Yesterday’s promissory note announcement was so complex that one might imagine that the government’s officials have been cooking up the various different elements for months. However, there is some fairly strong evidence that the additional elements (the role of NAMA and Bank of Ireland) reflect last-minute changes forced on the government by the ECB’s refusing to give any ground.
The reason I was surprised yesterday afternoon to hear of NAMA and Bank of Ireland’s involvement is that the shape of the deal that was supposed to be announced had been pretty well flagged beforehand and yet this deal was different.
What had been flagged in the moments leading up to the announcement was the IBRC were going to receive their cash payment from the promissory note but (and this is the crucial bit) rather than use it to repay ELA, they would use it to purchase a bond. The actual announcement say them make an ELA repayment via incurring a debt to Bank of Ireland that must be repaid next year.
Why do I say the original plan was a cash payment to be used to purchase a bond? Well, for starters, there’s the IBRC’s own annual report, released yesterday morning but presumably sent to press a few days beforehand. On page 168, it describes the proposed arrangement as follows:
Following an outline request, made on behalf of the Minister for Finance, the Bank is in discussions with the Department of Finance and the NTMA regarding a settlement proposal to utilise the funds due from the next instalment under the promissory notes on 2 April 2012 to acquire an Irish Government bond with an equivalent value.
“Utilise the funds … to acquire a bond” can’t really mean anything other than receiving a cash payment and using it to buy a bond rather than pay off ELA.
Then we had Governor Honohan’s appearance at the Oireachtas Finance committee on Tuesday. Honohan was given a number of chances to describe the deal in the offing and in each case chose to describe it as a cash payment that would then be used to buy a bond.
For example, here’s an excerpt from Deputy Michael McGrath’s questions
Deputy Michael McGrath: In the course of public disclosure, originally made early last week, of the shape of the deal on this month’s payment, it was stated the cash payment would be made by the State to Anglo Irish Bank but that in return the bank would buy an Irish Government bond.
Here’s the portion of Honohan’s answer relating to the cash payment.
Professor Patrick Honohan: With regard to cash payments, the detail is still not absolutely final. Assuming this arrangement works out, when it is complete – even if it takes a few more days – any cash payment would circle back. There will be no net cash outlay and any cash payment made by the Exchequer would come back.
Here’s Honohan replying to Deputy Pearse Doherty
Professor Patrick Honohan: That speaks to the issue of cash payment. A cash payment which is immediately extinguished by another transaction is still a cash payment which is valuable for communicating to markets that the Government does make its payments, even if the total effect of the transaction is to extinguish that cash payment and have the cash come right back to the Government in a prompt manner. I hope there is no tendency to get terribly excited about a cash payment which is rapidly extinguished.
Finally, when asked about Deputy Stephen Donnelly about IBRC’s cash needs, the Governor replied
Professor Patrick Honohan: The question I noted in particular related to how much cash IBRC needs. In fact, the objective of the plan is to eliminate the cash need by postponing it.
However, in actual fact, under the current plan the IBRC has a €3.1 billion cash need that it is honouring by means of a complex chain of transactions in which it borrows from NAMA and Bank of Ireland. There is no sense in which the IBRC’s cash needs have been postponed.
I can only assume that the “assuming this arrangement works out” element of Honohan’s reply to Michael McGrath didn’t actually work out. And the likely reason for this failure was that the ECB insisted, as it appears they had all along, that a €3.1 billion ELA repayment be made, something which required a cash payment. That this cash has been temporarily sourced from NAMA and then Bank of Ireland doesn’t at all change the fact that this deal is not what had been flagged and does not have nearly the benefits of that deal.
Optimistic ministerial talk of “movement from the European authorities” seems highly misplaced. (If the original proposal had gone through, there would have been some grounds for such a statement.) More accurate, I think, were junior minister Brian Hayes’s comments on Today FM to the effect that negotiating with the ECB was negotiating with bankers and you couldn’t get far with that, and that future negotiations needed to be with European politicians.