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Report
ANGLO DEBT AND THE
PROMISSORY NOTES
EXPLAINED
PLUS
What can you do?
How to get involved
Anglo & INBS Crash
 2008 – Irish property bubble spectacularly bursts
 September 2008 bank guarantee
 2009 – Merrill Lynch states “Anglo is financially sound”
 2009 – Anglo is nationalised
 March 2010 – Anglo posts the largest loss in Irish corporate history
(€12.7 billion for 2009)
 March 2011 – Anglo then breaks its own record (€17.7 billion loss for
2010)
 The INBS numbers are proportionally even worse

Both banks insolvent
Now - The IBRC
 Anglo Irish Bank = €29.3 billion
 Defunct – no new deposits and no new loans
 Insolvent
 Under criminal investigation
 Irish Nationwide Building Society = €5.4 billion
 Defunct – no new deposits and no new loans
 Insolvent
 €30.6 billion promissory notes – to pay for ELA


Letters of comfort
Never brought before the Oireachtas
 €4.1 billion exchequer payments
Guarantee
 The Anglo/INBS debts were originally guaranteed by the
Irish State in September 2008 as part of the blanket bank
guarantee
 The Irish Government made an initial payment of €4
billion to cover Anglo’s debts in 2009. This was paid out of
the exchequer finances. €0.1 billion was paid to INBS
 Over the course of 2009 and 2010 it became increasingly
clear that Anglo and INBS were insolvent
Averting Collapse
 If the insolvent banks were to collapse their debts would
have fallen back on the Irish State and become sovereign
debt - a consequence of the bank guarantee
 To prevent this the Irish Government had to obtain
external funding – the Eurosystem of Central Banks was
the only realistic source of this funding
 Anglo did not have sufficient eligible (i.e. good quality)
collateral to obtain the required amount of Emergency
Lending Assistance (ELA) from the Central Bank
Emergency Lending Assistance
 To prevent their collapse the Government negotiated a
mechanism with the Central Bank of Ireland setting out the
conditions under which the Central Bank would provide
Anglo/INBS with sufficient Emergency Lending Assistance
(ELA)
 This required the implicit consent of the European Central
Bank (ECB) governing council.
 Any future changes to the agreed mechanism also require
the consent of the ECB governing council
Paying Back the ELA
 The ELA provided by the Central Bank to the IBRC is




what enables the IBRC to pay-off its obligations
Most of the bondholders have now already been paid
using this ELA
The ELA is also used to pay-off creditors/depositors
and to enable the IBRC to retain its banking license
Eventually the ELA has to be paid back to the Irish
Central Bank
This is done through promissory note repayments
Promissory Note
 The Irish Government negotiated with the ECB
governing council to create a ‘promissory note’ as a
liability owed to the IBRC (Anglo/INBS)
 The promissory note is therefore an asset of the
IBRC
 This asset can be used by the IBRC as collateral to
obtain the necessary ELA from the Central Bank
 This is because the Irish Government is backing
the promissory note with ‘letters of comfort’
The price
 A promissory note is a negotiable instrument

one party (in this case the Government) makes an unconditional
promise in writing to pay a defined sum of money to the other party
(in this case Anglo/INBS – now called IBRC), on specified future
dates or on dates to be determined, under specific terms
 The State’s obligation is to pay down €30.6 billion
over 20 years (2011-2031)
How it works
 The promissory note repayments are paid to the IBRC
– the IBRC then reduces its ELA obligations to the
Central Bank
 In practical terms the Irish Government has received a
loan from the Central Bank to pay off the bondholders
 It is ultimately a transfer of wealth from the people living in
Ireland to the bondholders that lent to Anglo/INBS
 The bondholders and other creditors continue to be paid using
the ELA from the Central Bank – the promissory notes represent
our commitment to eventually repay the Central Bank
How much it costs
 The Irish Government is scheduled to make over €47 billion of
promissory note related payments between March 2011 and March
2031. This is composed of:


€30.6 billion capital reduction – the €30.6 billion owed
€16.8 billion in interest repayments
 Much of the funding for this will need to be borrowed unless the State
is running substantial fiscal surpluses. This is very unlikely in the
medium-term
 These borrowings will therefore also have to be financed


at an assumed 4.7% interest rate on borrowings the total cost to the State
will reach €85 billion by 2031
Some of which will eventually return to us due to the circular nature of the
payments
What happens when the ELA is paid
back to the Central Bank?
 Central Bank of Ireland (CBI)
 Asset side of their balance sheet

CBI reduces its ELA assets by €3.1 billion
 Liability side of their balance sheet


CBI expunges €3.1billion from the system
Inflationary impact if this is not done – increasing the money supply
(monetisation of debt)
Socio economic implications
 Over 2% of GDP will be drained out of the State each
year up to 2023 to make the promissory note
repayments

this will be through an additional €3 billion to €4 billion of
fiscal consolidation (tax increases/spending cuts)
 IMF research (Leigh et al, October 2010) indicates that
each 1% of fiscal consolidation:


reduces GDP by 0.5% to 1% and
Increases the unemployment rate by 0.3 percentage points
Socio economic implications
 The €3.1 billion promissory note payment due to be made
by the state on behalf of the former Anglo on March 31
2012 is:


greater than the total cost of running Ireland’s entire primary school
system for an entire year and
greater than the estimated cost to provide a next generation
broadband network for all of Ireland (€2.5 billion).
 €30.6 billion is equivalent to just under 20% of Ireland’s
current GDP or €17,000 for each person working for pay or
profit in the State. €47.9 billion is 30% of Ireland’s current
GDP.
The issue
 The interest rate is not the issue
 A red herring
 The real issues are:
The size of the principal

Reduction in the principal – write down
When we are making the repayments

Changing the schedule of repayment –holiday,
postponement
Risks in promissory note
suspension/postponement?
“The ECB will cut off funding to our pillar banks”
2. “It will impact on the European banking system”
3. “It will undermine investor confidence in Ireland”
4. “It is a condition of the EU/IMF Memorandum of
Understanding”
1.
Are these risks plausible?
Risks to suspension/postponement?
 “That the ECB would cut off funding to our pillar banks”
 Remove funding and the pillar banks will fall
 But this would trigger the very contagion the ECB has been trying to
prevent
 ECB cannot give the pillar banks inferior T&C to other Euro zone
banks
 “Impact on the European banking system”
 Promissory note payments do not involve the European banking
system
 No precedent created as IBRC is not a functioning bank
Risks to suspension/postponement?
 “Undermine investor confidence in Ireland”



Not a sovereign default
Ireland is already shut out of the markets and locked into an official
programme of assistance until the end of 2013
Amelioration of the Anglo/INBS burden improves Ireland’s debt
dynamics and makes Ireland better placed to pay its other debts
 “A condition of the EU/IMF Memorandum of
Understanding”

The promissory note repayments are not a condition of the deal
agreed with the troika
Decision makers - ECB Governing Council
 ECB concerns:
 Precedent regarding repayment of debt obligations –
parachute drop analogy - floodgates
 Adherence to rules and protocols – is flexibility legal?
 Mildly inflationary – monetization of the debt
 But the ECB need a success story
 The Greek programme has already failed
 The Portuguese programme is failing
 Italy is in the firing line
 Promissory note flexibility can help prevent the Irish
programme from failing
The need for a success story
What can you do?
 Sign our petition, and ask your friends to do the
same. Available at: www.notourdebt.ie
 Write to your local TDs. We have sample letters
available on our website
 Organize another public or community meeting
yourselves: Education and Resources pack available
on our website
 Get involved in our national day of action

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