NTMA spends €37bn mopping up legacy of notorious IBRC promissory notes

With the 15th anniversary of the infamous Irish banks guarantee less than three months away, arms of the State are racing to extinguish the last of the bond debt linked to the two most toxic boomtime lenders, Anglo Irish Bank and Irish Nationwide Building Society (INBS).

And with it, they’re looking to blow away the remaining whiff of monetary financing – or central bank funding of a government, which is prohibited in the European Union – that has lingered around the bonds since they were conjured up a decade ago.

Long story short, the bonds were used in February 2013 to refinance €25 billion of promissory notes – or IOUs – that a cash-strapped government had issued three years earlier to rescue Anglo and INBS. The two lenders were subsequently folded together under the name Irish Bank Resolution Corporation (IBRC).

The notorious prom notes, as they were known, were due to be paid off by the government over more than 10 years. But they were also used by IBRC during the height of the crisis as collateral to secure emergency central bank funding.

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The 2013 restructuring saw IBRC being put into liquidation and the then minister for finance, Michael Noonan, swap the prom notes for €25 billion of government bonds with the Central Bank.

Crucially, the terms of the bonds meant that they would mature over a period of 25 to 40 years. The breathing space was seen at the time as key to the Republic exiting an international bailout at the end of that year and returning to funding from the international capital markets.

Patrick Honohan, the then Central Bank of Ireland governor and European Central Bank (ECB) governing council member, was a key architect of the deal. The unease that the ECB, under president Mario Draghi, felt about the transaction was reflected by the fact that it only officially “noted”, rather than endorsed, the arrangement.

Germany’s Bundesbank president at the time, Jens Weidmann, was known to be particularly unhappy about the deal and the potential precedent it would set. Draghi, meanwhile, would tell Irish MEP Luke Ming Flanagan in a letter in June 2015 that “only by fully and expeditiously disposing of these assets can the monetary financing concerns be fully dispelled”.

The Central Bank has been selling down the bonds at pace ever since. The buyer has been none other than the National Treasury Management Agency (NTMA), which has been using cheaper debt raised in on the bond markets over the past decade to fund the purchase and cancellation of the notes.

The chief executive of the NTMA, Frank O’Connor, confirmed to reporters this week that the agency is on track to buy and cancel the last €500 million of the IBRC-linked bonds over the coming months. The Central Bank sell down has been four times faster than the official schedule.

However, the NTMA has had to pay up to buy the bonds. That’s because their value rose sharply in the second half of the last decade as euro-zone borrowing costs plunged, as memories of the financial crisis faded and the ECB spent about €5 trillion buying bonds under extraordinary stimulus programmes. Bond values rise as market interest rates, or yields, decline.

As of the end of last year, the NTMA had spent more than €34 billion buying €22.5 billion of the IBRC-linked bonds – representing a premium of more than 50 per cent above their original value. With bond yields having risen in the past year amid central bank rate hikes, market sources estimate that the NTMA will still end up paying a premium of about 25 per cent for the remaining €2.5 billion of the bonds that have been bought – or are set to be acquired – this year.

The total cost tots up to more than €37 billion, equating to almost a fifth of the €205 billion net national debt as of the end of last year.

On the other side of the deals, of course, has been the Central Bank, which has able to record the premiums paid as profit. Eighty per cent of the central bank’s annual profits are handed over to the exchequer.

Legal questions about whether the whole episode amounted to monetary financing or not were never actually tested in a European court. But it certainly pushed the boundaries of the spirit of the rules. Even income on the interest paid by the State on the bonds while in the hands of the Central Bank circulated back to exchequer.

Many would argue that the relief provided by the whole arrangement is cold consolation to Irish taxpayers, who were not allowed by the ECB to share the massive losses of Anglo and INBS with the lenders’ senior bondholders.