The first clear sign has emerged that the Central Bank is to sell down the bonds issued as part of the IBRC liquidation at a pace faster than the minimum commitment given to the ECB. The National Treasury Management Agency (NTMA) announced yesterday that it had cancelled €500 million of one of the bonds which it had bought from the Central Bank.
The Central Bank had already sold another €500 million of this 2038 floating rate bond to the NTMA at the end of June. At the time of the IBRC liquidation in early 2013 it had indicated that it would sell a minimum of €500 million a year of these bonds between 2014 and 2018. So the sale of €1 billion this year – following a €500 million sale at the end of last year of the same 2038 bond which met the 2014 commitment– suggests that the Central Bank is moving to sell down the bonds more quickly than the minimum commitment.
Following the cancellation, the total nominalamount outstanding for this bond will decline to €500 million, the NTMA said. The 2038 bond was one of a number issued to the Central Bank, with a total value of €25 billion, as part of the complex transaction to refinance the promissory note, the vehicle used by the Government for much of the bailout of Anglo Irish Bank and Irish Nationwide. The ECB expressed reservations about the transaction, as it feared it was close to the Central Bank financing the government, and has called on the Central Bank to sell down the bonds as quickly as possible.
The Central Bank pointed out in an information note issued with its 2014 results that at a time when the NTMA could refinance the bonds at such low interest rates, selling down the bonds led to increased profits to the Central Bank. The bulk of these profits are then returned to the exchequer via an annual dividend. The December 2014 sale led to a €180 million gain to the Central Bank and each of the two recent transactions will have yielded similar or greater profits.
However there is also a cost to the State of early disposal, as the interest paid on the bonds by the NTMA is now paid to a third party, and not the Central Bank, as was the case with the special floating rate bonds. The Central Bank argued in its note that this interest rate gain of holding on to the notes and refinancing them at a slow rate could be offset in future if interest rates rise and it cost the NTMA more to raise replacement debt . The bank would not comment further last night on its future plans.
Because the floating rate bonds issued to the Central Bank are not widely traded, the NTMA raises money from the market through a normal fixed interest rate issue. It then pays the Central Bank for the floating rate bond, which is then cancelled.