Cantillon: Draghi promissory ‘note’ hid so much

Remember the rather offhand reaction of ECB president Mario Draghi when the Government announced in February 2013 that it was tearing up the promissory note used to finance the bailout of Anglo and Irish Nationwide? The two had been merged into IBRC, which itself was liquidated as part of the dramatic move.

The financing move was controversial, as it effectively meant that Ireland would repay money to the Irish Central Bank, part of the ECB system, over a much longer time period than envisaged originally. For the ECB this was seen as a form of monetary financing, effectively printing money to finance a government. For an institution set up under Germanic inspired rules, this was a major no-no.

At the time Draghi told a press conference that the ECB “noted” the decision. It was as if it had just been told about it, and had yet to sit down and examine it.The reality, as the background papers published as part of the banking inquiry this week showed, was entirely different.

The move to tear up the promissory note and replace it with much longer term government bonds had, in fact, been under negotiation with Frankfurt for months in what memos referred to as “Project Dawn”. As early as October, the Economic Management Committee (EMC), comprising key Government ministers and advisers, had discussed the plan and believed that the ECB would “tolerate it”.

It is clear from this and subsequent notes there had been considerable coming and going over the type and duration of the bonds which would replace the promissory notes and the commitment the State would give about how long the Central Bank would hold them, a key issue for the ECB. So when Draghi said he would “note” the arrangement, it is clear that, in fact, the whole thing was already well thrashed out around the ECB board table.

Interestingly, the documents also show warnings from KPMG’s Kieran Wallace, later hired as liquidator, which estimated that a very significant deficit – up to €7.5 billion or more on the worst estimates – might emerge when all the IBRC assets were sold off. This would have fallen back on the State. As it happens, even the unsecured creditors will end up getting their money back, with cash left over for the State.