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IT WAS REPORTED last night that ongoing talks between Ireland and its European paymasters, on the cost of Ireland’s banking debt, had moved to the possibility of the banks being given direct access to European bailout funds.
RTÉ’s report suggested that the European Financial Security Facility, the bailout fund which is currently giving cash to Ireland, could issue a bond to the banks which could then be used as collateral for the banks to access the everyday cash they need.
So – in short, if this was to happen, what difference might it make?
When the credit crunch kicked in in 2008, and banks found it much more difficult to get cash from each other, the Irish government stepped in with a scheme that we all now know as the promissory notes.
These notes are essentially a form of government guarantee – a piece of paper which carries a government’s guarantee, saying ‘We will pay you a certain amount, at a certain interest rate, at defined points in the future’.
These notes were then used by the banks – primarily Anglo Irish Bank, but also Irish Nationwide – to get ‘Emergency Liquidity Assistance’ funds from the Central Bank of Ireland, which were used to cover their day-to-day activities and general running costs.
The Central Bank, as central banks do, simply created this money: fabricating the money out of thin air, on the eventual understanding that once the cash is repaid, it simply disappears again, dissolving into an electronic web of 1s and 0s.
The problem is, of course, that the State’s obligations are now being called in. (Naturally, the bank guarantee of 2008 also led to this.)
The total volume of the promissory notes given to Anglo and Irish Nationwide is around €30.6 billion, and these are now being repaid in annual instalments of €3.06 billion.
Their interest rate, incidentally, is around about the same interest rate the government would have paid to borrow cash itself at the time. It’s understood to be around 8.1 per cent.
While this is important in one sense – as it means the government’s overall bill for the promissory notes is higher, and therefore takes more cash out of the Budget – it is less important in another, as the interest is eventually being paid to IBRC, which is owned by the State itself.
It’s also worth noting that the banks are paying interest on the money they got from the Central Bank in exchange for these notes. This has never been confirmed, but it was reported last year that it’s somewhere between 2 and 3 per cent.
RTÉ’s report suggests that the proposed arrangements would see the banks weaned off the promissory notes, and instead be given bonds – a form of IOU – from the European Financial Stability Facility.
That’s the EU’s current bailout fund, set up originally as a temporary vehicle, and the fund which is contributing just under a third of Ireland’s €67.5 billion bailout.
The EFSF raises its own money through a combination of contributions from Eurozone member states, and by issuing its own bonds. The idea is that the promissory notes can be slowly phased out, with the EFSF bonds introduced instead.
These bonds, issued by a reputable agency which has a AAA credit rating with two of the three ratings agencies (Standard & Poor’s downgraded it two months ago), would carry a far lower interest.
The overall idea is that instead of using an Irish government note to get cash from the Irish central bank, the banks would be given an EFSF bond which could be used as collateral to get cash from the European Central Bank.
This would be welcome for the government, as the banks (which are now almost all state-owned) can get cash from the ECB more cheaply than they can get it from the Central Bank of Ireland.
Furthermore, the idea of replacing the note with the bond would basically mean there wouldn’t need to be discussion about ‘restructuring’ the promissory note and its repayment schedule – it could simply be replaced by another system on more favourable terms.
It would also be seen as a good thing by the ECB, because Frankfurt is obsessed with trying to prevent inflation, and the solution would allow the Central Bank of Ireland to be gradually repaid and to remove its newly-made cash from circulation.
The difficulty? Well, let’s go back to where the EFSF gets its money from – the other eurozone countries. All of them, bar Greece, pay the fund: we would need the approval of pretty much every eurozone member, therefore, if the proposal was to be pursued.
There’s also the possibility that the world’s investors could see Irish banks as a risky prospect – and charge a higher interest rate for the bond than we might expect.
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Reality check – the economy is already at breaking point, as are a huge number of the citizens who live in this ‘wonderful’ society/economy or whatever it’s called.
Don’t know about anyone else, but I’m stretched to the limit already. More cuts will be the straw that breaks the camels back, will also be majorly counterproductive, what we need is some confidence in the economy so people will begin to spend again, don’t see that anytime so though!!!!
I doubt the government will listen to the warning.
How many front loaded budgets will this have been, and isn’t that just another posh way of saying, ‘ Lets screw the f*****s again !
Well if this is coming from Austin Hughes I’d seek a second opinion. This so called economist appeared on a prime time debate with David McWilliams in 2003 using figures and forecasts to explain why the housing bubble was going to continue. McWilliams explained how the banks were in over their heads, guess who was right.
If it was 2003 that he predicted the bubble was going to continue, he was right. It continued until 2007.
4 years is a long time in these sort of predictions.
McWilliams was a broken-clock economist.
By 2003 it was already a bubble. A long period of very low ECB rates combined with ever more reckless lending by the banks just meant it had until 2007 to grow to gigantic proportions before it eventually burst.
Yet again I am going to say that you cannot tax your way out of a recession & no amount of austerity cuts, front loaded budgets or whatever the government wants to call it is goin to do this country any good. Or any of the other bailed out countries. The sooner the euro goes the better. We are barely able to pay the interest on the billions of loans. Debt forgiveness is the only answer.
Ann, you are spot on!
I think people are so worried about what the future holds that, even if they are in the enviable position of having a bit of extra cash, they are tucking it away and are in no hurry to spend. I think every purchase is pondered over and there’s a lot less impulse buying. I’d imagine that this trend will be even more prevalent after the next budget which will cause an ever greater downward spiral.
“it may be more sage for the government to under-promise, and then over-deliver, on its targeted cuts for the December budget.” A lovely way to say the Government should LIE.
The government can’t see what is happening to the ordinary Joe soap ie me and you. There is No money for property tax, water rates, septic tank charges etc. WHERE are we to get it from? Take home is cut way back and will be hit again. Hospitals are at breaking point (I know!!). Schools can’t absorb any more cuts either. There are incidents of overcrowding in schools and I know of a class of 20 fourth years who have no one to teach them at one point during the day due to cutbacks.
have your say