State faces millions in losses if forced to sell bonds

The Government is facing a potential shortfall of tens of millions of euro ahead of this year's budget as it comes under pressure from the European Central Bank (ECB) to sell the bonds that replaced the Anglo Irish promissory note sooner than expected.

In its annual report published yesterday, the ECB said last year’s promissory note deal, which saved the State an estimated €20 billion in borrowing costs, raised “serious monetary financing concerns”. These concerns “could be somewhat mitigated” by the disposal strategy of the Irish Central Bank, the ECB added. A crucial aspect of the promissory note deal agreed last year was the length of time the Central Bank would hold the long-term bonds that replaced the promissory notes.

The Central Bank committed to selling the bonds at regular intervals, including a minimum sale of €500 million this year. But it is now coming under increasing pressure from the ECB to dispose of the bonds at a faster pace than originally envisaged.

A faster disposal would have significant financial repercussions for the State. Under the current arrangement, the State pays a coupon on the bond to the Central Bank, which is ultimately returned to the exchequer at year-end as part of a Central Bank surplus. If the bonds are sold by the Central Bank to private bondholders, the State would then pay these investors and Central Bank surplus would be lowered by that amount.

Interest rate
The interest rate on the bonds equates to roughly €900 million a year, meaning that the State would stand to lose out on €36 million on each €1 billion worth of bonds disposed.

The current benign market conditions and the low level of Irish Government bond yields on Government bonds, which now stand at less than 3 per cent, is bolstering the case for a swifter sale.

In a statement last night the Central Bank said it was “comfortable” with the views expressed by the ECB, adding that it had expected that the “exceptional operation” would receive a lot of scrutiny.

The Department of Finance declined to comment.

Fianna Fáil criticised the ECB, saying any attempt to dilute the deal should be resisted. "Any suggestion by the ECB that this could be reopened or the deal diluted in some way by making the Central Bank sell off its holding of Government bonds more quickly should be flatly rejected by the Irish authorities," its finance spokesman Michael McGrath said.

"In fact we should be seeking to be allowed hold these bonds to maturity as well as having action taken to deal with the debt taken on in relation to AIB, Bank of Ireland and Permanent TSB, " he said.

Deal brokered
Sinn Féin finance spokesman Pearse Doherty questioned the entire basis of the deal brokered early in 2013 and the Government's claims that it was of benefit in dealing with Ireland's debt burden.

“While these bonds remain at the Central Bank the Government still has some options. Currently the Government can still delay the issuance of the bonds. One of the concerns we raised is that the ECB would push for a faster timeline for the disposal of the bonds than originally planned. Once the bonds are out on the open market our debt increases and our options are closed down.

The promissory deal was struck in February 2013. Sources have told The Irish Times that there is still significant disquiet among a number of governing council members of the ECB, who represent the central banks of the various euro zone countries, about the terms of the deal.