Comment:"We didn't pay the promissory note this year and as far as I'm concerned we're not going to pay it next year."
Thus spoke cabinet member Pat Rabbitte nine days ago. The remarks continue to reverberate – in the media over the weekend and into this week in the blogosphere.
Rabbitte was talking through his hat – the Government repaid in full this year. What’s more, it will do so again next March unless others outside this State agree to a de facto partial Europeanisation of Irish sovereign debt.
Before showing why that is the case, it’s worth recalling what the promissory notes are, not least because there is no little confusion about the instruments themselves, never mind how they are being repaid.
Government IOUs
In essence, the notes are no different from the more typical form of Government IOUs, bonds and (shorter term) treasury bills. Just as those instruments have a face value and fixed interest payments, so too do the promissory notes. Among the few differences between the notes and more traditional debt instruments is that full capital amount of the latter is repaid on a fixed date, the capital sum on the notes is to be repaid in 10 annual instalments.
The then government issued the notes in the first half of 2010 to repay creditors in utterly insolvent banks – most notably Anglo Irish. It did so because not repaying these creditors could have been interpreted as a sovereign default – the Government owned the bank having nationalised it earlier in 2009.
A sovereign default would have immediately shut the State out of the government bond market (something which happened anyway in the second half of 2010).
The administration also feared that not repaying the creditors (who were mostly depositers, not senior bondholders as many people believe) in the defunct institutions would have led to a run on the other banks.
€31 billion
The choice of the promissory note instrument was decided on because the amounts needed to repay the defunct banks’ creditors was so massive, at €31 billion, and the government could not have persuaded private investors to lend it that much.
Instead of auctioning off €31 billion in bonds to private investors in return for hard cash, the Government simply handed over newly minted IOUs (the promissory note) to the Irish Bank Resolution Corporation and EBS. They in turn used these assets as collateral to borrow the cash from the central banking system.
So what happened in March last year, when a repayment on the notes fell due? Claims that the Government did not repay are preposterous – that would have amounted to a sovereign default and created all sorts of mayhem.
What actually happened, was much less dramatic and really quite straightforward, amounting to debt rollover by issuing new instruments to repay the amounts falling due on the promissory notes.
The issue appears complicated, but it effectively amounted to the replacing of one Government IOU for another.
The political toxicity of the debts arising from the bank collapse has led Rabbitte and other Ministers to make statements which are quite simply wrong about the promissory note repayments.
That should stop.
