Blog Post

Good deal for Ireland, but no magic bullet

The promissory note deal announced last week by the Irish government and the Central Bank of Ireland will bring benefits to Ireland’s public finances and to the country’s financial stability. As a result, Ireland’s prospects for economic recovery and its chances of emerging from its EU/IMF programme of financial assistance have improved markedly. Indeed, yields on long-term Irish government bonds are now well below those of Italy and Spain.

By: Date: February 12, 2013 Topic: European Macroeconomics & Governance

The promissory note deal announced last week by the Irish government and the Central Bank of Ireland will bring benefits to Ireland’s public finances and to the country’s financial stability. As a result, Ireland’s prospects for economic recovery and its chances of emerging from its EU/IMF programme of financial assistance have improved markedly. Indeed, yields on long-term Irish government bonds are now well below those of Italy and Spain.

Nonetheless, Ireland’s economic recovery remains fragile, with large debt overhangs in the public and private sectors as well as poor prospects for growth in its major trading partners.

Background

Ireland’s two worst banks, Anglo Irish Bank and Irish Nationwide Building Society, were merged in March 2011 to form the Irish Bank Resolution Corporation (IBRC). This entity was almost entirely funded by Exceptional Liquidity Assistance (ELA) of €40bn extended by the Central Bank of Ireland.

The Central Bank of Ireland advanced these monies to IBRC against two main types of collateral: €25bn worth of a promissory note issued by the Irish government to recapitalise Anglo and €15bn of loan assets. The promissory note was scheduled to amortise at a rate of about €3bn per year – a process that would provide funds to IBRC to gradually pay down the ELA.

Liquidation and swap deal

Last week, IBRC was put into liquidation. The Central Bank of Ireland was then entitled to demand full repayment of ELA, which in effect meant taking ownership of the collateral securing these loans.

What will the Central Bank do with these assets?

·         As the Central Bank of Ireland has no business in managing a commercial loan book, the €15bn in loans will be sold promptly to NAMA, Ireland’s “bad bank”, in exchange for NAMA bonds or to the market for the best possible price.

·         The Central Bank will exchange the promissory note for newly issued long-term (25-40 year) Irish government bonds. The Central Bank will hold onto these bonds until such time as the selling of these bonds into the market will not constitute any risk to financial stability. Notwithstanding this condition, the Central Bank has agreed with the ECB a schedule of minimum disposals.

Benefits of the deal

The exchange of the promissory note for long-term bonds is mutually beneficial for both the Central Bank (and wider Eurosystem) and the Irish government. From the Central Bank’s perspective, a non-marketable, illiquid asset — whose terms could arguably have been unilaterally changed by the Irish government without constituting a formal default – has been swapped for standard Irish sovereign bonds.

From the Irish government’s perspective, there are three main benefits from the exchange.

First, the interest payments on Irish sovereign bonds held by the Central Bank are essentially internal transfers between one part of the Irish state and another. Of course, this is also true for the interest payments on ELA paid by the state-owned IBRC to the Central Bank. Since the rate of disposal by the Central Bank of its holdings of bonds will very likely be considerably slower than the rate at which ELA was expected to be repaid, the government’s interest burden over the medium term has declined as a result of the exchange.

Second, under the promissory note arrangement, the Irish government would have needed to sell about €3bn of new bonds into the markets annually to raise funds to pay down the note. The bonds given to the Central Bank in exchange for the note will not need to be refinanced for 25-40 years. The resulting reduction in the supply of bonds to the market over coming years should mean lower interest rates on borrowings to finance the budget deficit and refinance maturing debt. Borrowing costs for Ireland’s banks are also likely to be lower. In addition, the refinancing risks to the State associated with ELA (which is subject to bi-monthly non-objection from the ECB) have been removed.

Finally, government accounting rules treated interest payments to IBRC on the promissory note as public spending. The lower interest rates on the sovereign bonds translate into a reduction in Ireland’s general government deficit next year of 0.6 per cent of GDP. As a result, assuming no change in planned fiscal consolidation efforts, Ireland’s budget deficit is now expected to narrow to 4.5 per cent of GDP in 2014.

Last week’s deal is by no means a magic bullet for Ireland’s economic and financial difficulties, but it is another step in the right direction.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read about event

Upcoming Event

Jan
24
12:30

Corporate taxation in the digital era

How can we address digital taxation in the EU? Is the proposed "equalisation tax" on turnover the best policy to tackle the challeges posed by digital taxation?

Speakers: Johannes Becker, Dmitri Jegorov, Maria Demertzis, Stephen Quest, Stef van Weeghel and Georgios Petropoulos Topic: European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic

Blueprint

People on the move: migration and mobility in the European Union

Migration is one of the most divisive policy topics in today’s Europe. In this publication, the authors assess the immigration challenge that the EU faces, analyse public perceptions, map migration patterns in the EU and review the literature on the economic impact of immigration to reflect on immigration policies and the role of private institutions in fostering integration.

By: Uuriintuya Batsaikhan, Zsolt Darvas and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: January 22, 2018
Read about event More on this topic

Upcoming Event

Jan
29
09:30

Integration of migrants in the EU

This event will discuss the integration of migrants in the EU as well as the EU's response to the recent refugee crisis

Speakers: Manu Bhardwaj, Herbert Brücker, Jutta Cordt, Zsolt Darvas, Naika Foroutan, Marcel Fratzscher, Manjula M. Luthria and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Mohrenstraße 58, 10117 Berlin, Germany
Read about event More on this topic

Upcoming Event

Jan
30
12:30

Why think tanks matter in the era of digital and political disruptions

Bruegel is pleased to host this panel discussion as part of the global launch of the 2018 Global Go To Think Tank Index, published by the University of Pennsylvania’s Think Tanks and Civil Societies Program.

Speakers: Matt Dann, Shada Islam, Blanche Leridon and Hlib Vyshlinsky Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Feb
2
10:30

Europe’s immigration and integration challenges: Financial and labour market dimensions

The event, organised by Bruegel in cooperation with the Institute for International Affairs will discuss these and related questions and will also feature the launch in Rome of the study authored by Zsolt Darvas on the impact and integration of migrants in the European Union.

Speakers: Roberto Ciciani, Zsolt Darvas, Marcela Escobari, Tatiana Esposito, Manjula M. Luthria, Carlo Monticelli, James Politi and Nathalie Tocci Topic: European Macroeconomics & Governance Location: Rome, Italy
Read article More on this topic More by this author

Podcast

Podcast

Remaking Europe

This instalment of the Sound of Economics features Bruegel fellows Reinhilde Veugelers, Simone Tagliapietra and J. Scott Marcus explain how European industries are adapting to new manufacturing, and what more can be done to help EU countries and companies keep pace with the burgeoning 'Industry 4.0'

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: January 19, 2018
Read article More on this topic More by this author

Blog Post

Macroprudential policy: The Maginot line of financial stability

The ability of macroprudential policies to assure financial stability and thus leave central banks free to assign the interest rate tool exclusively to price stability is unproven. As the Maginot line did not protect France from a German invasion in WWII, so macroprudential policy may not be sufficient to counter financial instability. Central banks should prepare to deal with dilemmas in the use of the interest rate.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: January 17, 2018
Read article Download PDF More on this topic

External Publication

Reconciling risk sharing with market discipline: A constructive approach to euro area reform

This publication, written by a group of independent French and German economists, proposes six reforms which, if delivered as a package, would improve the Eurozone’s financial stability, political cohesion, and potential for delivering prosperity to its citizens, all while addressing the priorities and concerns of participating countries.

By: Agnès Bénassy-Quéré, Markus K. Brunnermeier, Henrik Enderlein, Emmanuel Farhi, Marcel Fratzscher, Clemens Fuest, Pierre-Olivier Gourinchas, Philippe Martin, Jean Pisani-Ferry, Hélène Rey, Isabel Schnabel, Nicolas Véron, Beatrice Weder di Mauro and Jeromin Zettelmeyer Topic: European Macroeconomics & Governance Date: January 17, 2018
Read about event More on this topic

Upcoming Event

Feb
27
12:30

Bruegel - Financial Times Forum: The future of euro-area governance

The third event in the Bruegel - Financial Times Forum series will look into the future of euro-area governance.

Speakers: Maria Demertzis, Gideon Rachman, Manfred Weber and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic

Blog Post

Does the European Parliament miss an opportunity to reform after Brexit?

While Brexit negotiations are beginning to progress, the European Parliament is preparing to vote on the possible reallocation of seats following the UK's departure. With many of the current proposals reflecting Member States' concerns about losing seats, this paper advocates for options that could better achieve equality of representation even within the constraints of the EU treaties.

By: Robert Kalcik, Nicolas Moës and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: January 10, 2018
Read article Download PDF More by this author

Policy Contribution

European Parliament

Bank liquidation in the European Union: clarification needed

Critical functions and public interest. What role do they play in Member States’ decision to grant liquidation aid? The author of this paper looks at how resolution and liquidation differ substantially when it comes to the scope of legislation applicable to the use of public funds and how the diversity in national insolvency regimes is a source of uncertainty about the outcome of liquidation procedures.

By: Silvia Merler Topic: European Macroeconomics & Governance, European Parliament, Finance & Financial Regulation, Testimonies Date: January 10, 2018
Read article More on this topic More by this author

Podcast

Podcast

Multispeed Europe

In this episode of the Sound of Economics, Maria Demertzis, and Italy's State Secretary for European Affairs Sandro Gozi, discussed about the issue of member-state integration in two or more speeds, one of the recurring questions in the debate about the European project.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: January 3, 2018
Load more posts