# Why is the CB selling off the bonds & what will it do with the proceeds?



## Brendan Burgess (7 Feb 2013)

from the Transaction Overview 



> The weighted average life of the above structure is 34–35 years in comparison to the weighted average life of the Promissory Notes of 7-8 years
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> The Central Bank of Ireland will sell the bonds but only where such a sale is not disruptive to financial stability. They have however undertaken that minimum of bonds will be sold in accordance with the following schedule: to end 2014 (€0.5bn), 2015-2018 (€0.5bn p.a.), 2019-2023 (€1bn p.a.), 2024 and after (€2bn p.a.)



Philip Lane has reported on the Press Conference 



> Central Bank expected to hold the government bonds for a weighted average of 15 years




I am trying to figure this out.
The Central Bank owns a €100 bond issued by the government which is paying 3.5 % variable . 
If the yield on Irish bonds at that stage is  5%, then the buyer will pay only around €57 for the bond. 

Does this not entail a loss for the ICB, and therefore, the state?


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## Brendan Burgess (7 Feb 2013)

The Duke said in another post



> Back to those 3.5% floaters. Brian Dobson put it to Noonan that when the  CBI sell these to the market we will lose the 2.5% profits. Good point.  Noonan answers that a 3.5% floater would sell above par giving a  capital profit. Good answer.



If the Irish government is paying more than 3.5% at that stage, then the bond won't sell above par.


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## Brendan Burgess (7 Feb 2013)

An interesting point from IrishEconomy.ie



> Central Bank expected to hold the government bonds for a weighted  average of 15 years  - so the cheap ECB funding will not be extinguished  very quickly.  The gap between the interest rate it receives on the  bonds and the cheap ECB funding will flow back to the government via the  profits of the central bank.


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## Brendan Burgess (8 Feb 2013)

OK, I think I have figured this out and the deal is not as good as it appeared yesterday.  It is still better than the Promissory Notes, but not as good. 

The average time for which the Central Bank will hold  the New Government Bonds is 15 years.

What happens when they sell on the bonds? They repay the money to the ECB presumably. There would be no point in them  selling the bonds if they gave the money back to the Government. 

If I am right, then this overall deal can be summarised by saying 
The ECB had agreed to give us loans at 0.75% with an average maturity of 7 or 8 years.
They have now extended the repayment period by around 7 or 8  years. 

Brendan


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## Duke of Marmalade (8 Feb 2013)

_Boss_, I think you have summed it up about right.  A few clarifications.  The floating payment will be 6 month Euribor + Irish spread. In other words it will adjust to compensate for the perceived creditworthiness of Ireland at the time of payment.  Therefore they should trade at near par, but why they should trade at a profit is still a mystery to me as there must be some discount for such a long maturity.

It seems that contrary to earlier musings by Yours Truly that the surplus in the CBI is not directly channelled back to the ECB - apologies Dr Debt.

Instead, and this is the really big development, the CBI are forced to sell the bonds into the market and so the ECB gets its monetary financing extinguished much quicker than is implied by the maturity profile of the bonds.

It is my guess that this was the big glitch of two weeks ago.  The Government believed they had a very long term commitment from the ECB for monetary financing but it stuck in the ECB's craw.  This compromise is a significant reversal.

Still two cheers.  I never, never expected any serious reprieve on the debt but I think this is even less than I had expected.


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## Duke of Marmalade (8 Feb 2013)

Further reflections.

I guess the spread will be decided at the date of issue and not ongoing.  Noonan seems to think it will be around 2.5%.

So if we get our act together a 2.5% spread over 6 month Euribor could look very attractive and the bonds could trade above par.


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## Dr.Debt (8 Feb 2013)

Ok, So we enjoy a net financing rate on the debt, of around 1% for the 1st fifteen years or so. After 15 years CBI will release the bonds to the market,hoping to make a capital profit, but at the same time the true cost of financing of the bonds increases to the floating 3.5% rate, or whatever the floating rate is at that stage. 

So basically its fingers crossed by the CBI that the bonds can be sold well above par, 15 years out.


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