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"The time for burning bondholders is gone": economists address promissory notes

Oireachtas Committee for Finance has heard that Ireland should cancel or defer the repayment of promissory notes.

Image: Images_of_Money via Creative Commons

IRELAND SHOULD push to defer the repayment of promissory notes, according to economists addressing the Oireachtas Finance Committee today.

Promissory notes are used to access funds in an extraordinary situation when an organisation is not in a position to get a regular loan – such as during the banking crisis of 2008.

“[T]he only reason the banks are solvent and liquid in the technical sense of those words is because of the largesse of the Minister for Finance,” UL economist Stephen Kinsella said.

In his presentation to the committee,  Kinsella said that Ireland’s banking system comprises three main liabilities: repaying remaining senior bondholders, repaying promissory notes, and the state’s unfolding mortgage crisis. Promissory notes accounted for one-fifth (21 per cent) of the state’s €148 billion debt in 2010.

UCD economist Karl Whelan said that, effectively, the state will repay the promissory notes issued to support Anglo and Irish Nationwide (now amalgamated as IBRC) at a rate of approximately €3.1b per annum over the next 15 years.

Meanwhile, Trinity College economist Brian Lucey said the promissory notes are not sovereign bonds and restructuring or cancelling them cannot in any way be seen as defaulting on a sovereign bond. He said that Ireland could write them off – but would need approval from the ECB, which is unlikely.

However, Lucey later added that there is no mechanism to throw Ireland out of the EU and that the threat to cut off Ireland’s liquidity is a threat that seems unlikely to be realised.

Whelan said that the most effective way to ease the burden of the notes is to defer payments for a number of years until, for example, Ireland’s GDP has hit a pre-crisis level. If this is not possible, then Ireland should push to have the notes replaced by new notes that have a lower interest rate which would enable the state to pay off IBRC more quickly.

Lucey agreed that deferral is a good option in the circumstances, saying: “Europe in general and Ireland in particular excelled at the national sports of can-kicking… and we should consider doing it again in delaying the repayments.”

There’s significant value in waiting to see what happens, he said, but his preferred option is for us to get rid of the notes as soon as possible.

“The time for burning bondholders is gone,” he said, “we may decry that, but that’s a fact”.

Scale

Stephen Kinsella said it was important to understand the scale of the repayments, and the different between the promissory notes and bond repayments.

The cost of the promissory note repayment is €3.085 billion a year, he said, and it becomes sovereign debt as we pay it off because we pay for it either with taxes or with borrowed money. Given the level of tax revenue, we need to borrow to pay.

“We can all see how monstrous this amount of debt is,” he said.

Two banks became insolvent and couldn’t access their funds in the normal way so these promissory were created to save the banking debts of a particular type of lending through a particular period of Irish banking. However, he said, we will be paying them off with our borrowings.

Kinsella said the focus should now be on how burden-sharing can be carried out as credibly as possible. He also said the ECB’s statements of intent should not by treated as synonymous with how they will act in the future.

The next €3.1bn payment on the promissory notes is due on 31 March.

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