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Ireland’s Banking Debt: Explaining the Cost of Anglo and Irish Nationwide
31 Jan 2012
Prof. Karl Whelan
Speaking in Davos, Harvard professor and former IMF chief economist, Ken Rogoff, has said that Ireland’s bank debt may need to be restructured. Rogoff’s comments reflect the correct perception that a huge amount of the debt that Ireland has accumulated in recent years stems from the government’s decision to bail out its banks.
However, exactly how “Ireland’s bank debt” will be restructured is rarely outlined. Significant amounts of money were provided to AIB and Bank of Ireland from the National Pension Reserve Fund but these funds have been used to acquire equity shares. These banks have now been well capitalised and it will not be possible to write off bondholder debt in these institutions without writing off these state investments first. While both institutions lost huge amounts on property loans, the opportunity to inflict large losses on bondholders in these banks has largely passed.
What is more open for discussion is the ongoing question of the cost of bailing out Anglo Irish Bank and Irish Nationwide Building Society (INBS), two institutions being wound down, which have now merged to form the Irish Bank Resolution Corporation (IBRC).
Here are slides from a presentation that I gave on at a conference on Friday on the subject of the fiscal burden on the Irish government associated with bailing out the IBRC. Most of the public focus in Ireland on this issue has been to do with the so-called “promissory notes” that the government has provided to the IBRC. In particular, there has been a lot of discussion, including amongst Irish cabinet ministers, about the interest rate on these notes.
A key point that I made in the presentation is that the interest payments associated with the promissory notes do not describe the cost of bailing out the IBRC. The IBRC is wholly-owned by the Irish state and if it obtains high interest payments on its assets, these can be kept and refunded to the state.
The real issue in relation to the cost of the IBRC thus relates not to its assets but to its liabilities. And IBRC’s principal liability (I estimate €42 billion out of total liabilities of €58 billion as of mid-2011) takes the form of an enormous loan granted to it by the Central Bank of Ireland under an “Exceptional Liquidity Assistance” programme. This programme saw the Central Bank of Ireland create money to loan to the IBRC after these banks had run out of the marketable assets required to obtain a normal Eurosystem loan. The IBRC used these funds to pay off bondholders and depositors.
Without this ELA debt, there would be no need for the government to provide the IBRC with promissory notes. Thus, the promissory note payments can be seen as repaying the Central Bank of Ireland, which having created money to provide to IBRC, then reduces the stock of money in circulation.
The ELA is regularly re-visited by the ECB Governing Council, which can require the programme to be stopped under the powers granted to it under Article 14.4 of the ECB statute which states that
National central banks may perform functions other than those specified in this Statute unless the Governing Council finds, by a majority of two thirds of the votes cast, that these interfere with the objectives and tasks of the ESCB. Such functions shall be performed on the responsibility and liability of national central banks and shall not be regarded as being part of the functions of the ESCB.
So the crux of the “Irish bank debt restructuring” question comes down to whether the ECB Governing Council is willing to allow for a slower pace of ELA repayment than is currently envisaged, under the implicit agreement in which IBRC receives promissory note payments of €3.1 billion (about two percent of Irish GDP) each year.
Irish government ministers now regularly state that they are discussing this issue with the so-called troika. However, in this case, policy will be set by one arm of the troika and, in particular, by one man: Mario Draghi.
As an independent forum, the Institute does not express any opinions of its own. The views expressed in the article are the sole responsibility of the author.