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.
Politically, both Kenny and Noonan noted that the liquidation of IBRC was important. The Taoiseach told the Dáil yesterday: “The remnants of Anglo Irish Bank and Irish Nationwide – stains on our international reputations and dents to our national pride – have now been removed from the financial and political landscape. Their closure bookends a tragic chapter in our country’s history.”
The 56-page legislation is clear in its purpose – the appointment of a special liquidator and the sale or transfer of assets to Nama.
Economist Dr Alan Ahearne yesterday suggested it removed an element of duplication as transferring €12 billion to €14 billion of assets from a wind-down bank to Nama made sense as it was the specialist agency already dealing with dozens of billions of euro worth of similar assets.
This process won’t be simple and the special liquidator appointed to the IBRC under the Act is required to have an independent valuation carried out of assets acquired by Nama from the bank. There may be some injustice along the way, and smaller developers finding themselves dealing with the behemoth that is Nama.
There is also the need for adroitness in the handover, especially with complicated and problematic cases such as that relating to Seán Quinn and his family.
Another political downside is the fact that about 1,000 people have lost their jobs in an abrupt and insensitive manner.
Central Bank governor Patrick Honohan said in Frankfurt yesterday that the Anglo Irish Bank episode was “horrendously damaging” for Ireland.
Asked why IBRC had to be liquidated, or whether it was an ECB condition for a deal, he declined to go into any further detail.
“The whole thing hangs together, one thing leads to another and that is part of the structure we have ended up with,” he told journalists.
He said the plan to liquidate IBRC was “part of the design from a long way back”.
“There were a number of options being considered but [liquidation] was there for some time,” he said.
Mr Honohan said it was necessary to design a structure that satisfied all in the euro zone and did “not take anybody out of their comfort zone”.
He insisted that replacing the promissory note with a long-term bond was not monetary financing, but merely ensuring the Central Bank of Ireland did not end up with “non-standard, non-tradeable” promissory notes.