Tuesday, 20 September 2011

Wiping Clean the Anglo/INBS Debt Slate

Tom McDonnell, Michael Burke and Michael Taft: The Anglo Irish and Irish Nationwide debt must become a major political issue. The Anglo/INBS debt-burden is an unjust and unwarranted charge which the Irish people ought have no responsibility for, a charge which will continue to drain the productive economy for years to come. In the following we discuss how we can expunge this debt based on (a) renegotiating the promissory note, (b) renegotiating a new repayment schedule (if any are needed), (c) writing down bondholder debt, and (d) political strategies to strengthen the Government’s negotiating position. The starting point should be a Government announcement this autumn that it does not intend to continue with the current promissory note payment schedule and will enter into renegotiation with the affected parties.

Many people are not aware that the vast majority of the Anglo/INBS debt has yet to be repaid. While the full amount has been placed on our general government debt, this was an accounting exercise. Under the current promissory note of €31 billion, of which Anglo Irish comprises €25 billion, the Department of Finance estimates the total cost to the state to be in the order of €65 billion, including interest on the promissory note, interest on borrowing and the capital payment made to Anglo Irish in 2009 (though this total could vary depending on future interest rates). This averages out to an annual bill of €4.2 billion over the next 14 years.

• In the next four years the cost of Anglo/INBS debt will make up almost a third of all state borrowing.;
• The annual repayments will exceed the entire budget for the nation’s primary school system;
• The average annual repayment for just one year exceeds the entire cost for a next generation broadband network;
• The total cost is equivalent in scale to half of our GNP this year.

The absorption of Anglo/INBS debt has currently added over 15 percent to total Government debt. Were it to be removed or substantially written down, Ireland’s debt levels would fall back towards the Eurozone average which stands at 87 percent of GDP. Even with the recent Anglo Irish interim report and the anticipated reduction in losses, the scale of future borrowing will be substantial.
In dealing with Anglo/INBS debt we have advantages. First, the promissory notes are not part of the EU-IMF Memorandum of Understanding. Therefore, further payments under the IMF-EU bail-out deal are not contingent upon maintaining the current promissory note schedule. Second, Anglo/INBS is for the most part detached from the European financial system; the issue of contagion to other financial institutions is extremely limited.

Bondholder debt makes up only a small part of Anglo/INBS liabilities – less than 10 percent. The major liabilities are made up of loans from central banks (€40.8 billion) of which the promissory note (€23.8 billion) makes up over half.

Renegotiating the Promissory Note

While the Central Bank of Ireland (CBI) is part of the Euro system of central banks (and, therefore, cannot act unilaterally), the promissory note is the CBI’s responsibility. The loans from other central banks look set to be covered by the non-promissory note assets on Anglo’s books (over €30 billion). Therefore, the renegotiation will, in the first instance, commence with our own Central Bank.

In a renegotiation, the Government should be seeking a complete write-down of the promissory note. This would require an innovative response from the CBI. We believe this will be done as the CBI has already accepted its critical role in the Anglo/INBS debacle.

In early January 2009, the Minister for Finance relied on advice from the CBI and the Financial Regulator when nationalising Anglo Irish. This led the Department of Finance at the time to state that Anglo Irish was ‘solvent’ and ‘open for business’. Subsequently, however, the CBI admitted they had been profoundly mistaken, stating that months before nationalisation and the bank guarantee both Anglo Irish and INBS ‘were well on the road towards insolvency’. Shortly after the Anglo Irish nationalisation, the CBI was compelled to notify the GardaĆ­ and the Office of the Director of Corporate Enforcement (ODCE) of ‘certain matters’. These admissions are signals of a potentially positive response from the CBI to rectify some of the damage its mistakes have inflicted on the Irish public.

The crucial issue is the extent to which CBI can unwind its position without risking balance-sheet insolvency (through write-downs and other strategies). Anything short of that risk should be explored and negotiated. A Government announcement that it does not intend to proceed with the current repayment schedule would provide the incentive to parties to explore all the options.

Such a course would of course require sanction or, at least, tolerance from the ECB. However, it is a matter of debate as to what extent the ECB was aware of Anglo/INBS insolvency when negotiating with the Government over the fate of these banks. In this respect, it would be helpful in terms of accountability, transparency and clarification if the Government published all communication between itself, the CBI and the ECB regarding Anglo/INBS since the run-up to the bank guarantee starting in early 2008. Such publicly-released information can help progress the debate by establishing where different responsibilities lie for propping up insolvent banks with Irish taxpayer money and central bank loans.

A New Repayment Schedule

If, at the end of this process, an agreement is negotiated which imposes a debt on the Exchequer, the next issue is the repayment schedule. There are two approaches.

(a) Reschedule with the CBI

The debt could be repaid over a greatly extended period of time (e.g. 30/50 years) via a similar instrument to the existing one. The goal would be to significantly reduce borrowing in the short/medium term with either a repayment holiday for the period that we are reliant upon EU-IMF funding and/or a payment restructuring so as to back-load the annual liability. This also leaves open the possibility of revisiting the issue in the future with a view to further write-downs. This approach may provide the CBI with more flexibility than actually writing down the promissory note itself and could constitute an effective write-down via future inflation.

(b) Reschedule with the EFSF

Alternatively, the Government could seek to transfer the promissory note to the European Financial Stability Facility (EFSF) with whom the Government could then negotiate a greatly extended loan. As the EFSF can now lend to recapitalise banks, this would simply be taking advantage of a new opportunity. Even this option, on the basis of repayment of the Anglo Irish debt, would greatly reduce borrowing in the medium-term.

Restructuring the repayment schedule, even if there is no write-down of the promissory note, would provide the Irish economy with considerable breathing space. A further option would be to substitute a ‘bullet bond’ (similar to a normal Government bond) whereby only interest would be paid annually with the full amount redeemed after a greatly extended period (e.g. a 30-year bond). At the least, we could expect annual costs to fall by a minimum of two-thirds, saving the taxpayer €2 billion a year over the next 14 years and postpone the payment of the principle to a longer-term horizon where it would be easier and cheaper to roll-over the debt.

Bondholder Debt

Bondholder debt, estimated to be approximately €6 billion, would be the subject of separate negotiation/actions. There is a clear argument in equity, as mooted by the Minister for Finance, to unilaterally write-down the unguaranteed debt. The ECB is reported to be opposed to this strategy because of contagion fears. However, the markets have already distinguished between the debts of viable banks and those of the dead banks Anglo and INBS. Financial analysts continue to criticise and express bemusement that the Government is continuing to honour unguaranteed debt: ‘because the two banks are effectively in the process of being liquidated, burden sharing by senior unsecured bondholders does not constitute a threat to financial stability’.

As for the guaranteed bondholders, it would be argued that not honouring this debt would undermine the credibility of similar guarantees underpinning the pillar banks, with implications for their ability to access the market. That is why this debt should be negotiated.

A Political Debate – in Ireland and Europe

The Government has a strong opportunity to strike a new deal on the Anglo/INBS debt. We have outlined a series of approaches which can provide the Government an opportunity to expunge this unjust debt. By opening up renegotiations on the entire amount of Anglo/INBS debt, the Government would give itself (and other parties) more flexibility across a range of issues (the promissory note, restructuring the payment schedule, and bondholder debt). This could allow for more give-and-take than focussing on one issue such as the unguaranteed senior debt.

It is important the Government keep the Irish public abreast of its goal and strategies and that this be done in an open and transparent manner (hence the publication of communications between the Government and the CBI/ECB regarding Anglo/INBS). For this is essentially a political project – to reverse the decision by the previous Government to place the private debt of dead banks on to the public balance sheet. That the new Government had no part in this vast transfer of resources (over €14,000 per person living in the State) gives it clean hands and greater moral capital.

But this is a Eurozone issue as well and it is necessary for the European public to become aware of the immense burden Ireland is carrying for non-existent banks. For instance, how would the German public react if they had to repay an equivalent dead-bank debt of over €700 billion, with annual repayments of around €50 billion for over a decade? Or if the French had to pay over €550 billion with annual repayments of around €40 billion (nearly four times the amount of the recently announced austerity package)? The appropriate Government Ministers could launch a Eurozone-wide information campaign – informing the public, commentators and policy makers of the immense debt burden that is Anglo/INBS. We believe this would elicit considerable sympathy (and not a little bit of shock), thus strengthening the Government’s negotiating position.

There are reasons why the ECB, under a new President, would be open to such a renegotiation. The Anglo/INBS debt is relatively small in comparison to the amount that the viable banks (e.g. AIB, Bank of Ireland) owe the ECB. The elimination or write-down of Anglo/INBS debt would reduce the burden on the economy. A strengthening economy, in itself, will increase the chances that the viable banks can return to private funding and that the ECB will be repaid in full.

This debate must be taken up by all sections of society – by individuals, civil society organisations, political parties; for the Anglo/INBS debt is a key component of the economic and fiscal crisis. While we cannot pre-empt or predict the ultimate outcome, we can call for the Government to suspend the current repayment schedule for the promissory notes (which requires a further €3.1 billion payment in March of next year) and enter into a renegotiation.

And if there are other, better alternatives than the ones outlined here, we welcome that. For we are only concerned here with starting the debate, not writing the last word. But that debate must start now before we spend one more cent on this invidious debt.

1 comment:

David O'Donnell said...

Well done! SHOUT it from the rafters ...