Honohan says 'deal likely' over Anglo promissory notes

Central Bank governor Patrick Honohan warned today the payments on the Anglo Irish Bank and Irish Nationwide promissory notes have become "a source of risk to financial stability" to Ireland.

Mr Honohan told the Oireachtas Joint Committee on Finance, Public Expenditure and Reform a deal on the next €3.06 billion payment on March 31st was likely to be successful.

He said the Central Bank has been "working vigorously" with the European Central Bank and other parties to come up with a mechanism to reduce the annual cost of the notes ahead the next payment.

"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," Mr Honohan told the committee. "A way of funding this cash payment over a much longer period would clearly help reduce this risk."

Speaking this afternoon in Brussels, Luxembourg's prime minister Jean-Claude Juncker, head of the group
of euro zone finance ministers, said there were good reasons for reducing Ireland's debt burden.

"There are good reasons for easing the burden, which has been put on Ireland, as far as the debt service," he said.

Mr Honohan said that the Central Bank, the ECB and other parties were working on a mechanism that was at "an acceptable cost to Ireland" and whose design is "beyond criticism" from the perspective of European Union treaty rules.

"While some technicalities still need to be resolved, it now seems likely that this effort will be successful," he told the committee.

Mr Honohan said the banking debt "does hang over the economic and financial recovery of Ireland" and "needs to be set on a more secure basis".

The Government provided promissory notes - State IOUs which promised to make annual payments over a long period - to Anglo and Irish Nationwide in 2010 to cover €31 billion of the €35 billion bailout costs to the public of the two failed institutions.

Irish Bank Resolution Corporation, which was formerly Anglo and is winding down the two institutions, uses the promissory notes as collateral to borrow emergency loans from the Irish Central Bank in a transaction approved by the ECB.

The Government authorities - together with the troika of the ECB, the EU Commission and the International Monetary Fund - are in "technical discussions" on changing the promissory notes in a wider restructuring of the banks.

The Central Bank is actively studying ways of "enhancing the security of the arrangements surrounding the provision of liquidity to IBRC and ensure that avoidable deleveraging costs to the system as a whole are not incurred in the disposal of non-core assets," Mr Honohan said.

"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," he said.

Mr Honohan said that the settlement of the €3.1 billion payment on March 31st with a long-term Government bond instead of cash, expected within days, was a "very considerable step forward" and "a very definite gain" on the ability of the State to repay its debts.

"It puts off for a long number of years the actual need to refinance those payments," he said, but relative to the bigger amount due on the €31 billion promissory notes was "a considerable improvement".

The cost would be at "quite a low valuation" to other sources of funding available and lower than the interest paid on the bailout loans advanced by the troika, he said.

Mr Honohan said that there would be "no net cash outlay" to the State under the terms of the deal being worked for the March 31st payment to settle the €3.06 billion instalment by issuing a Government bond instead of paying in cash.

The Central Bank governor repeatedly refused to divulge information during the public hearing of the committee, telling TDs and senators he would say more once they went into closed session.

The Government planned to issue debt to IBRC on an existing bond rather than issuing a new Government bond to cover the next instalment due this Saturday.

It is understood the Government is planning to avoid the cash payment using a bond due in 2025. There is a Government bond in issue due for repayment on March 13th, 2025, according to the National Treasury Management Agency.