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IBRC bonds replaced promissory notes used to fund the losses of Anglo Irish Bank and Irish Nationwide
The Central Bank has sold half a billion euro worth of IBRC bonds – the debt instrument that replaced the promissory notes used to fund the losses of Anglo Irish Bank and Irish Nationwide building Society.
The bonds were bought by the National Treasury Management Agency (NTMA) – the very organisation that issued them to the Central Bank in the first place.
Effectively the taxpayer has paid off half a billion of the €25 billion in debt that was left over when IBRC was liquidated last year.
Under the terms of an agreement with the European Central Bank, the payment of the promissory notes debt with newly issued, long duration Irish Government bonds was deemed legally acceptable only if it included a timetable to sell off part of the Central Bank’s holding of the bonds.
For the period 2014 to 2018, the Central Bank is obliged to sell off half a billion euro worth of IBRC bonds each year (rising to €1 billion a year until 2024, then €2 billion each year after that).
It had been assumed that the bonds would be sold to private investors, who could then hold the bonds to maturity and collect interest payments each year – which would reduce the attractiveness of the overall deal to the State.
However in the transaction carried out just before Christmas, one state agency (NTMA) has bought the debt back from another state agency (the Central Bank) with cash.
The NTMA – as the issuing agency – can now cancel the bonds it has bought back.
Effectively it is an early repayment of debt. It can thus save on the interest payments due each year until June 2038. It is understood the cash for the repayment comes from the NTMA’s cash holdings. Reducing the cash balance at the NTMA also results in an interest saving.
Neither the NTMA nor the Central Bank of Ireland would disclose the price paid for the bonds, which carry a face value of €500,000,000.
Since these bonds were issued, in February 2013, the price of Irish Government bonds has risen significantly, as investor demand and confidence grew.
If the IBRC bonds were marked to market prices, the Central Bank could be in a position to record a profit on the transaction.
The Central Bank declined to comment on the transaction, except to confirm that it had taken place. Any further information on the transaction – if disclosed – will come in the Central Bank’s annual report, due in April.
This may also clarify the accounting treatment of the transaction.
The half a billion Euro of bonds bought back by the NTMA were part of a €2 billion issue that is due to mature in June 2038. In total some €25.034 billion of bonds were issued to cover the debt of IBRC on its liquidation.
All are held by the Central Bank, which receives the annual coupon, or interest payment on the bonds.
This latest transaction reduces the outstanding amount of IBRC bonds to €24.5 billion. It also reduces the amount outstanding on national debt by half a billion to €175.7 billion.
The state injected €31 billion into Anglo Irish Bank and Irish Nationwide using money borrowed from the Central Bank/Eurosystem. It issued a promissory note agreeing to repay this sum in ten annual instalments of €3.1 billion.
The first instalment was paid in cash, and the second was settled with a new government bond that is due to mature in 2025, leaving just over €25 billion outstanding on the promissory note when IBRC was liquidated.
This sum was settled with the Central Bank with long dated government bonds that are due for repayment between 2038 and 2053.