THE DIRTY DOZEN - w/e May 5th 2012

PROMISSORY NOTES TO SOVEREIGN BONDS EXPLAINED

 

When Minister Michael Noonan announced the means by which he transformed the Promissory Notes to sovereign bonds I presumed everyone understood exactly what was being done, was surprised there wasn’t more outrage. Now I'm not so sure people did understand, perhaps not even those who – alcohol haze notwithstanding – voted it through.

Everyone knew that under the old scheme/scam, every March 31^st for the remainder of this decade the Central Bank would take €3.1bn from the Irish economy and destroy it. What Michael Noonan should have done on behalf of the Irish people was simply refuse to do that anymore, face down the ECB. Michael didn’t have the stomach for that fight so instead he found excuse to wind up Anglo/INBS – the two banks at the heart of the Promissory Notes bailout exercise – and in place of the Promissory Notes, issue €25bn worth of sovereign bonds.

EASING MICHAEL'S BURDEN

It took the pressure off him and off his government colleagues for the next few years - no more of that pesky debate every year in the months preceding the March 31^st deadline. Immediately, on our airwaves and on our major daily newspapers, figures were bandied about, headlines trumpeting the government line of '€20bn in savings'.

Subsequently of course – though far less prominently – those claims were admitted to be utter nonsense but nevertheless the general acclamation for Michael’s sleight-of-hand still stands. I wonder though, do all those cheerleaders fully understand what this deal entails? Does our local Fine Gael TD Áine Collins understand, for instance? On the basis of a letter she recently sent to one of our regular marches where she proclaimed the ‘end of the Promissory Notes, we don’t now have to pay’, I don’t think so.

THE SELLOUT COMPLETE

Under Michael’s treacherous scheme this is what now happens: beginning before the end of 2014 the Irish Government will start withdrawing the €25bn of new bonds it pledged to the Central Bank and sell them on the open market. Their proposed schedule is €0.5bn a year for five years, €1bn a year for another five years, €2bn a year for the next eight years, and finally, in 2032, €1.5bn, making a not-so-grand total of €25bn.

ASHES TO ASHES, DEBT TO DEBT

So far, so simple. But what happens next? What happens the €25bn generated by the issuance of those bonds, the bonds on which we will be paying interest for the next 40 years? Have you heard any explanation on that, any probing questioning of any of the myriad government trumpeters of this great deal? No? Here’s why.

Just as the €25bn from the remaining Promissory Notes was going to be destroyed, so too will this €25bn. As bond after sovereign bond is issued and those billions taken in by the Central Bank, so those billions will be burned, shredded, whatever-you're-having-yourself. 

To put it very succinctly, we’re borrowing money so we can burn it.

Not one cent of that €25bn will go the Irish people, nor yet the €3.06bn bond the Central Bank also now holds from the 2012 Promissory Notes farce, payment for the €3.06bn the same Central Bank did destroy in early April last year, despite all spin to the contrary.

We will, however, pay the full cost of all those borrowings, and then some.

IRELAND'S BURDEN ENCASED IN CONCRETE

Already, and for the past three years, we’ve been paying the ECB’s own interest charge on the full original Promissory Notes amount, the €31bn of ELA (Emergency Liquidity Assistance – note that word ‘liquidity’, very important when you remember this was money going to zombie, insolvent banks, simply to enable them bail out their bondholders and their institutional probably same-source ‘depositors’). We will continue to pay that interest, albeit reducing from year to year as the ELA is paid off.

As those bonds are issued, however, the 'coupon' or interest (it averages out at around 2.65%) we are now paying entirely to ourselves through the Central Bank will instead be going to the new bondholders, that amount increasing annually.

You know what? Wouldn't it be really fitting if the same people who were bailed out with the original €31bn were now again to profit from the Irish people and purchase these bonds? Not right, but fitting.

AS BAD AS IT GETS? AH, NOT YET...

Oh, and to rub salt in raw wounds – this can only get worse, and will. How? 

• The Euribor six-month interest rate to which the bonds are tied will rise, we can be absolutely certain of that, and with it will rise our interest payments to the ECB;
• The ECB may also impose a faster rate of issuance on the bonds, which means all the above will kick in sooner and harder;
• Finally, there’s no guarantee that when those bonds are issued they will actually sell for ‘par’ value. I won’t bother to even go into that, suffice to say it will cost even more so that eventually this great Noonan deal could end up being even more expensive than the deal it replaced.

A reasonable estimate on the interest we'll pay on those sovereign bonds (including the 2012 bond, including also the ELA interest) is €40bn; then, and starting in 2038, we start to pay the €28.06bn itself. All this burden imposed on the Irish people through the machinations of the last government in cahoots with the ECB, and now solidified by this government all on its own, to bail out the failed bondholders in two failed banks.

Anyway, now ye know, the few of you whom this blog will reach.

As to this week's Dirty Dozen, the next 12 bonds due for payment from the remaining Irish banks, have a quick look and then wonder why those banks simply can't afford to fulfil their supposed primary fuction of servicing the Irish economy. Today for instance, Tuesday Apr 30th, a billion-euro bond from Allied Irish Bank. Thank God we don't own 100% of AIB; instead, because we own only 99.8%, we're on the hook today for a mere €998,000,000.