Can we make Irish promissory notes a bit more bonkers? Yes we can | FT Alphaville

Can we make Irish promissory notes a bit more bonkers? Yes we can

We have an Irish promissory notes deal! A weird one.

This is not the deal to restructure the notes (used to reanimate the IBRC, the Anglo Irish after-life vehicle) overall. This is not a deal ‘with’ the ECB at all, technically. It’s in order to defer a €3.06bn cash payment that Ireland would have had to send to the bank at the end of this month. One plan was to swap out the cash for a long-term Irish government bond, achieving the deferral for, potentially, the bond’s lifetime.

This would leave time for a proper rescheduling or replacement of the notes. It’s tricky, because the notes guarantee emergency liquidity from the Irish central bank for Anglo. This ELA allows looser collateral quality than the ECB. If Ireland sent cash, Anglo could reduce its need for ELA by this cash amount. If Ireland sent a bond, Anglo could pledge it for either emergency liquidity or, assuming the ECB accepted it, for normal ECB liquidity. But it sounded simple enough (as far as any of this stuff’s simple), this plan.

Plan’s changed.

Here’s Ireland’s finance minister Michael Noonan speaking to MPs on Thursday, with one of the more disingenuous uses of “put simply” we’ve seen… (h/t

Put simply, €3.06 billion will be settled by delivery to IBRC of a long term Government bond with an equivalent fair value. Ultimately, it is intended that this long term Government bond will be financed for one year, on commercial terms, with Bank of Ireland who may in turn refinance the bond with the ECB. While this transaction has been approved by Bank of Ireland’s board it remains subject to the approval of the Bank of Ireland shareholders.

As a short term interim measure, pending the results of Bank of Ireland’s shareholders’ vote, the financing of the bond will be a collateralised facility provided by NAMA to IBRC on equivalent commercial terms as the financing with Bank of Ireland. NAMA is in a position to facilitate this collateralised financing from its own funds.

This financing approach reduces the level of Emergency Liquidity Assistance provided by the Central Bank of Ireland to IBRC.

Here’s how we think it works:

1) IBRC gets an Irish government bond worth €3.06bn. Pop! There it is.

2) Nama, the bad bank but which is off the government’s books, uses part of its €4.3bn cash hoard to buy the government bond off IBRC for €3.06bn in a repo, we would assume.

3) IBRC now has €3.06bn cash. It uses this cash to pay off some emergency liquidity from the Irish central bank. This is the key and we would say helpful bit. Pop! There goes some ghostly Irish central bank liquidity back to wherever it came from.

4) IBRC later buys the bond back from Nama (we think – not sure).

5) Bank of Ireland, a bank in which the government owns a sizeable stake but which escaped nationalisation and is off the government’s books, buys the bond off IBRC.

6) This is a repo transaction. Here is the Bank of Ireland statement:

The Repo will be governed by a Global Master Repurchase Agreement which will incorporate standard market terms including daily cash margining with respect to changes in the value of the Bonds.

All IBRC’s payment obligations to the Bank with respect to the Repo including the cash margining are covered by a guarantee from the Minister for Finance of IBRC’s exposures for transactions of this nature.

7) Bank of Ireland can rehypothecate pledge the bond to the ECB for cash.

The transaction can be financed by the Bank, through standard ECB money market operations using the Bonds which are Eurosystem eligible.

8) A year from now, IBRC buys the bond back from Bank of Ireland.

Update 8.5) Collect underwear

9) ???

10) [Insert long-term promissory notes deal here]


This does seem complicated, but we’re open to the view that this is what the Irish government could get done in the time available, and given resistance from the ECB Governing Council towards wholesale restructuring of the promissory notes.

We’ll avoid the accounting implications of this deal, though we think it might be an interesting study, given the involvement of Nama and Bank of Ireland.

The easiest way to think about it is that Anglo’s reliance on ELA goes down. Because ELA happens to be an uncomfortable fiscal-monetary entwining — this is an improvement. As far as it goes. Bank of Ireland, which is deleveraging its relatively stronger balance sheet, sees its reliance on ECB liquidity go up though. There is a year to test out the ultimate fate of the promissory notes. Time enough? Time will tell.

But our question is, why couldn’t Anglo pledge the bond to the ECB directly?


Here’s a possible answer, from IBRC’s 2011 annual results (h/t Karl Whelan):

In October 2011 the Central Bank of Ireland advised the Bank not to increase its usage of sale and repurchase facilities provided under open market operations with the ECB. As a result, at 31 December 2011 there were no senior bonds used in sale and repurchase agreements under open market operations with central banks (2010: €12.3bn). At 31 December 2011 senior bonds with a nominal value of €750m had been pledged under a Special Master Repurchase Agreement with the Central Bank of Ireland.

Which shows a preference (from which central bank really?) for IBRC to tap ELA in place of its expanding its borrowings from the ECB, the normal liquidity. Even when (judging from the above) assets were eligible for ECB liquidity.

With all the entwining around the Irish bank bailout, that’s something to think about.


One last bit, by the way, from the IBRC results. There’s also a bit on IBRC hedging its interest rates exposure to the prom notes…

The promissory notes have resulted in the Group having significant interest rate risk as they are fixed rate instruments. The Bank has hedged a total of €4.3bn of the nominal amount using amortising interest rate swaps. A further €5.7bn of economic hedges exist in the form of the Group’s capital and fixed rate debt issuance. However significant fixed interest rate exposure remains with limited capacity to hedge further amounts with market counterparties.

How about that?

Related link:
Dublin says it has made ECB debt deal – FT