Being the lender of last resort during the financial crisis has, without doubt, been the Central Bank of Ireland's most profitable work. Ever.
Last week, the bank reported a near €3 billion profit – two-thirds more than the State's surviving three banks combined – driven by gains as it sold off government bonds linked to emergency lending to the now-defunct Anglo Irish Bank and Irish Nationwide Building Society at the height of the credit crunch.
Total profits generated by the institution over the past decade have topped €17 billion. Surplus money paid over to the exchequer during the period, including €2.38 billion on last year's profits, amounted to more than €14 billion. It has dwarfed, by some measure, dividends received from other State-owned enterprises during the downturn when the Government pressed other State-owned enterprises such as the ESB, who were asked to rummage around the back of the couch as it struggled to balance the books.
The Central Bank’s profits over the past five years have been rocket-fuelled by €7.3 billion of special gains from the sale of more than half of the €25 billion of government bonds it received in 2013. This was under a complex restructuring of so-called promissory notes that had been used by the State to rescue Anglo Irish Bank and Irish Nationwide.
The two ailing lenders – which merged in 2011 to create Irish Bank Resolution Corporation (IBRC) – had been using the promissory notes (and a further €3.5 billion of bonds) as collateral for emergency funding with the Central Bank as their bad loans spiralled.
When IBRC was put into liquidation February 2013, the State handed over government bonds to the Central Bank to replace the emergency loans.
Surge in value
The gains from the sale of the bonds come as a result of a surge in the value of Irish Government debt over the past six years, as the interest rate demanded by investors – or yield – has slumped.
The slide in borrowing costs have been a result of extraordinary measures by the European Central Bank (ECB) under Mario Draghi to fight the wider euro-zone debt crisis and a rapid improvement in Ireland's own creditworthiness after it exited an international bailout in 2013. Restructuring the burden of the €34.7 billion bailout of Anglo and Irish Nationwide, of course, played a major role in the improvement in the Republic's financial standing.
So who's been buying the bonds from the Central Bank? None other than the State's National Treasury Management Agency (NTMA). Since 2014, it has bought €15 billion of the such bonds and duly cancelled them.
A little-known note in the NTMA’s most recent annual report, for 2017, disclosed for the first time what it has been stumping up to acquire the bonds. It records that it paid a €1.95 billion premium that year to buy €4 billion of bonds from the Central Bank. That’s almost 50 per cent above the nominal value of the bonds.
The figure corresponds with the gain recorded by the Central Bank for the same year on the sale of bonds.
The note also highlights that the NTMA paid a €1.35 billion premium to acquire bonds from the Central Bank in 2016 – again, exactly the gain recorded by the bank for that year.
Extraordinary profits
To acquire the bonds, of course, the agency has to go out and raise long-term funds on the debt markets. The extraordinary profits being generated by the Central Bank as it sells its IBRC-linked bonds are effectively a zero-sum game when looked at it from the point of view of taxpayers.
The pace at which the Central Bank is offloading the bonds is much quicker than the schedule that was agreed in early 2013 to appease the ECB, which said from the outset that the restructuring of the promissory notes "raises serious monetary financing concerns". In other words - that it could be seen as the central bank funding of a government, which is prohibited in the European Union.
In reality, however, that monster already raised its head when the Government issued the promissory notes to the banks in the first place in 2010.
The notes amounted to little more than IOUs written by then taoiseach Brian Cowen’s administration to plug a hole in Anglo Irish Bank and Irish Nationwide’s balance sheets – at a time when the State wouldn’t have been able to raise the money in the capital markets. The two lenders duly put forward these notes as collateral for emergency Central Bank loans.
The ECB, meanwhile, would go on to start printing money – or what is known as quantitative easing (QE) – in early 2015 to reboot the euro-zone economy, years after other leading central banks had pressed that nuclear button.
"ECB QE did not start in 2015, as history will record," according to Owen Callan, an analyst with Investec in Dublin. "It started with the promissory notes."
