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.
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, and handed over the money.
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 until 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 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 you 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, and 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 troubled Irish 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.
Image top: proforged.