security, or collateral, to borrow from the the Irish Central Bank via its short-term Exceptional Liquidity Assistance facility –

the very last resort for commercial banks.

This was expensive, involving an annual repayment of €3.1 billion until 2023, followed by lesser payments until 2031. The total cost of this would have been €48 billion.

Why was it so important to achieve a deal?

Apart from the cost savings that will be realised under the newarrangement, the Government had hung its hat on the negotiations and thus needed the political victory that should ensue.

Crucially, it is expected that the deal will ease the path to exiting the EU-IMF bailout programmeat the end of this year by making it easier for the State to borrow on the bond markets.

A good gauge of this will be the reaction of ratings agencies to the new deal – an enthusiastic thumbs-up should make life for the State on the bond markets much more straightforward.

How will the new deal work?

IBRCwas liquidated early yesterday morning, which means it will be quickly run downand disappear from the banking system.

As part of this, the Central Bank will take ownership of the promissory notes that were being used as collateral for the funds the Central Bank itself was providing to IBRC via the last-resort lending