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A Briefing Note on Promissory Notes
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
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
 This is because the Irish Government is backing
the promissory note with ‘letters of comfort’
The price
A promissory note is a negotiable
◦ 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
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
◦ 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
“The ECB will cut off funding to our pillar
2. “It will impact on the European banking
3. “It will undermine investor confidence in
4. “It is a condition of the EU/IMF Memorandum
of Understanding”
Are these risks plausible?
Risks to suspension/postponement?
“That the ECB would cut off funding to our pillar
◦ 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
◦ 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
◦ 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 about the bond?
€1,250m of Anglo Irish Bank senior bonds
◦ Not covered by the guarantee
◦ Not secured against Anglo’s assets
Disingenuous to say we are not paying it
Moral hazard and the ECB

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