Q&A Promissory Notes

What is a promissory note?

What is a promissory note?

It is a "promise to pay", or an IOU, whereby one party (in this case the Government) makes an unconditional promise, in writing, to pay a fixed sum of money to the payee (IBRC) in the future.

In 2010, when it became evident that Anglo Irish Bank and Irish Nationwide Building Society would need a considerable injection of funds to pay back their depositors and most of their other creditors, the Government came up with the concept of a promissory note, which was approved by the European Central Bank.

At the time, other options such as funding in the bond markets weren't possible because of our difficult financial position. The promissory note allowed the State to borrow money indirectly from the euro central banking system, using the note it had just created as collateral .

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How does the promissory note work?

The Government provided IBRC with a promissory note for €31 billion, which it then used as security to borrow from the ECB via the Central Bank's Emergency Liquidity Assistance (ELA) facility. This involved a complicated interest rate structure, which included a headline interest rate of 8.2 per cent.

However, according to research from economist Pat McArdle, the actual interest cost to the exchequer is 4.4 per cent (€8.8 billion), while the cost to "Ireland Inc" is less (€2.1 billion), at just 0.75 per cent, because both IBRC and the Central Bank benefit from some of the interest payments.

How much is it worth now?

The amount outstanding on the promissory note comes to €30.85 billion (€25.3 billion for Anglo; €5.3 billion for INBS; and €0.250 billion for EBS Building Society). The structure of the 2010 note meant that the Government committed to repay €3.06 billion every year until 2023, and to smaller payments thereafter until 2031 when the final payment would be made.

Along with these repayments, additional interest payments were also scheduled.

In 2011, the Government made its first payment of €3.1 billion, reducing the total outstanding to €28 billion. Last year, instead of paying it, the Government came up with a convoluted loan structure which involved the National Asset Management Agency and Bank of Ireland.

Why has there been so much hype over a deal?

Having to raise multiple billions every year to repay it is a drain on State finances at what is an already extremely difficult time. Achieving a deal would offer some much-needed relief.

Why has it taken so long?

The EU treaties governing the ECB prohibit it from creating money to finance governments directly. Restructuring the promissory note could leave the ECB vulnerable to the charge that it has breached EU treaties.

Why should we expect a new deal will be better?

A refinancing of the arrangement would stretch out the repayments, taking some pressure off the Government over the short and medium terms.

So we might be rich again?

Not quite. While the consensus is that a deal would be a positive for Ireland and offer a much-needed psychological boost, it probably won't be a game changer. As of the end of last year, the State had more than €160 billion in non-promissory note debt.

As described by Taoiseach Enda Kenny, refinancing the promissory note to a long-term bond is akin to swapping from a "high-interest-rate overdraft to a long-term, low-interest-rate mortgage".

Fiona Reddan

Fiona Reddan

Fiona Reddan is a writer specialising in personal finance and is the Home & Design Editor of The Irish Times