Tag Archives: Promissory Notes

Hall v Ireland (even though Ireland is on his side)

The essence of democracy is under question in the case taken by David Hall against the minster for finance which starts in the high court Tuesday January. 22nd. Hall is challenging the legality of the wretched Anglo promissory note . He is saying as I understand it that the constitution requires that all expenditure be approved by the Dail. That is where the power is. People elect TD' s who then in a democratic way vote on various matters including expenditure. The dail gives the government the money to spend . In 2010 the finance bill allowed the minister for finance to provide funds to the banks. Hall maintains that the dail can not give its constitutional powers to anyone else. Although not a lawyer my understanding is that one cannot alienate ones rights, not you, nor I nor the Dail.

The minister for finance on the strength of the 2010 bill created the now infamous promissory note. Halls constitutional challenge questions weather the promissory note was created legally as it was never approved by the Dail. It's hardly a small sum so it does seem odd that this was never subjected to a Dail vote.

A lot is riding on this case which will ultimately end up in the Supreme Court. If Hall succeeds then the Government will be faced with a very difficult situation of having to vote in the Dail and this might cause some issues for TD'S. this might be a chance to really negotiate with our European “friends. The government has put in place a high powered legal team to defend that which it is saying in Europe is indefensible. Expect these lawyers to do a super job, and expect the government to then face these arguments it is relaying to be used in evidence against it (and us) in Europe. This case won't be just about the constitutional niceties, but will inevitably raise issues of economics and bank solvency.

A smart government would not fight this case with rigour, but would let it lose, and then note that there was no way it could get something through the parliament. In reality they migh be hoping that the case, won or lost in the High Court, would result in a delaying of the need to pay the €3.1b in end march. That would put it up to the ECB. But Michael Noonan is not a man to eschew legal advice as the family of Bridget MCCole. Expect this one to run and run…..


Are ministers deceiving themselves or deceiving us on the Anglo Promissory Notes?

LThe idea of a meme is that its a concept, a psychological or cultural trait, that propagates  Like anything that propegates it can only do so if it is allowed to. Thus we have seen grow up the meme that Ireland did not pay the 3.1b which was due in March 2012 on the Anglo Irish Promissory Note. This is sown by ministers who either do know (so they are telling untruths) or should know (in which case they are not able to read government accounts and thus we might  question their fitness to be in high office).  It is however fertilized by the unquestioning swallowing of this by the media, print and broadcast, who again either dont know (why then are they questioning on issues wherein they are ignorant) or know but dont care to press (why then are they pretending to be impartial journalists?)

Here are some recent examples

  • Minister Pat RabbittWe didn’t pay the promissory note this year and as far as I’m concerned we’re not going to pay it next year. It’s as simple as that”
  • Minister for Finance Michael Noonan (this time speaking on the record in the Dail)  “did not pay it last year and I have signalled to the Europeans and nationally that I am not disposed to pay it this year”
  • Minister Leo Varadkar (points for accuracy, deducted for illogic) “The payment is due at the end of March and certainly in my view we didn’t pay it last year and issued a bond to avoid paying it.
  • Minister for Foreign Affairs Eamon GilmoreThe Government didn’t pay the promissory note last year

These statements are simply false (with the exception of Varadkar’s comment which seems to see issuance of a bond as being somehow not a payment….one wonders what the conversations round the cabinet table are like).  We paid. In full. This has been explained succinctly in a letter to the Irish Times and more fully  in a blogpost by Constantin Gurdgiev. It was explained quite fully back in April by Karl Whelan.

Here it is again :  NAMA (us) gave IBRC (us) the money which IBRC gave to the Central Bank (us).  Meanwhile, Bank of Ireland (35% of which is us) lent this money on a one year basis to IBRC which lent it to NAMA. In March 2013 not only do we need to pay the 3.1b to the Central Bank but Bank of Ireland need to either extend that loan or it needs to be repaid.

The Anglo note was repaid in 2012. To say otherwise is to deceive oneself or to try to deceive others. Ministers need to stop doing so and the media need to stop facilitating this delusion. Oh, and someone needs to ask Minister Noonan to correct his (no doubt inadvertent) misleading of the Dail.



a) As Karl Whelan notes the key facts are : did IBRC get 3.1b? Was that used to extinguish ELA? Answer to both is yes. The mechanics of what arm of the state did what when is of technical interest only.

The Banking Union: what’s in it for Ireland?

This is an expanded version of an OpEd in the Irish Examiner published 15 December 2012

Group Chief Executive of the Bank Of Ireland, Boucher, reacts during an interview with Reuters at the company's head office in Dublin, IrelandThe new banking union proposals that are now emerging from the wreckage of the European economy are to be given a (very) cautious welcome. Without going the whole Naomi Klein “shock doctrine” route, its very clear that once again this is a win for (mainly german) banking interests. They for one have not wasted a good crisis, unlike our hapless crew of permanent and transitory governments. Banks have walked away scot free, in essence, from the calamitous decisions they have made. In Ireland, faced with a government as weak as water they essentially bluffed and buffaloed a hapless crew of inepts into socialising the losses. Anybody who think that senior bank management have learned their lesson of humility need only look at the truculent faces when the elected representatives dare question their remuneration.

1-leg-stool1A banking union required three essential elements: a common supervisor, a common system of deposit insurance or assurance, and a common method to resolve problems. What we have here is the first, and its as good a place to start as any. But without the others its a onelegged stool. The power in European banking has now shifted decisively to Frankfurt – already building an new towerblock (for a cost of over a billion euro…) the ECB will soon need more space. As presently proposed the effect of the new regulator will be to shift regulatory control of AIB, IBRC and BOI to Frankfurt. What exactly that will mean for the newly beefed up regulators office in Dame Street (the beefing up requiring that it move to the IBRC shell – very apt) is unclear. Will staff move to Frankfurt or more probably will it be a remote operation?

Two issues emergent from this require us here to think long and hard. These are the future funding of SMEs and the future of those vile promissory notes

On SME funding the Irish banks are in a bind. They need to continue to delever, and the only way to do that is to progressively increase the deposit base (costly) and/or reduce outstanding loans. In particular, reducing loans will be done while also shifting the balance of loans away from riskier towards less risky ventures. Lending to SME’s is inherently more risky than to more established sectors and ventures. The easiest venture at present is to obtain cheap money from the ECB and purchase Irish government bonds, a carry trade as it is known, reaping a handsome profit for the banks and incrementally driving up the price and down the yield on these bonds yielding a handsome political dividend for the government. Evidence from the ECB biannual survey on access to finance that along with Greece Irish SME’s are the most likely to be discouraged from applying for credit. Although only around 10%, this is unfortunate – discouraged borrowers may be borrowers that have excellent prospects but feel that there is no point seeking a loan. Since March 2010, when the data series begins, excluding property and financial services related lending, lending to the SME sector has fallen by 24%, while in the overall economy it has fallen by 22%. Within the SME sector lending to property and financial services related activity has risen by 30%. Its hard to see how this is justified given the job creation engine that the SME sector can be. As banks regulatory oversight moves more and more remote it is likely that the existing centralization of lending decisions at HQ will intensify. It is reasonable to assume that local managers of banks are more likely to be at least approachable by local SMEs seeking finance. If we wish to reduce discouragement in applicants we need to be very nimble in negotiating the parameters of this new regulatory regime. It’s a good job we have a history of nimble wily negotiators with the ECB….




















IOU_1The creation of the new regulatory framework was a quid pro quo for the establishement of the new ESM lending framework. This will lend to banks for new capital needs, finally breaking the linkage between the soverrign and the banking sector. However, this is of little use to Ireland. We have invested 24b in the pillar banks and 30b via the wretched promissory note in IBRC. The proposal on the table will not give us any relief on these. The government in march 2012 engaged in a complex shell game to avoid payment of the note but this was for a one year basis. Despite this can kicking they continue to claim that they have avoided repayment, which is simply untrue. Thus a solution to the deferred 3.1b and the regular 3.1b needs to be found before march. All indications are that this will involve a restructuring of the repayment schedule, to reduce the amount of money destroyed from 3.1b to perhaps 1b per annum. That anyone outside a lunatic asylum would consider it acceptable for a state so broke that it is cutting respite care to carers to destroy a billion euro shows how degraded our political debate has become. After Minister Rabbit stated that we would not pay in March I asked the Central Bank, the ECB and the government for a statement. Despite being the ultimate loser in any refusal to pay the Bank declined to comment. The ECB reiterated the statement by its president that it was Frankfurts way all the way, while the government press office reiterated that we hadn’t paid in 2012 and were seeking a deal. None of these give any hope that a meaningful reduction in the outstanding debt, as opposed to some restructuring of the payment schedule, is in the offing. That wont prevent the government from touting some form of interest reduction or extension of the repayment schedule as a triumph. But it should.

Ireland should give one (1) cheer for the Greek debt deal.

So, once again (what is it now, the fourth time?) we have a greek debt deal. Great. Except, its not. The essence of this deal (which has delayed funds since may..) is a maturity extension and a rate reduction on existing and new Greek debt. This will reduce the present value of greek debt and make it easier to repay. There will also be a bond buyback from private investors, which might or might not succeed. It is all useful stuff, if a little hopeful, and might well give a breathing space to greece.


In the Irish context there is however little to cheer. Recall that the only significant chunk of debt which we hold which is in play is the wretched promissory note for the whirlpool of debt that is IBRC (the zombiestein that is Anglo and INBS). This is 30b euro which is structured in a complex way to ensure that each year for a decade more we pay over 3.1b (the total amount of the budget austerity package to be unveiled 5/12/12) to the Central Bank of Ireland and they ….destroy it.

No interest relief is relevant here: this has been well parsed by among others Karl Whelan. An extension of the repayment schedule would help, in that instead of the CBank destroying 3.1b each year it might destroy 1.5, or .75b. This of course is to accept the lunacy of the whole project. From the greek debt deal, and greece is in  a much worse place than we, it seems that maturity extensions and interest relief is the only game in town for official creditors.

Expect little relief for the Anglo promissory notes, the most toxic legacy of the FF/GP folie de grandeur. Expect what little relief we get to be spun like a top. Expect the media to swallow said top with glee. Expect all that but dont expect any meaningful relief.

A question I have posed on the ECB and the Anglo Prom notes to which there seems no answer…

I have long advocated that the Irish Government should walk from the wretched promissory notes which were given to cover the losses at Anglo/INBS , and on which we are now as a state paying €3.1b per annum (or about 5 weeks tax take). 

I have written about the mechanics of these odious scraps here

What nobody can answer, in specific action terms, is what would happen if we did. All I ever get, even from  market participants, is a statement along the lines of “ooh,that would be bad, sure the ECB now, you dont want to mess with them, theyd react so they would”. 

Well, they would. But how? The implication is that the ECB reaction would be devestating, and worse for the economy than burning 5 weeks tax take in a bonfire of idiocy each march. What would that be? Invasion? Cutting off irish banks, good and bad, from liquidity? What actions, and how would they be done? 

If, as I suspect, there are few if any actual actions the ECB can or would take, then it begs the question why not do this? One imagines the other members of the Troika would heave a sigh of relief at the issue being settled, and the remaining real national debt being secured from default (probably).


So, what can/would the ECB do if we walked from the notes? No vages threats, no tut-tuting, no pursing of lips and shaking of heads. Actual actions that they can take… please. I mean, there must be some…mustnt there? 

IBEC and IBRC and the IMF

This is a version of a column published in the Irish Examiner

It must be dangerous to be a bird in Dublin these days. The government that promised transparency has instead adopted a kite-flying approach. The kites pop up, and like modern day Benjamin Franklins the government minister hangs on as it drifts into the storm, and then gauges the lightening. Occasionally they get singed, sometimes they escape, and withdraw for another day. And its not just the government. Every other aspect of social partnership is busy with economic bals and fiscal paper and silk, constructing and testing kites. In the best Japanese tradition, and as we are heading towards a Japanese style lost decade why not, we even see kite wars. Some kites are saw edged and designed to cut down others. Some kites get smashed down and then amended get relaunched.


IBEC have joined in this pleasant pastime recently, with their proposal that public sector increments be paused. The saving from this would be approximately 1b per annum it appears. The problem with such increments is that they are generally paid regardless – one is on a salary scale along which one advances by dint of survival. In a modern managerial environment that doesn’t make a lot of sense – there is little incentive to excel, and little disincentive to slack. Of course, we have know this for decades and for a long time it suited IBEC as a member of social partnership to allow this to go on. Peace at any price was the seeming mantra. Cutting a billion euro from the state budget is eminently justifiable in the context of borrowing a billion. However, throughout the crisis the argument on cutting public sector wages has been notable for a lamentable lack of follow on argument. Cutting X does not save X. At the most basic it saves less than X due to the fact that yes, public sector wages are subject to tax. So 0.7X might be the after tax savings. And then there is the knock-on effect…


we have seen recent estimation from the IMF of these effects. In economics the effect of changing one item on another is known as a multiplier. The assumed and conventional multiplier for government expenditure was in the region of 0.5-0.7. This would imply that cutting X would in the end result in a fall in overall economic output of 0.5 – 0.7X. In other words, cutting wages would not have the overall effect of reducing the economic cake by the same amount as the wage cut. This may now need to be revisited in the light of the IMF world economic outlook report which suggested that far from being less than 1 (implying that cutting public sector pay would result in a small fall in output) these shortterm multipliers may be significantly greater than 1. In other words, cutting X will result in a decline of 1.5 X– 1.9X .


Whatever the attraction from a government accounting perspective of cutting the short and medium term effects on the rest of the economy would be significant and negative. In the Irish case the effects are complicated by the GNP/GDP issue – while GDP can be growing or contracting slowly the GNP component can be falling more rapidly. Thus we cannot say with confidence that based on the IMF analysis the multiplier is too small we can take it that some very significant work on same needs to be done, pronto, by a combined ESRI-DFinance-C Bank team to ascertain the best evidence. In that context, we might want to hold fire on accelerating the pace of consolidation


IBEC have not, to my knowledge, come up with a comprehensive set of implementable performance metrics – that to be fair is not their job – but one must applaud their desire to save a billion. However, why stop at a billion? Why not save three times that much, and harm nobody? Part of the problem with cutting government expenditure is that it gets recycled into the economy. It is rare to have government expenditure which is totally isolated from the economy, and yet we have such.

Each year the government spends 3.1b feeding the IBRC (anglo/inbs) black hole. This year in a cunning plan instead of real money they issued a bond to the beast. The borrowed or tax derived money, you will recall, is given to the Central Bank of Ireland who then destroy it. As far as I can ascertain IBEC have not expressed concern about that, except in so far as the technicalities of the bond v cash 2012 payment impacted on government aggregates. It is abundantly clear that there is little appetite in the ECB for a deal on this money. At the very best we might replace this promissory note (which is not government debt) with a 40y bond. At worst we will be stuck with the full repayment schedule. It would cause nothing but the closure of IBRC and a technical temporary accounting headache for the Central Bank if the government were to announce that in framing the 2013 budget they were not going to make the March 2013 (or any subsequent payment). The ECB would be unhappy but I guess we can live with that. What they would not be able to do is to “cut us off” from liquidity. It would be nice if IBEC were to advocate saving 3.1b but then again IBRC is a member firm of IBEC. This money does not get spent in the Irish or European economies. It vanishes. We borrow it, and we destroy it. Why not…not borrow it.?


The Quantum Mechanics of Irish Debt

This is an extended version of a column published in the irish examiner. The Irish government find themselves on the horns of a dilemma. They, quite properly, seek a write down, from somebody, anybody, of a large part of the banking debt, which has accumulated. At the same time they wish to convince the markets that everything is ticketyboo and, and that any day now we will return to normal funding of the ongoing government deficits via the private debt markets. These two issues cannot be reconciled. What the government are saying is in fact the Irish debt is Schrödinger’s debt. It is both sustainable and unsustainable. In this thought experiment we the people who pay the debts are left in the dark. Economically, we are Wigner’s Friends. It is manageable debt if you are trying to persuade bond investors to buy into the idea that having failed over decades to run the country as a a going concern we have now mended the error of our ways and will be prudent. It is unsustainable if you are in talks with Troika officials and you need them to persuade their government that we are at the brink of penury and revolution. That these meetings take place in a peaceful prosperous country where nary a revolt is on the horizon is unfortunate…

In June of this year the government announced to great fanfare that a decision had been taken, in principle, which would greatly alleviate the Irish debt position. This was, we were told, “seismic”. It came from the 29 June meeting where the phrase “similar cases will be treated equally” was used in relation to ESM dealing with Bank debt. Thus far the evidence is that if it has been a seismic experience It is more an event of Richter scale 2 than of Richter scale of 10. The earthquake off Mayo in early June was scale 4, and nobody really noticed.

Throughout the summer it has been clear that the event that preoccupies the European government is when, rather than if, Spain will be forced into seeking a bailout. As the fourth-largest economy in the Eurozone it is too big to ignore. We on the other hand can be very safely ignored. We have shown over the last four years that we are perfectly willing to acquiesce to every requirement that emanates from the center of Europe, no matter how deleterious this may be to the long-term health of the Irish economy. The Irish negotiating position has been to lie around with a pathetic look on its face hoping someone will take pity on us while we continue to annoy them with various quaint local customs such as having a low rate of corporation tax, paying ourselves over the Euro area median salaries in all sectors, and generally not being good germanofinns.

I have characterized this numerous times as sending out nice well meaning Irish fellas to negotiate with the heirs of Bismarck (who suggested swapping the Irish and Dutch populations, enabling the Dutch to feed the world while we would drown in short order) and Richelieu. Throw in the Finns, a dour doughty lot who don’t back down (they took on the Red army in 1939 and beat them to a standstill, with the world record sniper being Finnish with over 500 confirmed kills) and we are hopelessly outclassed.

At the end of 2012 the national treasury management agency estimated that our national debt will stand at €187 billion. This is 117% of GDP, Just behind Greece and Italy/Potugal. If we accept that there is a large chunk of GDP, which cannot easily be taxed, then the appropriate metric becomes GNP, and the figure then makes Ireland look much closer to Greece than it does to Italy. Of course, the wedge between GDP and GNP is one that we have allowed to grow as a consequence of our reliance on high money low job FDI, and that policy choice of acting as a tax arbitrage location is one that is hard to explain as being a core tenet of economic growth to a German, a Finn or a Dutch official or minister. And lets not even go near the French…

Of our debt two thirds has been accumulated in the old-fashioned budget deficit way. While the debt exploded after 2009 this is not all bank debt. A large part is down to the hole in government spending that had opened up through overreliance on bubble taxes. And it will have to be paid down in the old fashioned way – by reducing spending and increasing taxes. Indeed the deputy governor of the central bank has gone so far as to suggest that we run surpluses to pay down the nominal debt rather than letting it erode through time and inflation. He doesn’t see growth roaring ahead. How this will happen is unclear as every single special interest group are NIMPPs – Not In My Pay Packet. Absent a banking debt mountain we still have a problem. That said, the willing lunacy of the bank guarantee and the Anglo bailout tipped the country from a fiscal problem to a fiscal basket case.

We have poured in in excess of €60 billion into the banking system. We have put in approximately €20 billion into the main banks, which equity is now valued at approximately €8b. The statements recently from Finland , Austria, Netherlands and Germany (FANGs we may call them) makes it very clear that the creditor nations are willing to contemplate the GSM only taking further equity stakes. In other words legacy bank debt is not going to be on the table. We are therefore stuck with this ownership, stuck with the money sunk into the banks, and unlikely to see a rapid return on this money. The largest part of the banking debt that can be put into play relates to the IBRC promissory notes. Every year, on 31 March, the Irish government pay €3.1 billion to IBRC, who pay this onto the central bank, Which then destroys the money . I have consistently been of the opinion that this is political, economic, and indeed in the context of swinging budget adjustments moral lunacy. Successive Irish governments have taken the approach of Mr Micawber, that something will turn up, in relation to this Schrödinger’s debt. Something has turned up, but it’s not a something to our liking. At very best it is likely that this promissory note (which is not government debt, as if it were a government debt then Anglo could have gone to the European Central bank and obtained liquidity rather than having to go through the Irish Central bank) will be replaced by longer dated government debt. This will reduce the annual outflow, but will not reduce the stock of debt. A year ago I suggested that on the return of the Dail the Taoiseach should have stated that we were no longer going to pay this debt. I stand by this. If the Irish government were to tear up the promissory note, is my view that nothing will happen. At least, nothing bad will happen. Both Anglo Irish bank and Irish nationwide building society would become immediately insolvent. This would then force them to be wound up. The central bank of Ireland would either have to sue the government for the repayment of the promissory note or have to accept the loss of it. The consequence of this would be that the €30 billion would remain as created money.

The argument against tearing up the promissory note runs that upon this happening the ECB would cut off all funding to Irish banks. The latest data suggest approximately €60 billion in ECB funding is made available to the Irish covered banks, and some €80 billion to all credit institutions in Ireland. This argument is bunkum. What the ECB would be doing in that context would be punishing a well performing (within the troika program) peripheral country for taking immediate steps to ensure that its sovereign debt is sustainable. It would become clear that no matter what their government did it would not satisfy the monetary uber-Hawks of Frankfurt. It would crystallize the fear that many on the periphery of Europe have, that in the eyes of the core (in reality in the eyes of a toxic blend of populist politicians and frightened faceless bankers in thrall to the ghost of a memory of a supposed consequence of a monetary event in the 1920s) the periphery is dammed if it does and dammed if it doesn’t. I do not believe that the ECB is a suicide cult, which is what it would have to be if it were to in effect force Ireland out of the euro. That is what logical endpoint of cutting off liquidity would be, and no organization willingly engages in an action which will result in its own demise. .