Tuesday, 17 January 2012

The Anglo Promissory Notes explained

PROMISSORY NOTES EXPLAINED

There’s been much talk lately about promissory notes, the Anglo promissory notes particularly. Having been involved in Ballyhea in protesting the bank bondholder bailout for 45 weeks (and counting), I felt it my duty to do some research on this topic. Here is the result, in layman’s terms and with massive thanks to the Namawinelake blog.

THE HISTORY
A few years ago when this vat of worms was first opened up, it quickly became apparent that Anglo was insolvent, in other words its assets were worth less than its liabilities. Banks aren't allowed to be insolvent so Anglo needed more cash, and in a hurry or it would go under. The then Minister for Finance, the late Brian Lenihan, wrote a €30bn IOU and gave it to Anglo, who in turn took it to the Central Bank and asked to exchange it for cash. Did Brian ask your permission, my permission, before he landed us all with this massive debt? Did he even ask the permission of his government colleagues, did he – as required by our Constitution - ask permission of the Dáil? Did he hell. Anyway, off the rails as this request was the Central Bank nevertheless said yes, handed over the money.

THE TERMS
Under the terms of the agreement, the interest payable on this €30bn ‘advance’ by the Central Bank was 6% p/a. Minister Lenihan committed the Irish state (that’s us) to paying €3bn a year to Anglo, who would then pass on that money to the Central Bank, these payments to continue til the original €30bn plus the interest was paid off in full. So no, it won’t be done in ten years (10 x €3bn), rather it will take at least 15 (if you're not into sums look away now: March 2011, 30bn + 6% = 31.8bn, less 3bn = 28.8bn; + 6%n = 30.5bn on March 2012, less 3bn = 27.5bn; + 6% = 29.2bn on March 2013, less 3bn, etc. etc.).

WHAT HAPPENED TO THE €30BN
Anglo got it and uses a huge portion of it to pay off its bondholders - €2.3bn in the next few weeks alone (see bondwatchireland.blogspot for full details)

WHAT HAPPENS TO THE €3bn EVERY YEAR
The Central Bank destroys it – burns it, shreds it, any way you want it, but it’s simply destroyed.

TO WHOM ARE WE PAYING THE INTEREST
We’re paying the interest to Anglo, which we 100% own; Anglo in turn pays interest to the Central Bank on the €30bn loan, and the Central Bank gives the profit it makes (when talking of banks, I can't say ‘earns’) each year to the government, including the interest it charges Anglo (round and round the houses they go - are ye beginning to see how all this can eventually confuse even those who are charged with regulating it?).

SO WHAT’S THE BIG DEAL ABOUT GETTING THAT INTEREST RATE REDUCED?
Exactly – what is the big deal, and why is the government making such a song-and-dance over that when most of that interest finds its way back to government coffers anyway?

SO WHAT IS THE BIG DEAL?
The big deal is that every year we’re going to have to borrow every penny of those billions, with more interest, and real interest this time, to pay back those promissory notes.

THE ROLE OF THE ECB
The ECB’s stamp is all over this, quite literally, down to setting the interest rate. By law, a bank is required to have at least as much in real assets as it has in liabilities (the multiplier depends on the country); on its own the IOU given by Brian Lenihan wasn’t real, no guarantee that the promises made in the note would ever be kept. The ECB had to give its approval but more, it also had to give the Irish Central Bank permission to print that €30bn and give it – in total and up front – to Anglo. This though was against the ECB’s own policy; they didn’t want to print new money because – they believe - it will cause prices to rise and their main objective is to keep price rises to about 2% per year. But they had an even bigger concern – their own major banks in Germany and France, those to whom Anglo and all the other Irish troubled banks owed many of those billions. So, they allowed Ireland to temporarily print money to fund Anglo's losses, but with this massive sting in the tail - as the money is repaid it is destroyed, so that at the end of the repayment of the promissory note there is no extra cash, no new money will have been created.

WHAT SHOULD BE DONE NOW
Refuse to pay another bond, refuse to pay another promissory note, look for repayment from the ECB of the money they’ve already forced us to pay through their blackmail policy.

Regards,
Diarmuid O'Flynn.

3 comments:

  1. Brilliant , well that is as clear as mud then. but that is the way these money people want it, it always astounds me that when something like this comes up the politicans say that it is too complicated, the man on the street won't understand, but when it comes to looking for our vote, they say we are higly educated people who can't be fooled. !!

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  2. The 30 BN EUR have been printed by the Irish Central Bank in exchange for a worthless piece of paper.
    The money helped Anglo to survive and to repay their massive liabilities.
    The 30 BN EUR should be paid back.
    If not I would like to receive a BN EUR as well. If not every bank in the world would like to receive that free bail-out.
    The terms of "only" 6% interest have been incredibly generous for such a risk in an absolute crisis mode.

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  3. In practice, however, lowering the interest rate on the notes does nothing to reduce the long-run burden of the IBRC debt on the Irish state. As with the transactions between the IBRC and the Central Bank discussed above, payments from the Exchequer to the IBRC are intra-governmental transactions and so the interest payments on these transactions have no net impact on state’s finances. Indeed, only a small fraction of the €17 billion difference between the payments total of €48 billion and the principal of €31 billion represents a net cost to the state.

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