In the opinion of Eurointelligence:
FT Alphaville probably has the best explanation of how the promissory notes deal might work, and how this deal fits:
1) IBRC gets an Irish government bond worth €3.06bn. Pop! There it is.
2) Nama, the bad bank but which is off the government’s books, uses part of its €4.3bn cash hoard to buy the government bond off IBRC for €3.06bn in a repo, we would assume.
3) IBRC now has €3.06bn cash. It uses this cash to pay off some emergency liquidity from the Irish central bank. This is the key and we would say helpful bit. Pop! There goes some ghostly Irish central bank liquidity back to wherever it came from.
4) IBRC later buys the bond back from Nama (we think – not sure).
5) Bank of Ireland, a bank in which the government owns a sizeable stake but which escaped nationalisation and is off the government’s books, buys the bond off IBRC.
6) This is a repo transaction.
In an edit that didn’t make it in to the Politico.ie version of an earlier post “The Game is Rigged” I said:
Basically there was always going to be some form of restructuring. However, although it may amount to a slight reduction in the cost on the interest rate it’s function is to copper-fasten the payment, even though the money being taken from the State (from General Government Debt) is being paid back to the State (the Central Bank of Ireland). Once repaid it will promptly vanish!
So when Alphaville say that “there goes some ghostly Irish central bank liquidity back to wherever it came from” they are being a little eh, disingenuous. ELA is money that the Central Bank of Ireland printed, with the authorization of the ECB, even though legally they’re not supposed to provide liquidity to insolvent banks.
This a note from Willem Buiter quoted in another Alphaville post when the ELA issue first came to public attention at the beginning of 2011:
Above we noted that, at least in the interpretation of the ECB, the monetary financing prohibition in the Treaty would be violated if ELA were granted to an institution that was not just illiquid, but insolvent.
So this bending of the rules indicates that the ECB would prefer not to extend it for too long, but ultimately, the money being paid back goes no where. It just disappears. Which makes the extension of the payment, through this new government bond issue seem like a tactic to somehow give it more corporeality.
Again, we now now that Anglo or whatever its called has been allowed to retain its banking licence even though it is most definitely a dead bank. So it’s about making something real that isn’t and getting Ireland to pay for the rendering.
This means that sharks like Denis O’Brien can benefit from this arrangement. While Anglo is chasing Sean Quinn for the money he owes, it doesn’t really seem to care about the 500 million O’Brien owes to Anglo and which he borrowed to buy shares in his takeover attempt in Independent News and Media, all of which was wiped out during the recent debt restructuring.
As John McManus pointed out this week, Anglo looks rather favourably on O’Brien as client in other areas too:
IBRC facilitated the €45.42 million takeover of Siteserve by one of its biggest Anglo legacy clients, Denis O’Brien. The deal saw IBRC write off debts of more than €100 million while the Siteserve management got a €5 million payoff and kept their jobs.
No explanation has been proffered by IBRC.
So what we have seen with this rejigging of the IBRC promissory note is the creation of a new one, which is to be bought by the Bank of Ireland. However, as BoI is still privately owned by a bunch of US based asset-striping vulture funds, this requires approval by the shareholders. This takes time, we assured, so, in order to get us beyond the weekend NAMA is going to buy the bond using its 4bn plus cash pile which it will then sell to IBRC.
Then, when BoI approve the deal (and given the percentage of state ownership one presumes that this is certain to happen) they will buy it off IBRC. Each of these transactions are supposed to be done at commercial rates.
But the original promissory note payment will go to the Irish Central Bank and promptly vanish!
Thus the process of making imaginary debt (and considering the odious nature of the original debt it should simply have been written down completely) into real debt using four state institutions is completed - and all done ‘off-balance’ sheet, or so we are told.
In the meantime of course, the source of all the problems is being used as an unlimited extended credit facility for the usual suspects.
What will happen for the next promissory payment is unknown, but we can be sure that the problems in the economy will be as bad.