Unexpected turn for debt deal campaign
The liquidation of IBRC would be the first part in a complex chain of manoeuvres that would culminate in the scrapping of the Anglo promissory notes and its replacement with long-term government bonds to be held by the Central Bank of Ireland. These bonds are needed to repay huge emergency loans drawn down from Dame Street by IBRC.
In the plan rejected by the ECB, the Central Bank was to hold the bonds to maturity. In the new plan, the bonds would be held as tradable instruments which the Central Bank could sell on to investors if demand emerged.
The new bonds would carry a longer average maturity than the 20-year promissory notes and a lower interest rate. The fine grain of the proposal remains unclear, but the core objective would be to significantly reduce the annual €3.1 billion liability the Government must meet under the promissory note arrangement.
In essence, Dublin would pay only the interest on the bonds year-by-year with repayment of the principal put back until they mature. The longer the maturity - there was talk last night the average maturity would be 27 years - the more time there would be for the Government and its successors to put present economic difficulties behind them.
By contrast, the Government is repaying both interest and principal every year under the promissory note arrangement. It is a given that the requirement to shell out €3.1 billion every year does more to hinder recovery than foster it.
But the real benefit of any new arrangement remains to be clarified. The reality is that this will turn on the interest rate attaching to the new bonds. This must approximate with current market rates.
The news on this front is good, for the equivalent of Irish 10-year bonds are trading this week at about 4.12 per cent, less than half the 8.6 per cent rate attaching to the promissory notes. Still, the fact that the bonds will carry a longer average maturity than the promissory notes means Dublin will be paying interest for longer. This is a prime consideration when figuring out the upfront and ultimate benefit of the deal.
The rump of Anglo and INBS would transfer to Nama in the new dispensation. Much remains unclear but a deal seems at last to be in train.