Frequently Asked Questions
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Why are we responsible for the Anglo/INBS debts?
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. Over the course of 2009 and 2010 it became increasingly clear that Anglo and INBS were insolvent.The government has renamed Anglo/INBS the Irish Bank Resolution corporation or IBRC
To prevent these institutions from collapsing the Irish Government had to obtain external funding – the Central Bank system was the only realistic source of this funding. The Government negotiated a deal with the Central Bank of Ireland which set out the conditions under which the Central Bank would provide Anglo/INBS with the necessary Emergency Lending Assistance (ELA). This deal required the permission of the ECB (European Central Bank).
The Emergency Lending Assistance from the Central Bank was crucial to prevent Anglo and INBS from collapsing – if the banks were to collapse their debts would have fallen back on the Irish State. This obligation was a consequence of the bank guarantee.
Who is the money going to?
The ultimate transfer of wealth is primarily 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 Emergency Lending Assistance from the Central Bank (all bar circa €5 billion have been paid so far) – the promissory notes represent our commitment to eventually repay the Central Bank.
Who are these bondholders?
We don’t know who the bondholders are – and can’t know unless transparency provisions are made at EU level. One of the attractions of bonds for investors is their opacity. Individual bondholders don’t know who the other bondholders are. Even the Government doesn’t know who they are.
How much of the debt is owed to bondholders?
Most of these bondholders have now already been paid. The estimated bondholder debt still to be repaid on Anglo’s bondholder debt is approximately €5 billion.
What is a promissory note?
A promissory note is a negotiable instrument – this is where one party (in this case the Government) makes an unconditional promise to pay a defined sum of money to the other party (in this case Anglo/INBS), either on specified future dates or on dates to be determined, under specific terms. In this case, the promissory notes were assets of Anglo/INBS which can be used as collateral.
Where does that money go?
The promissory note repayments are paid to the IBRC. The IBRC uses the money to repay the Irish Central Bank for its Emergancy Liquidity Assistance (ELA) funding. Once the Central bank recieves the money, it deducts it from the value of its ELA liabilities. The money is effectively destroyed.
How much are the repayments?
The Irish Government is scheduled to make €47.9 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 – and €16.8 billion in interest repayments.
Much of this €47.9 billion of repayments will need to be borrowed unless the State is running substantial fiscal surpluses – very unlikely in the medium-term.
To put these repayments in context, €30.6 billion is equivalent to just under 20% of Ireland’s current GDP or €17,000 for each working person working for pay or profit in the State. €47.9 billion is 30% of Ireland’s current GDP.
What will be the total cost?
It is estimated that the total cost to the State could reach €85 billion by 2031 (assuming a 4.7% interest rate on borrowings). 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 tightening (tax increases/spending cuts).
What else could we do with this money?
The €3.1 billion promissory note payment on March 31 2012 would be more than sufficient to fund the total cost of running Ireland’s entire primary school system for an entire year – it is also more than the estimated cost for a next generation broadband network for all of Ireland.
What other option do we have?
The Irish government could suspend the promissory note payments in order to negotiate a write down of the €30.6 billion capital repayments.
What are the risks in debt suspension?
1. There are risks. However, the main risk commonly cited that the ECB would ‘cut off funding to our pillar banks’ is simply not plausible as the pillar banks are being maintained to avoid contagion; a contagion that would spread to the core-EU economies if the ECB precipitated their collapse (and they would collapse without ECB funding). Why would the ECB take action to precipitate the very outcome they have been desperately trying to avoid since 2008?
2. Loss of investor confidence – With Government bonds rated as junk, and given that we are not in the international market, this risk is in many respects academic. If anything, it would probably help since we would need less funding and would have less of a debt/interest payment burden.
This is likely to impress the ‘markets’ more.
3. Would there be a retaliation by the troika? – Promissory note repayment is not a condition of the EU/IMF Memorandum of Understanding agreed with the troika and would therefore not directly affect the loan agreements.