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THE LAST 48 hours have brought about a serious and historic development for the state. In less than a day the government has debuted and promptly passed legislation liquidating IBRC and secured a deal for the replacement of the IBRC promissory note with a long-term sovereign bond. These are massive, sweeping changes and the speed with which they have occurred is utterly gobsmacking.
So why the rush? According to Finance Minister Michael Noonan, the government was forced to immediately liquidate IBRC because details of an imminent liquidation were leaked to the press (Reuters and Bloomberg). Noonan said that to prevent a run on the bank and the widespread withdrawal of deposits, which would strip state-owned IBRC of its assets, it was important to make sure the bad bank legally had liquidated status before trading began the next morning.
So Noonan is telling us that the government implemented a huge liquidation plan in response to a couple of articles; this is highly reactionary behaviour. Many commentators have since insisted that if the government hadn’t responded it seems likely those articles would have been largely ignored. Even more crucially, we should remember that rumours of a liquidation and the resulting fears about a flight of capital existed because the government have been planning to liquidate for months. They didn’t just come up with a Bill overnight when someone at Reuters started an unfounded rumour about a possible liquidation.
The Reuters story followed the decision to liquidate, it didn’t cause it. The government might have intended to announce IBRC’s liquidation at a more suitable opportunity and is now claiming it had its hand forced by the Reuters article, but the fact is this liquidation strategy has been in place for months. In fact it’s miraculous, given that these plans have been in place for so long, that they weren’t leaked sooner. So it’s incorrect to argue that IBRC was only liquidated to stop a flight of capital. It’s the other way around: there was a potential flight of capital because IBRC was being liquidated.
The chain of causation surely had to start somewhere. Regardless of whether they were pushed or they jumped, the government has told us that the aim of their actions was to ultimately allow the IBRC promissory note to be replaced by a government bond, turning it into sovereign debt with much less punishing repayment terms. Liquidation also results in the advantageous transfer of €16 billion of IBRC’s loan book (separate from the promissory note debt) to NAMA, who will now finance these loans with low-cost government-backed NAMA bonds which pay just 0.75 per cent interest.
The European Commission has already approved NAMA to issue €54 billion of these bonds but to date it has just issued €32 billion (and redeemed €5 billion of those), so has lots of scope to do this. However, considering the serious side effects it has created, it’s questionable whether it was actually necessary to immediately liquidate IBRC to achieve these aims.
Because it’s the liquidation aspect of this whole debacle that really embarrassed us yesterday. The demand for immediacy it caused saw a hugely important piece of legislation rushed through the Dáil and Senate, complete with dodgy images of a packed Dáil bar and media statements from TDs who openly admitted they hadn’t had time to actually read the Bill. Hundreds of people were abruptly told they were jobless. It all echoed horribly with the last speed-tracked piece of legislation, the infamous signing of the bank guarantee in 2008.
It was always intended that IBRC would be wound down but, as its own website still says, this was expected to take until 2020 to achieve :
Our goal is to achieve full resolution of IBRC by 2020.
So why liquidate? Why now? Given the monumental, radical powers that last night’s Act introduced, surely the transfer of IBRC assets to NAMA could have been achieved using some other method and there is nothing that indicates a promissory note deal required the liquidation of IBRC first.
Let’s remember that the Irish Bank Resolution Corporation Act that was just authorised, among other things, essentially turns the Minister for Finance into a bank, with the right to issue securities, and gave NAMA the right to interfere with property rights. If the government can pass this, in less than twelve hours from start to finish, surely it can manage legislation that would allow the transfer of IBRC’s loan book and the converting of promissory notes into sovereign debt, without the need for any liquidation at all.
The Irish Times reported that, when asked yesterday why IBRC had to be liquidated or whether liquidation was an ECB condition for a deal, Central Bank governor Patrick Honohan declined to answer. On Twitter I asked both UCD economist Karl Whelan and legendary blogger @Namawinelake on bank debt why they thought the government felt liquidation was necessary and whether a deal on the promissory note could have been reached without it.
Karl’s response was:
No I can’t explain why it was necessary and yes it seems to me a deal could have been reached without it.
@Namawinelake agreed, stating that:
Minister Noonan unconvincingly claims that once rumour of liquidation leaked, then he HAD to liquidate. Unconvinced.
Let’s hope the liquidation of IBRC can ultimately be justified, because this type of rush-job should have been avoided at all costs.
Sarah McCabe is a law and finance journalist. You can find her on Twitter at@sarahmccabe1. To read more articles by Sarah for TheJournal.ie click here.
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Here’s what I don’t get.
The liquidation was done in order to allow the promissory note be exchanged with a long-term sovereign bond
The talk is that this is a good deal because the value of future money is less than today’s money, because of inflation.
Fine, I get that. So I did some calculations :-)
The vast majority of the interest on the bonds will be payable to the ICB, so it doesn’t leave the country or gets destroyed. So the taxpayers pay interest on the bonds which in turn is handed over to the ICB, which can release this money for growth and employment initiatives. So we’re paying the majority of the interest back to ourselves. Slightly less that 1% will be unrecoupable. That’s the theory, anyway.
Interesting idea that we’ve exchanged a debt for an accounting exercise. I’ve been looking for details on that (how much gets destroyed, for example) but haven’t found them yet…
The Irish Central Bank isn’t the Exchequer though, so I don’t think it’s true to say that they can ‘release’ the money for growth & employment. They can loan money to the state at (one would hope!) a favourable rate, but the state is still minus the repayments on the bonds….
It has to be an accounting exercise, as the whole task is to fix the accounts. The ICB created a pile of money from nothing, so the accounts became a joke. That’s why the ECB was so against a write-off or write-down, it leaves the accounts in a mess, with clean accounts we can’t have effective regulation of the euro zone, if without regs toon of the euro zone, the euro becomes a untrustworthy currency on the world markets, which is exactly what the ECB is mandated to prevent.
In theory they say the money will be released, but the details of “how” are not yet clear, at least not to me. I reckon you’re in the right track when you said it could take the form of loans St extremely low rates. If they are lending to the commercial banks, say to allow for mortgages and business loans, the ICB will need a means to enforce that the low interest is passed on the the borrower, and not used solely for the benefit of the commercial banks.
Great article, there hasn’t been enough independent coverage of this issue, all I can see is everyone saying how great the deal is, but no one is explaining why.
Isn’t it strange that this was done just as the Quinn family were in the process of joining the Dept of Finance and the Central Bank to their big case against IBRC. and now this highly questionable piece of legislation tries to ringfence the dirty secrets of the establishment in a further despicable attempt to deny the family natural justice by proceeding with a case that was ruled that they have a legitimate right to take.
Yes, really strange. Quick, get the pitch forks.
Anglo Irish Bank should have been liquidated some years ago by Fianna Fail. It’s a shame on FF that they did not take corrective action when it should have been taken! The then regulator did not do his job properly but FF gave him a big pay off and a big pension. Shame on FF.
And shame on FG for converting it into a lifetime of sovereign debt.
They acted not on behalf if the Irish citizen once again…..
A pig with lipstick is still a bloody pig at the end if the day.
I would hope that freedom of information will eventually shed some light on all this ECB stuff. Between the 2008 guarantee and this its necessary to put any speculation of conspiracy theory’s to bed, if not today then before the next general election. We’re entitled to know.
Does this get Sean Quinn and his family off the hook?
No, cases brought on behalf of what was Anglo can continue, but case against Anglo are halted. So Quinn’s not safe from ICB /NAMA, but there assets held by ICB / Nama are safe from Quinn and other remaining creditors. Ultimately, this has to happen sooner or later, and it’s happened in a way that at least a chunk of taxpayer’s wealth that was funnelled into the zombie bant can be rescued..
..zombie bank can be rescued. Apologies.
@ Ciaran, no. Nama will take over the actions.
The stock reply to this question is set out by Nicholas and Peter, but at the very least, the legal capacity of NAMA to take the place of IBRC/Anglo/INBS will be challenged. If the Government has drafted the bill giving effect to the liquidation properly, most likely such a challenge will fail. But I wouldn’t be rushing to the bookies to bet the mortgage that they have. And I would doubt that the Quinns will even be first in the queue to make such a challenge. The courts themselves must have been getting sick of the endless stream of vindictive and spiteful cases involving Anglo, and may see this latest development as a way to draw a line under them all.
@ Garry, good reply and a balanced comment.
How is it fair that Anglo/Nama will still be able to chase Quinn for what they believe is there’s……when the case against Anglo and all the big guys involved in that case, is going to be dumped? The government knew that Quinn had a massive case that would shake the foundations of Anglo and severals in the Dáil. They had to make sure the liquidation went through in the night, for obvious reasons, but there was no reason to rush the clauses that went along with the liquidation. They were running scared and sneaklily, like rats in the night, they made sure that Quinn’s case would be scuppered. The population of the country have their heads turned to the liquidation,…and so they stamp out Quinn. Corrupt, inept, sneaky, cruel governing!
Shame shame shame on all those sitting around the table, drawing up clauses and intrinsics of the Act on Wednesday night.(Although we all know that these ‘little clauses’ were drawn up months ago) There is no integrity left in the Dáil. Dictatorship is alive in Ireland. We have no voice.
It does not get the Quinn family off, as cases by the IBRC carry on, while cases against have to end.
The decision to liquidate had to happen to get rid of the Anglo Irush tumour, but is a move that seems a bit, well, poorly explained.
In 2016, all this will be forgotten by many of the voters. Like Fianna Fail, Kenny’s voters will have “stockholm’s syndrome” as an advantage.
But I hope not….
All we have to hope is that we get significant inflation, despite some prognostications of deflation or marginal inflation, that we will have a booming economy, hopefully not based on property speculation, that the principal can be found on the due dates, that our next two generations will be trapped to stay in Ireland and willing to pay the huge taxes required to pay the principal sums when due.
I will acknowledge one thing. The short term savings will ensure that magnificent salaries and munificent pensions will continue to be paid to the politicians and senior civil servants. That’s the important thing.
An unaffordable overdraft which was not enforceable has been converted to a 40 year bullet proof mortgage.
No one can predict inflation and economic progress for the next 40 years. No one knows for sure but the pointers are all towards lower salaries and wages so that we are competitive cheap labour and no one knows what State Ireland will be in 2038.
The honest answer is that this is an immoral deal and there is no one who knows if it will be a good deal.
It is spinning to assert that 20 billion has been saved. Only gullible people will swallow such nonsense.
The whole thing is as suspicious as the overnight saving of Anglo in the first place it’s hard to know what caused the plan to be rushed through in the night when supposedly the plan had been on the cards for months.
I wonder was it something to do with the promissory notes agreement with the ECB rather than anything else. Maybe for market stability reasons they had to have the bank liquidated before the ECB announces the plan but I don’t know
Probably because someone in the know told them the court case had an excellent chance of success. So to save face with their European “pals” noonan and Enda did this.
The answer is obvious. Didn’t Merkel advise about the increase in the VAT rate before the Minister for Finance did! A civil servant in Frankfurt disclosed the ” behind the scenes” deal before it could be implemented.
In that event the legislation had to be approved and sealed before the markets opened the following morning at 8.0AM.
Michael Noonan did Trojan work and should receive an accolade from the Irish Nation. A stroke of genius!
The only thing Moonan did was circumvent a Supreme Court case he and his cronies were aware they could lose.
@Dermot O’Reilly Michael Noonan put the interests of his Bilderberg pals before those of the Irish people. I feel sorry for people like you – seemingly intelligent people ,who have fallen for the spin – hook, line and sinker. The harsh reality is that Noonan and his buddies have effected a massive heist, and the ordinary people of Ireland will be paying back billions of debt that wasn’t ours for generations to come. Treason!
Spot on, M Bowe. I think it was all about that case and the impact on the next election…..
The “markets” had bugger all to do with Anglo – Anglo was not raising finance and neither was the NTMA. Virtually all of the creditors are “us” as we issued the PN
Arthur Beesley said in today’s Irish Times:
“If the main financial benefit for Ireland is to reduce the national borrowing requirement by €20 billion over the next 10 years, the essential kicker for the ECB is that former Anglo will no longer be leaning on it for €40 billion in short-term funding known as exceptional liquidity assistance. The overnight liquidation of Irish Bank Resolution Corporation, as Anglo is now known, essentially means that the ECB gets to seize its collateral for these loans.”
Even though Draghi played stum, it’s clear the ECB imposed conditions, including this one.
If inflation brings the cost of this debt down as Noonan explained yesterday, then using his lesson about been a teacher, that after 20 years his original mortgage premium was equal to his months salary….I think teachers can look forward to monthly salaries of 300,000 euro in 2038. Great money if you can get it.
@ Thomas Roche, good context.
It seems to me that the government just made sure that the debt related to IBRC is now impossible to write off as it is transformed into bonds. Or am I missing something? …. Was there an alternative in how to deal with this debt? How about a true liquidation (without this swap) and a default of the IBRC without compensation to its creditors (or only to a limited degree)? Why didn’t they try to get rid off the debt?
Because they couldn’t. The last government had guaranteed the debt. The liquidation did not add anything to the government’s liability, although it did crystalize it.
It is extremely unlikely that ECB could have legally done a deal if Anglo had not been liquidated.
There is nothing particularly noteworthy, shocking or embarrassing about liquidating a zombie company. Companies are liquidated every day of the week, with no notice.
I would have thought that IBRC had to be liquidated in order to facilitate the the transfer of assets to NAMA, IRBC is in effect far from bust, its sitting on 14bn of real assets , not to mention a loan book , not all of which is toxic. ( ie loans to O’Brien etc) My understanding under company law is that assets cannot be moved out of a company ( ie to NAMA) , in essence leaving debt, (or attempting to transfer debt elsewhere). Hence this is in effect a members voluntary winding up. In that case the liquidator can “dispose” of the business in any way practical as long as the preferential creditors are looked after.
Secondly it is reported that Reuters actually contacted the Dept of Finance and sought a confirmation or denial , and a denial was not forthcoming. If IRBC wasnt liquidated in the middle of the night , all the creditors not on the preferential list ( and potentially the employees and uncle tom cobbly and all ) would be in the High court demanding the Court injunct the process and stop the liquidation. That would have put a right ki-bosh on Dragis little message, and IRBC would be in the courts for months.
Its worth noting that the Act is probably unconstitutional, its overrode the Transfer of Undertakings legislation , it rode over asset and property rights ( which might have prevented IRBC from transferring certain assets) , of course by the time the challenges are heard , theres no going back.
I must say , its very handy to be a company with the minister as a shareholder, dont like something in company law, hell change it all.
The employees in particular are only getting statutory severance, ( as is all that you get in a liquidation), but they are entitled ( or were under the Transfer of undertaking) to be transferred to any new employer to bring all their entitlements with them. I suspect they will just be bought off. The sums involved being a tiny tiny fraction of the amounts in question.
It had to be a liguidation and that liguidation had to be done in an instant ,I suspect it had nothing to do with the Reuters story and everything to do with the ECB making an announcement the following morning. To suggest the Gov didnt know what was going on , as some commentators have said, is nonsense. it was all agreed before hand.
All in all a good deal given the circumstances. Dont blame this deal, the Gov Had its hands tied behind its back by the Lenihan guarantee. That was the decision since the founding of the state.
If they can make a new law to circumvent and over-ride the laws that already exist, why couldn’t they over-ride the guarantee from 2008? … Wouldn’t an isolated default of this company be better as it would greatly helped the country?
A Nation in Bondhood.
To suggest we and in Bond now and weren’t already in it is nonsense, the State issued a legal and total bank guarantee, it simply isnt possible to undo that. Iceland didnt guarantee its banks and could let some of them fail, Brian Lenehan took the worst decision in the history of the state, This Gov is just dealing the hand it was handed.
People talking about default as full of hot air, the banking system almost completely relies on emergency liquidity from the ECB, if that dried up and your PASS machine wouldnt give you money , I suspect many would forgot about “burning bondholders – like”
Point out any , repeat any, sovereign debt the ECB has written down!!, it simply cant, its direct Monetary Financing and the laws of the ECB , which I dont agree with , simply dont allow it. Blame the Germans for that.
Dave,
The Greeks have defaulted 4 times and their ATMs still function.
http://www.independent.ie/opinion/columnists/david-mcwilliams/ecb-wont-go-nuclear-if-we-default-on-promissory-note-look-at-greece-29051719.html
Two quotes. And.
have your say