I was interviewed on Morning Ireland earlier today about the prospect of a deal with the EU on Ireland’s promissory notes. A recording is available here.

From a public relations point of view, the revised promissory note arrangement has been a great success for the Irish government. This editorial in the Sunday Independent declared

In the staring match between Ireland and the EU and the ECB, the other guys blinked first.

The Irish Times, only slightly more restrained, headlines the new promissory note arrangement as a “coup” for Michael Noonan.

What is supposed to have been achieved? Apparently, the Irish state has saved having to make a cash payment to IBRC with the burden of the payment being delayed until 2025.

In reality, a quick inspection of the announcement makes clear that neither of these claims are true.

The Irish state has not been saved making a cash payment: NAMA, an arm of the state, has provided €3.06 billion in cash to the IBRC, which IBRC is using to repay Emergency Liquidity Assistance loans, just as the ECB (the blinking guys) had always insisted.

In a separate arrangement, the government are planning to have Bank of Ireland provide a one-year loan to IBRC so that NAMA can be repaid and the state’s cash levels (including NAMA) can be restored to what they were prior to the ELA payment. IBRC will need to repay this loan next year.

Because the state is providing cash to IBRC to make its promissory note payment, the only thing added to what was already supposed to happen is that the state has arranged a one-year loan from Bank of Ireland.

Is arranging short-term loans from Bank of Ireland—a bank that has limited access to capital markets and is looking to shrink fast to meet troika-imposed deleveraging targets—a route to putting Ireland’s debt on a more sustainable path? Clearly not.

So the deal does literally nothing to improve debt sustainability. It also compromises the supposed operational independence of NAMA and raises questions about state intereference with the majority-private-owned Bank of Ireland.

For these reasons alone, this arrangement is an unwelcome development. However, in addition, it appears that the shenanigans surrounding this arrangement have seriously upset European officials who are better able to see what is going on than the Irish media.

This story from Arthur Beesley of the Irish Times likely illustrates the attitude of our EU colleagues.  In relation to Minister Noonan’s comments that he now wants a wider deal to replace the promissory notes altogether, the story reports:

“This risks further antagonising the ECB governing council,” said a euro zone source.

“His remarks were not helpful, particularly on the day after the bank agreed to facilitate an operation designed purely to give him an opportunity to make a statement saying that the payment of the promissory notes was settled with bonds.”

The Euro zone source is making clear that, as far as they are concerned, this deal was purely about optics.

I suspect that pennies may start to drop in Ireland about what has been arranged when Bank of Ireland have their shareholder meeting. For now, though, I’ll let it drop.

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.

Despite a lot of hype in recent weeks that the Irish government were going to arrive at a deal with the ECB that would reduce the burden imposed by promissory note payments to the IBRC, I had remained fairly skeptical that any announcement this week would represent significant progress.

In my last post on this issue, last Saturday, I had noted that any deal that was done was just in relation to the March 31 payment and did not affect future payments. I had written:

Is it likely that the ECB will agree at a later date to a more comprehensive restructuring of the promissory notes allowing for a systematic payment deferral? I would guess not. While you could argue that a deal on the current payment shows some flexibility on the part of the ECB, an alternative viewpoint is that six months of “discussions” failed to get anything other than a fairly meaningless one-off deferral.

My pessimism turned out to be too optimistic. In fact, it appears that the Irish government made essentially no progress with the ECB even regarding the current payment.

The arrangement arrived at today (ministerial announcement here) is so complex that it will bamboozle everyone and this confusion will provide plenty of cover for those who wish to claim that it represents useful progress. However, effectively what is happening is that the Irish government are providing the IBRC with a long-term bond, the IBRC are exchanging that bond with Bank of Ireland for one year in return for €3.1 billion in cash and this cash will be used to repay the IBRC’s Emergency Liquidity Assistance (ELA) loans.

What has been achieved? In essence, the government has delayed paying out the cash for this year’s €3.1 billion but the IBRC (and hence the state) now has to repay Bank of Ireland this amount next year. This is effectively a one-year deferral of this payment, which is far worse than the long-term deferral of the payment that I had already described on Saturday as “fairly meaningless”.  Because the ECB have fully achieved their goal — getting a full €3.1 billion ELA repayment — calling this “a deal” with the ECB is hardly appropriate. Rather, it represents an arrangement with a privately-owned Irish bank that maintains the appearance of some sort of deal having been agreed with the ECB.

What further puzzles me about this transaction is that Governor Patrick Honohan described the plan to the Oireachtas Finance committee on Tuesday as follows:

The arrangement regarding this first tranche is very much in the direction in which I want us to go. It is a major step forward qualitatively in the approach.

I guess one could say it is “the direction we want to go” in the sense that this arrangement represents a deferral of the cash payment, however short-term. But the actual arrangement used to implement this deferral — borrowing the cash on a short-term basis from a privately-owned bank — is not at all a sustainable way to refinance a debt that amounts to almost 20 percent of GDP. So I fail to see how this is a major step forward, qualitative or otherwise (I had been puzzling about qualitative major steps ….)

Where does this leave us? In the same position as I reckoned we were last Saturday. No deal of any substance has been done with the ECB nor is one forthcoming. An arrangement to borrow long-term funds from EFSF or ESM to pay off IBRC’s debts and retire the promissory notes may happen. But it would require political approval across Europe, will not happen before Ireland passes the Fiscal Compact and would effectively amount to a second EU-IMF bailout with all the terms and conditions that this implies.