Long-term bond to replace €3bn promissory note

PAYMENT OF the €3.06 billion promissory note for the former Anglo Irish Bank has been deferred, Minister for Finance Michael Noonan has announced.

The payment was due by tomorrow but will now be financed by a long-term Government bond, which it is understood is expected to last 13 years.

But the Minister said the proposal “does not involve any adjustment or variation to the terms of the promissory notes”.

It would have an “approximate €90 million impact on the general government deficit in 2012, which is small relative to the overall benefit of the removal of the requirement for the exchequer to settle €3.06 billion in cash”.

The deal reduces the amount of debt repayable this year but “it has no impact on the measures introduced in Budget 2012”, he warned.

He said “the Government’s primary objective in this regard is to reduce the general government deficit to meet the 8.6 per cent deficit target in 2012”.

Mr Noonan added, however: “The €3.06 billion of programme funding that would otherwise have been used to make the promissory note payment should potentially allow greater flexibility around when and at what level Ireland returns to the capital markets.”

In an unscheduled statement to the Dáil, Mr Noonan said: “Put simply, €3.06 billion will be settled by delivery to IBRC [Irish Bank Resolution Corporation] of a long-term government bond with an equivalent fair value.

“Ultimately, it is intended that this long-term government bond will be financed for one year, on commercial terms, with Bank of Ireland, who may in turn refinance the bond with the ECB.” He said the transaction was approved by the Bank of Ireland board, but “it remains subject to the approval of the Bank of Ireland shareholders”.

The agreement follows discussions with the EU authorities about settling the promissory note instalment by the delivery of the long-term government bond.

Mr Noonan told the Dáil the use of a bond “allows the wider discussions to continue between the Irish authorities and the troika, both on the promissory notes arrangement and on how to advance the return to normality of the Irish banking system, thus improving the availability of banking services in support of economic recovery”.

It would result in a significant cash-flow benefit to the exchequer in 2012 and “our long-term debt sustainability is enhanced”.

“The net effect of this transaction is to reduce the economic cost for the State as a whole of refinancing this payment.”

The €3.06 billion was included in Ireland’s debt repayment schedule for 2012 and the deal agreed “removes the requirement for the exchequer to settle in cash” on that instalment.

He pointed to comments by governor of the Central Bank Patrick Honohan, speaking at the finance and public reform committee, that “there is a very definitive gain in debt sustainability”.

While awaiting the outcome of the vote of Bank of Ireland’s shareholders, “the financing of the bond will be a collateralised facility provided by Nama (National Asset Management Agency) to IBRC (Irish Bank Resolution Corporation) on equivalent commercial terms as the financing with Bank of Ireland”.

He said Nama “is in a position to facilitate this collateralised financing from its own funds”.

But the Minister urged caution, warning of the State’s “sizeable exchequer deficit of public spending over revenue of €15.8 billion”.

He said that if jobs were to be created “we must continue on the path of closing this gap over time”. There would be no change to measures introduced in the budget and the Government’s overall aim was to hit the 8.6 per cent deficit target in 2012.

The deal is part of a development which, if successful, would mean gains “in the medium term rather than immediately”.