What will be the impact of this Promissory Note deal?

The big difference between your analogy and our story is that our house is worth zero but our mortgage is 30 billion. The reason we have a mortgage worth 30 billion and a house worth zero,is that our naughty brothers Brian & Brian decided to borrow 30 billion to pay back our next door neighbours gambling debt, which was of no concern of ours. Now our whole family has to suffer......
 
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but we end up paying a lot more interest in the end.
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That is not the way to look at this at all.

Under the Promissory Notes we had to pay 0.75% on the notes but every year we had to repay €3.1 billion. We would have had to borrow that at, say, 4%. So we will be paying an awful lot less interest over the long-term, although the immediate saving is not much.

The only downside is that some people might think that we are saving billions and therefore we can continue to overpay ourselves and undertax ourselves. That is not the case.
 
Dr.Debt said:
that our naughty brothers Brian & Brian decided to pay back our next door neighbours gambling debt, which was of no concern of ours.
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Not quite. They decided to guarantee all our other Irish brothers' and sisters' and parents' deposits in Anglo and in Irish Nationwide. They decided to pay off our pension funds and credit unions investments in Anglo bonds. And, yes,, they decided to pay off our neighbours deposits and bonds as well.

They shouldn't have done so. However, they have managed to borrow the money at 0.75% to do so. And if I had known at the time that they could borrow it at this price for 40 years, I would have agreed with it.
 
If we can expect an inflation rate of more than 0.75% on average over the next 20 years then the real cost of this is negative. Yes?
 
I just wonder about this 0.75% borrowing rate. I accept that it was the net borrowing rate under the existing arrangement but are we really sure, under the new bond arrangements, that the full 3% will not go to the ECB in its entirety.
Where has it been disclosed that the cost of the financing to the Irish Central Bank will remain at 0.75%.
 
Brendan Burgess said:
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That is not the way to look at this at all.

Under the Promissory Notes we had to pay 0.75% on the notes but every year we had to repay €3.1 billion. We would have had to borrow that at, say, 4%. So we will be paying an awful lot less interest over the long-term, although the immediate saving is not much.

The only downside is that some people might think that we are saving billions and therefore we can continue to overpay ourselves and undertax ourselves. That is not the case.
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That is getting close to the nub. The fact is we owe 30bn now and we will owe 30bn in 50 years time, when Seanie and Fingers will have been long forgotten.

The issue is who do we owe the 30bn to and at what rate of interest. At present we owe it to the ECB at monetary financing rate of 0.75%. Under the PN schedule that got fairly rapidly substituted with more conventional long term funding at, say, 4%. Under the New Deal (Labour's Way) the rate of substitution is much, much slower. That is a good thing provided today's very easy monetary conditions persist. Not so long since ECB rate was 4%.

I think a cold assessment of the benefits would be fairly modest. Psychologically it cuts both ways. It makes it harder to keep up the austerity thing, which is still so essential, but it makes it easier to return to the markets (is that a good thing?).
 
Purple said:
If we can expect an inflation rate of more than 0.75% on average over the next 20 years then the real cost of this is negative. Yes?
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No. Official money rates tend to follow inflation. The ECB's prime objective is a 2% inflation target and its main weapon is the interest rate. Inflation goes up, up goes the ECB rate. In a sense this extended monetary financing is more exposed to a bout of inflation than long term funding.
 
Dr.Debt said:
I just wonder about this 0.75% borrowing rate. I accept that it was the net borrowing rate under the existing arrangement but are we really sure, under the new bond arrangements, that the full 3% will not go to the ECB in its entirety.
Where has it been disclosed that the cost of the financing to the Irish Central Bank will remain at 0.75%.
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The 3% will go to the ECB in its entirety. But currently only 0.75% (the ECB universal refinancing rate) will constitute interest, the rest will be a repayment of the loan. So you can see how much slower a repayment schedule this is. Under the PNs 8% was (effectively) paid to the ECB, 0.75% interest and 7.25% loan repayment, now it is 0.75% interest and 2.25% loan repayment.
 
Dr.Debt said:
Where has it been disclosed that the cost of the financing to the Irish Central Bank will remain at 0.75%.
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My understanding is that this bond is issued by the government to the Central Bank. They promise to pay 3% a year to the Central Bank and then they will repay the capital after 30 years.

So the money goes from one hand of the government into the other. The CB apparently borrows this money at 0.75% or maybe they create it and pay 0.75% to the ECB. In any event it costs 0.75%.

Michael Noonan said at his press conference that the real cost of the new debt is 1%.
 
You're losing me now @ Duke .....

Its been very clearly said today that there is a 3% interest rate on the bond and no capital will be repaid in the first twenty years.

My understanding also was that the Irish Central Bank will be the holder of the bond.
The ICB will be paid 3% interest by the Irish Government. The ICB will pay 0.75% financing to the ECB. The surplus 2.25% that the ICB makes on the transaction will flow back to the exchequor which is what gives us the net 0.75% that we have been discussing ????

Duke says that the 3% is part capital and my own doubt is whether the full 3% goes to the ECB as interest.
 
Dr Debt, sorry for my very confusing style. The CBI owes the ECB a lotta money. It pays interest on that, currently at 0.75%. The CBI will have an asset earning 3% - the Government bond. 0.75% of that will go to the ECB in interest. 2.25% will be a profit. But its profits will be used to pay down its ECB loan.

So you see that the whole 3% finishes up with the ECB, I am not saying the ECB are charging 3%. All I am saying is that all revenue of the CBI will go to paying interest on its ECB loan with any balance repaying the loan.
 
OK Duke, Thats interesting. I havent heard that version before.

So therefore there is a capital element to the 3% payment (of 2.25%) and the full 3% does go to the EURO creditor.

The original borrowing between the ICB and the ECB was done under the ELA mechanism (the Emergency Liquidity Assistance). Im not sure if the ELA funding still applies when the promissory note debt converts to bonds, and if not, Im wondering if the interest charged between the ICB and the ECB remains fixed at 0.75% or if there are provisions for raising or lowering this under the new arrangements.
 
Brendan Burgess said:
That makes sense, but where did you see that? I hadn't heard that mentioned.
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Fascinating stuff on RTE news. Noonan spells it out quite well. The bond will be a 3.5% floater. ECB interest rates are currently 1%. The 2.5% difference will flow through as CBI profits. I don't see it explicitly mentioned anywhere but one presumes that the profits will go to pay down the ECB loan, it is hardly going to be allowed to be channelled elsewhere - the ECB desperately want paid back.

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.

We can see that this is a game of arcane rules. The ECB is very keen that this is not subsidised monetary financing and that the Government bonds will be sold into the market and will get a price near par.

I was a bit disturbed that Noonan said he had a billion more to play with in the 2014/2015 budgets (combined I suppose) though he reiterated that we have to target 3% deficit in 2015. That is an easier target without the PNs. So two cheers for this deal.

Even as I write, I hear Fierce Doherty. Put to him that inflation will reduce the loan he said yes but pointed out that the bond was a floater and this would go up with inflation. These Shinners are a bit of a cut above the folk I used to know:D
 
Dr.Debt said:
OK Duke, Thats interesting. I havent heard that version before.

So therefore there is a capital element to the 3% payment (of 2.25%) and the full 3% does go to the EURO creditor.

The original borrowing between the ICB and the ECB was done under the ELA mechanism (the Emergency Liquidity Assistance). Im not sure if the ELA funding still applies when the promissory note debt converts to bonds, and if not, Im wondering if the interest charged between the ICB and the ECB remains fixed at 0.75% or if there are provisions for raising or lowering this under the new arrangements.
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Dr Debt. You are confusing the two sides of the CBI balance sheet. The 3.5% is on the asset side and is all interest. The loan side is to the ECB which charges 1% (per Noonan), so by implication the profit between these two rates can be used to pay down the ECB loan.
 
Duke, I dont think Im miximg up the two sides of the balance sheet (I hope not or im in deep trouble in my personal life)

I do understand the the CBI is earning 3.5% on the asset side.
You also have answered my question regarding the interest rate payable between CBI and the ECB (1% as per Noonan)

Its the last part that I have difficulty with - "so by implication the profit between these two rates can be used to pay down the ECB loan" Why do you assume this instead of assuming that the 2.5% will be paid back to the Irish exchequor by the CBI. Im just wondering if this is your own assumption or if MN has actually said that. You did say earlier that the full 3% will be paid over to the ECB and im just curious why you believe that.
 
Dr.Debt said:
Duke, I dont think Im miximg up the two sides of the balance sheet (I hope not or im in deep trouble in my personal life)

I do understand the the CBI is earning 3.5% on the asset side.
You also have answered my question regarding the interest rate payable between CBI and the ECB (1% as per Noonan)

Its the last part that I have difficulty with - "so by implication the profit between these two rates can be used to pay down the ECB loan" Why do you assume this instead of assuming that the 2.5% will be paid back to the Irish exchequor by the CBI. Im just wondering if this is your own assumption or if MN has actually said that. You did say earlier that the full 3% will be paid over to the ECB and im just curious why you believe that.
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The Boss has queried me on the same point. I have no definitive statement on what happens to the CBI profit. It is probably not dictated by the ECB but I presume they would take a dim view if it was used to build a hospital in Reilly's constituency rather than pay them back.:rolleyes:
 
Hi Duke

The Central Bank pays a dividend to the Exchequer each year. They will be paying a higher dividend because their profits will be higher from this transaction.

There is no requirement on the government to begin capital repayments on the new bond for at least 25 years.

Nor is there any requirement, that I know of, on the Central Bank to start paying capital to the ECB.
 
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