Although I will need to take great care in my statement to protect the financial interests of the State in view of the discussions taking place, recognising the interest and concern of the joint committee to understand the various issues surrounding the promissory notes, in respect of which a scheduled amortisation payment falls due to be made next week, I will be glad to provide as clear an account of the matter as I can.
The promissory notes owned by the Irish Bank Resolution Corporation, IBRC, are part of the legacy of the banking crisis. They represent just one aspect of a large and complex structure of institutional indebtedness involving the Government, the banks and the central bank system which has resulted from the crisis. Although some commentators have tended to exaggerate the extent to which the tax increases and spending cutbacks which have taken place to date in Ireland can be attributed to the banking debt, this debt hangs over the economic and financial recovery of Ireland and, as is generally agreed, needs to be set on a more secure basis.
The promissory notes were provided by the Minister for Finance, using powers granted to him by the Oireachtas under the Credit Institutions (Financial Support) Act 2008, as a way of ensuring the compliance of Anglo Irish Bank and the Irish Nationwide Building Society, that is, the precursor institutions of the IBRC, with the capital requirements directives. This became necessary as a result of the losses entailed in the prices announced in March 2010 and the following months for the various tranches of NAMA purchases. The pace of the annual cash payment stream provided for in the notes was from the outset structured, perhaps somewhat arbitrarily, as one tenth of the value of the note to be paid on March 31 each year, with the total duration of the payment stream being set to ensure the capital requirements were met. The notes were reset on several occasions during 2010 to reflect the progressive crystallisation of losses. Interest on the value of the notes was included at the yield required by the market on Irish Government securities of comparable maturity at the time of issue of the notes. It is relevant to note the spread on ten year Irish Government securities above the securities of the federal German Government was only about 125 basis points immediately after the end-March 2010 PCAR announcement that made it clear - to anyone who still doubted it - that extremely large banking losses would be incurred by the banks in the NAMA purchases. Clearly, the cost of refinancing the amortisation payments at such a yield would have been much lower than it is today. The first annual amortisation payment was made in March 2011. I will abstract from some details such as the question of the interest holiday for the first two years. This is how the promissory notes were set up.
Meanwhile, it should be recalled that when, despite the Government guarantees that covered many but not all of them, deposit outflows and bond repayments exceeded Anglo Irish Bank's capacity, the Central Bank, consistent with the euro area view that no senior bank creditors should suffer losses in the crisis, extended emergency liquidity assistance to Anglo Irish Bank. To cut a long story short, much of this is still outstanding to the IBRC and much of it is secured by the promissory notes. Funding such flows is not something that a central bank will normally do for longer than is necessary. In conjunction with the troika and the other Irish authorities, the Central Bank has been actively studying ways of enhancing the security of the overall arrangements surrounding the provision of liquidity for the IBRC and ensuring avoidable deleveraging costs to the system as a whole are not incurred in the disposal of non-core assets. This is a large ambition and the design of a full solution that would achieve the objectives and respect the constraints of all the parties has not yet been finalised.
Given the deepening of the crisis since April 2010 and, in particular, the loss of market access by the Government and the need to have recourse to the EU-IMF programme to ensure continued financing of the Government's budget, the sequence of annual cash payments by the Government of €3.06 billion envisaged for the coming years in the promissory notes has become a source of risk to financial stability. A way of funding this cash payment over a much longer period would clearly help to reduce the risk. Ahead of the scheduled March 2012 payment, the Central Bank has been working vigorously with the ECB and other parties on a mechanism for ensuring such a result in a manner that would be at an acceptable cost to Ireland and the design of which would be beyond criticism from the perspective of Articles 123 and 124 of the treaty. While some technicalities still need to be resolved, it seems likely that this effort will be successful.
