# Working out the net cost of the Promissory Notes and the benefit of the deal



## Brendan Burgess (10 Feb 2013)

I was thinking today of how to figure out the real cost of the Promissory Notes and the real cost of the new bonds. The difference would be the benefit of the deal. 

*Promissory Notes
*The real interest rate is 0.75%
The average maturity date is 7 years. 

This is a very cheap loan. If we had not got this money from the ECB we would probably by pay 3.75% to borrow the money needed. 

So discounting €31 billion at 3% over 7 years gives a Net Present Value of €25 billion.  So the deal struck by Brian Lenihan was worth €6 billion.  Tha is, it reduced the real cost of bailing out Anglo and IN by €6 billion.

*The new Government Bonds
*The real interest rate is 0.75% (It might be a bit higher. I still don't fully understand it. But it wouldn't change the conclusion much) 
The average term for which the Central Bank will hold the bonds is 15 years. 

Discounting €31 billion at 3% over 15 years gives a NPV of €20 billion. 

*So the real cost of bailing out Anglo and Irish Nationwide has turned out to be €20 billion in today's money.  

The benefit of the deal on Wednesday, was €5 billion (€25 billion - €20 billion) 


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## Brendan Burgess (10 Feb 2013)

John McHale has done a similar analysis on Irish Economy.ie 



> Assuming a 3% premium over the market interest rate, the equivalent writedown would have between €5 billion and €5.5 billion



*John McHale's article is the best desription of the deal I have seen.  He goes on to explain the other benefits very clearly. Anyone who wants to understand the deal should read this article. *

Seamus Coffey has estimated the NPV of the interest saving at €4 billion.


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