Tackling Anglo's toxic legacy leads to expanded role for Nama
The series of measures put in place by the Government over the course of 24 hours has resulted in the immediate demise of what was left of the failed Anglo Irish Bank, a new role for Nama and the conversion of punitive promissory notes into Government bonds involving far smaller payments by the State each year.Promissory notes
The promissory notes were put in place by a weakened government in 2010 as it tried to shore up Anglo Irish Bank and Irish Nationwide Building Society.
The overall amount that they covered was €31 billion but the repayment terms were onerous, mainly because they had to be repaid in an extraordinarily short time span of a decade (for the most part) rather than the customary 30- or 40-year time period.
The upshot was an annual payment of €3.1 billion each year between now and 2023, with smaller payments for a decade afterwards. A loan of a further €20 billion over that period was necessary just to service the loan and its interest. And so when all that was calculated the overall bill came to €48 billion.
The Government’s aim was to convert the notes into long-term sovereign bonds. While the principal to be paid off would remain the same, the extension of the term from a decade to perhaps 30 or 40 years would result in far smaller annual payments, much like converting an overdraft into a long-term mortgage.
There were legal and political hurdles to overcome with the ECB. The arrangement that was agreed, and that would not fall foul of any EU treaty provisions, was the liquidation of the IBRC and the sale or transfer of its assets to Nama. This was achieved by the emergency legislation which was rushed through the Oireachtas in the early hours of yesterday morning. With IBRC gone, the promissory notes could be converted into bonds.
With IBRC liquidated, the Central Bank assumed full ownership of the notes and, as agreed with the ECB, they have been exchanged for long-term government bonds with maturities of between 25 to 40 years. The average maturity is 34 years, over four times longer than the repayment schedule for the promissory notes.
While the overall repayment will be identical, annual payments in the short term will tumble dramatically.
Minister for Finance Michael Noonan said yesterday it would mean €1 billion less in adjustments between now and 2015 – in other words fewer taxes and fewer cuts. Taoiseach Enda Kenny said it was not a silver bullet but it would undoubtedly lighten the burden.
There are another couple of bonuses. For one, the interest rate charged by the Central Bank is currently 3.5 per cent, but it gets its money from the ECB at 1 per cent. The upshot is that it passes its interest profits to the exchequer, giving an effective rate of 1 per cent on the bonds. In addition, both Noonan and Labour’s Arthur Spring pointed out that the €20 billion loan needed to service the interest and repayments of the promissory note would not be necessary.