The ECB is uncomfortable with Ireland’s promissory note arrangement
By Economics Correspondent Sean Whelan
Is the Central Bank selling down its stock of Anglo Bonds faster than required? If it is, what bonds is it selling? And most importantly of all, will it cost us or save us money?
There are in fact two separate types of bonds used to settle the old promissory notes, issued in two different years, and using different types of coupon.
Think of IBRC bonds and we think of the €25bn issued in 2013 to the Central Bank as part of the liquidation of IBRC. These were newly created floating rate notes – the interest charge is an average of 2.63% above 6 month Euribor.
Under the deal with the ECB, these bonds are to be sold on to the open market in line with a schedule of roughly half a billion a year until 2019, at which stage it goes up to €1bn a year. The figure rises again to €2bn a year from 2024 on.
The most important point about these bonds is that the interest payment on them goes to the bondholder. Right now that bondholder is the Central Bank of Ireland. It can book the interest received as profit.
At the end of the year it can pay out most of its profit as a dividend to its shareholder… Who happens to be the Minister for Finance.
So the longer the Central Bank holds these bonds, the cheaper it works out for Ireland, as most of the interest payment is effectively returned to the State.
Once the bonds are sold to the market, the circle is broken and the interest leaks out of the State system, becoming a real cost to the taxpayer. So why sell them at all?
The ECB is uneasy with the structure of the promissory note deal precisely because of the circular nature of most of the interest payments. Including a schedule of sell offs of the Central Banks holdings of these new IBRC bonds to the open market is enough to keep the deal on the right side of legality as far as the ECB is concerned.
But there is another tranche of bonds that were used to settle a prom note payment.
This is the €3.06bn payment due in March 2012.
Instead of paying cash, the Government settled that year’s bill with Government bonds. These bonds were an additional amount of an already existing bond – in this case the 2025 bond that was first used to raise around €8.2bn in 1999.
These bonds carry a fixed coupon of 5.4%. As an existing bond, they already trade on the bond market.
This is a key point, because if the Central Bank was selling any of the new, long dated bonds issued in 2013, they would have to convert them into fixed rate bonds. They would then show up in the daily reports published by the NTMA, showing the new bonds, their coupon, their expiry date and the amount outstanding.
But no such new treasury bonds exist (yet).
So the CBI is not selling off the “new” IBRC bonds. What about the “Old” 2025 bonds?
Because those bonds are already listed in the NTMA daily return, we do not know if the CBI has sold any more of its holding. The Central Bank declines to make any comment at all on the IBRC bonds issue. So the only way we find out if they are selling down these 2025 bonds is from trawling through the small print in the Central Bank’s annual report.
What is the point of selling these 2025 bonds off faster than scheduled? It seems it’s back to the ECB and its unease with the whole arrangement.
As Ireland’s economic fortunes improve and the cost of Government borrowing has fallen to record lows (in no small part due to the ECB’s own actions), it seems that some in the ECB want the Central Bank to increase the pace at which it sells on IBRC bonds.
This pressure intensified when the idea of early repayment of the IMF programme loans was broached some months ago. Remember, when Mario Draghi was asked what he thought of the IMF repayment at the September rates meeting press conference, his answer was all about the IBRC bond repayments.
Two things make it relatively easy for the Central Bank to appease this pressure from the ECB by selling on more of the 2025 bonds, rather than any of the “new” IBRC bonds issued last year.
One is that these bonds are already effectively in the market, so the CBI can sell them without showing up on the radar. The other is that the price of these bonds has risen quite a lot in line with the rise in all Irish Government bonds.
This is where the idea of a profit comes from.
It looks like somewhere in the region of €800m could be taken if the entire €3.06bn could be sold at today’s prices (€350m worth was already sold last year).
This seems to be about 45% of the (present value of the) outstanding interest bill on the 2025 bonds linked to IBRC.
So is it worth paying this outstanding interest to a private bondholder or save most of it through the continuation of the almost zero coupon circular arrangement with the CBI?
It’s a judgement call – it looks like the cash price of keeping the ECB on board for the bigger savings that accrue from leaving the 2013 vintage IBRC bonds with the Central Bank a while longer.