Head-spinning deal gives State breathing space

ANALYSIS:The real benefit of the plan is that it frees up €3.1 billion of cash that can be beneficial elsewhere

THE PLAN to avoid paying cash on the next €3.1 billion instalment due on the State IOUs covering the costs of Anglo Irish Bank and Irish Nationwide is so complicated it would make any head spin.

While it really just trims at the edges the heavy blanket of debt lying over the State, the real benefit is that it frees up €3.1 billion of cash that can be beneficial elsewhere. This is €3.1 billion the Government does not have to borrow from the EU-IMF and could be used to go towards the repayment of the €8 billion of debt due in early 2014 on the first post-bailout State bond.

The deal results in a €90 million hit on the general Government deficit, though, so there is a cost involved.

The arrangement is complex. It involves the Government issuing a long-term bond to Irish Bank Resolution Corporation (IBRC), the entity winding up Anglo and Irish Nationwide, instead of paying a wind-down bank €3.1 billion in cash.

The most likely debt to be issued will be on the existing Government bond that matures in 2025. This is the longest dated bond the State has in issue, so it pushes out the repayment date.

The bond is trading at about 88 cent in the euro in the markets, so to cover the €3.06 billion bill this week, the amount outstanding on the bond will increase by about €3.5 billion, pushing the debt owing on this IOU to €11.8 billion.

In a deal agreed with Bank of Ireland, the only Irish bank outside State control, IBRC will swap the bond with the bank for cash.

This covers this weekend’s payment so that the State cannot be accused of welshing on its debts.

Bank of Ireland will then take the bond to Frankfurt and swap it as collateral with the European Central Bank borrowing cash. IBRC can use the cash to reduce its emergency loans at the Irish Central Bank. IBRC said yesterday these loans stood at €40 billion at the end of last year.

Given that the Government owns 15 per cent of Bank of Ireland, the bank has to put the deal to shareholders (because stock market rules say the Government is a related party) so approval is unlikely to be secured until May.

IBRC can’t wait that long, so the National Asset Management Agency (Nama), which has €4.5 billion of cash and easily cash-able assets, has been enlisted temporarily. Using the Nama Act, the Minister for Finance has directed Nama to step into Bank of Ireland’s shoes until it secures shareholder approval.

The bank will receive a fee of about €40 million for the deal. This is partly why it has agreed to the deal, but also because the Government is a customer.

Under the swap deal, IBRC has to repurchase the bond from Bank of Ireland within 364 days.

This gives the Government time to agree a longer-term deal with the troika to restructure the rest of payments due on the promissory notes. That deal could then take in this deferred €3.1 billion bill.