To recap..A Reuters report yesterday, still unmodified, notes that the ECB has rejected the proposal made by the government on dealing with the Anglo Promissory notes. Ireland's national broadcaster NASA report which says that the ECB have denied this. However that latter states that baldly and gives no detail.
The proposal was that the government would issue a long term (term unclear but presumably more than 10years) bond
Irish Finance Minister Michael Noonan had proposed converting the note into long-term government bonds that would be taken up by the Irish Central Bank with the intention of keeping the bonds in its portfolio for a long period.
This was unsurprisingly rejected by the ECB as tantamount to monetary financing. They don't, can't, do. That.
So why did the Irish givernment, two years into the negotiations, propose that? Was it naivety? Stupidity? cunning? We're they proposing something so impossible that the ECB would reject it?
As things stand we pay 3.06b each march 31 through 2023, 2.2b in 2024, 0.9b 2025 to 2030 and a final 0.1b in 2031. That is 23 years, a generation, after Anglo imploded and the FF government pushed the taxpayer into the black hole after it.
There are only three things that can be done with a debt to reduce its impact; reduce the amount, the interest rate or the time. For complex reasons better explained by Karl Whelan here the interest rate issue doesn't matter. So we deal with the time (stretching it out longer means less, in today's terms, of a burden) or the amount. The deal proposed seems to have been a too clever by half attempt to deal with the time issue. A bond of say 50 years would be “cheaper”. Exactly how much would depend on the time span and the interest rate but it could be a few billion.
My view is that we cut this at the core. Pay nothing. The promissory notes were another too smart by half attempt to fool the markets by the bright boys in the FF government, by a structure that both locked the state into keeping Anglo alive and tried to keep the cost of same off the national books. Nobody treats the debt a not real debt so one argument is why not simply convert to actual NTMA debt, and be honest and open.
To my mind there is no downside to the government stating now that it will not pay the note due now or ever. Three arguments are advanced.
First, the ECB will “cut us off”. Gov Honohan, who sits on the ECB board, alluded to this or something else by saying that th ECB would not look kindly on such a move. The ECB could, in theory do a number of things if we defaulted on the Anglo payment. It could invoke the risk control framework and deny Irish NTMA issued bonds as being eligible for collateral at the discount window. That would cut Irish banks , good bad and indifferent, and indeed any holders of Irish bonds, off from liquidity. The result would be that to keep the ATMs fed and money flowing in the economy we would have to issue own liquidity. we would in effect be expelled from the euro. Think of this : the only succes of the troika, doing something to ensure its long term fiscal stability, being subjected by a troika member to exemplary punishment. What would the effect of same be on her other peripheral nations? Would they calculate that there was literally nothing that would satisfy the fetishistic desires of the ECBundesHawks and contemplate leaving? Would the IMF like to see massive currency instability in an already fragile currency environment? Maybe the mooted IMF “it's a standby not a bailout” trailed last week is evidence of some forward planning here… My view is that the ECB would be extremely miffed and would like to but would balk at this. They are not a suicide squad.
Other issues suggested were we to walk are that MNCs will depart, that we will lose credibility and that…errr…that's it.
why an MNC would leave a country making itself more stable, not less, is beyond me. I haven't seem or heard a single MNC executive address this. I haven't heard the IDA say walking from the Anglo deal would make their job more difficult. Maybe I missed them. As for reputation, to whom does it matter? Again, as this is not government debt it's not a default. The bond markets, truth be told, care less about what we do with Anglo. It only enters into the mix in so far as it gives an indication of whether we are more or less credit worthy on real NTMA issued debt, Removing the rotting albatross that is Anglo makes the state more, not less, creditworthy, more liable to repay and in full on time, not less. Patrick Honohan in 2009 stated
mature reflection by the financial markets would recognize that a country honouring its debts and guarantees to the letter–and not beyond–was more creditworthy than one which handed over money lightly to unguaranteed risk investors
What went, but was ignored, for Anglo and bondholders in 2009 goes double for handing over money to a central bank to destroy it. It's morally, economically, politically and in every way wrong.