Dáil Éireann Debate, Wednesday - 22 February 2012
10 Deputy Pádraig Mac Lochlainn asked the Minister for Finance if he will provide an explanation of the reason the promissory notes need to carry a similar yield as was prevailing on the Irish Government in 2012; and the impact of the interest on the general Government deficit and Government debt through to 2015. [9959/12]
View answerDuring 2009 it was determined that Anglo and INBS required additional capital. A commitment was provided by the Minister to Anglo and separately to INBS to provide capital of €8.3 billion and €2.7 billion, respectively. This capital was provided on 31 March 2010.
In relation to Anglo, this €8.3 billion of capital was injected by way of a capital contribution. This capital contribution is treated as equity capital for regulatory capital purposes. In relation to INBS, a special investment share was acquired for €100 million in cash and a further €2.6 billion was subsequently injected by way of a capital contribution.
The Government did not pay for these capital contributions in Anglo and INBS with cash. The Government effectively issued an IOU, in the form of Promissory Notes, to Anglo and INBS for €8.3 billion and €2.6 billion, respectively. As the State had a debt to the institutions, it also had an associated interest charge. The Bank prepares its financial statements under International Financial Reporting Standards (IFRS). To comply with IFRS the Bank must recognise the Promissory Note initially at fair value. Subsequently, the Promissory Note is carried at amortised cost. Given fair value requirements this interest charge was set by reference to Government yields at the date of issue and was set to ensure that the fair value of the IOUs provided the full capital required.
To do otherwise, or to set the coupon rate at a lower level would have meant that the fair value was lower than the par value of the Promissory Note with the result that the institutions' capital requirements would not have been satisfied.
Subsequently, it was determined that Anglo and INBS needed additional capital, which was again provided by increasing the 31 March 2010 Promissory Notes. The final Promissory Note increase was on 31 December 2010 bringing the total Promissory Notes in Anglo and INBS to €30.6 billion. See table below for the increases:
|
€ billion |
Anglo |
INBS |
Total (IBRC) |
|
31 March 2010 |
8.30 |
2.60 |
10.90 |
|
28 May 2010 |
2.00 |
— |
2.00 |
|
23 August 2010 |
8.58 |
— |
8.58 |
|
31 December 2010 |
6.42 |
2.70 |
9.12 |
|
25.30 |
5.30 |
30.60 |
In each of the Promissory Note increases, the coupon was set by reference to Irish Government bond yields at the date of increase so as to ensure that the fair value of the Promissory Note increases provided the full amount of the additional capital required at those times. As a result, the differing tranches of Promissory Notes carry differing interest rates.
When the final capital contribution was made on 31 December 2011 an interest holiday was inserted into each of the Promissory Notes which meant that between 1 January 2011 and 31 December 2012 no interest was payable. Absent the interest holiday the weighted average interest rate on these Promissory Notes would have been 5.8%. However, as a result of the insertion of the interest holiday the weighted average interest rate from 1 January 2013 is c.8%.
