Dáil Éireann Debate, Thursday - 21 November 2013
56. Deputy Michael McGrath asked the Minister for Finance if he accepts that the sale of Exchequer bonds issued to replace the Irish Bank Resolution Corporation promissory note by the Central Bank of Ireland has the potential to increase Ireland’s bond yields and in so doing raise the State’s annual interest bill; and if he will make a statement on the matter. [50029/13]
View answerDeputies will recall that the IBRC Promissory Notes were replaced with a portfolio of Irish Government bonds which consists of three tranches of €2 billion each maturing after 25, 28 and 30 years, three tranches of €3 billion each maturing after 32, 34 and 36 years and two tranches of €5 billion each maturing after 38 and 40 years. Under the original Promissory Note arrangement, the Government was scheduled to make annual payments of €3.1 billion thereby putting significant upward pressure on the amounts to be funded from the market. The provision of these long-term non-amortising Government bonds to replace the amortising Promissory Notes has therefore had significant benefits from a market perspective as it ensures that there will be much less issuance of Irish Government bonds into the market over the next decade and beyond than would otherwise have been the case.
Increasing the weighted average life of the debt associated with the funding of IBRC from circa 7-8 years to circa 34-35 years and securing a lower funding cost for the State, result in significant annual interest savings. Combined with the extension of EFSF and EFSM loans, this will result in an estimated reduction of some €40 billion in the Exchequer’s funding requirement over the next decade. It is also expected that there will be a reduction in the underlying General Government deficit of circa €1 billion per annum in the coming years (before transaction costs) reducing the forecast deficit by around 0.6% of GDP annually. Removal of Exceptional Liquidity Assistance and the inherent risk associated with short-term borrowings which had to be rolled over on a fortnightly basis was also a significant benefit.
Bond markets have reacted well to the impact of these and other improvements in Ireland’s financial and fiscal position with the result that Irish bond yields are now at historically low levels. The ten-year yield, for example, is currently at around 3.5%, far lower than had been the case before the State entered the EU/IMF programme. The impact of the announcement in February regarding the Promissory Notes was notable with the yield on the 2025 bond falling by almost half of one per cent (0.5%) in the week following the announcement. Standard and Poor’s revised the outlook on Ireland’s credit rating to ‘stable’ on the back of the announcement while Moody’s and Fitch Ratings published positive commentaries.
The Central Bank of Ireland, which holds the Government bonds that replaced the Promissory Notes, will sell a minimum of the bonds in accordance with the following schedule: to end 2014 (€0.5 billion), 2015-2018 (€0.5 billion per annum), 2019-2023 (€1 billion per annum), 2024 on (€2 billion per annum until all bonds are sold). The schedule of sales takes into account the Central Bank’s holding of €3.6 billion of the 2025 bond as a result of the liquidation of Anglo Irish Bank. Further amounts can be sold but only where such sale is not disruptive to financial stability.
