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Ireland: What to Expect When You Are Expecting
• June’s eurozone summit raised expectations
of a refinancing of the Irish banking bailout.
• Ireland’s ‘prize’ from such a deal is potentially
high, with the gross cost of the bailout to date at
around 40% of GDP.
• Any deal will not necessarily lower its debt-to-
GDP ratio from its 120% peak, but it would alleviate
Ireland’s funding needs significantly over the next
few years.
• It is ultimately in the interest of most of the
parties in the negotiations to produce a deal that
will move Ireland towards sustainable finances.
• It could also serve as a carrot for other
programme countries, alongside the usual sticks.
Statement of intent
The statement following the eurozone summit at the
end of June was widely considered to be very
favourable to Ireland. Specifically, the end of the first
paragraph contained a commitment to “examine the
situation of the Irish financial sector with the view of
further improving the sustainability of the wellperforming
adjustment programme.” That was
interpreted as meaning that once a single supervisory
framework for eurozone banks was up and running, the
Irish could hope for some of the huge cost of their bank
bailout to be refinanced ex post through the ESM.
Big envelopes
The potential ‘prize’ from any re-engineering of the
Irish bailout is considerable. The total gross cost to the
Irish state of the banking-sector bailout is put at
EUR 62.8bn. That is equivalent to a staggering 40% of
the island’s GDP. At this size, the IMF considers the
bailout to be the second-costliest banking crisis in an
advanced economy since the Great Depression, at
least, only pipped to the post – just – by Iceland.
Table 1 sets out the key elements of the bailout to
date. Around half of the increase in total funds injected
into the Irish banks is due to the promissory notes
injected into Anglo Irish, which is now part of the Irish
Bank Resolution Corporation Limited – in effect, the
legacy wind-down bank for Anglo and Irish
Nationwide. The other half of the bailout injections are
from government and national pension-fund (NPRF)
equity and capital injections.
In terms of the possible scope of any agreement
between the Irish government and the eurozone/ECB
to restructure the broad bank bailout, it makes sense
Table 1: Gross Costs of Ireland’s Bank Bailout
EUR bn Body Date Total
Government preference shares NPRF 2009 7
Promissory notes/special
investment shares Exchequer 2010 31.6
Ordinary share capital Exchequer 2009 4
Ordinary share capital NPRF 2010 3.7
Total pre-PCAR 2011 46.3
Following PCAR 2011
Capital Exchequer 2011 6.5
Capital NPRF 2011 10
Post-PCAR 2011 16.5
Total costs 62.8
Source: NTMA
to think about the promissory notes as distinct from
the other injections.
As a reminder, the EUR 31bn of promissory notes
injected into IBRC are just that, a promise from the
Irish sovereign to pay the bank cash each year. The
repayment schedule for these notes stretches out over
the next 20 years. For the next decade, the Irish
government is on the hook for EUR 3.1bn a year.
The full value of the promissory notes has already been
booked and is one of the major causes of the increase
in Ireland’s debt-to-GDP ratio from 64.9 % in 2009 to
92.2% in 2010. But in a cashflow sense, the funds for
the notes will be raised in the year they fall due. And
they will be a significant cash call on the sovereign
each year, with EUR 3.1bn equivalent to 1.9% of the
country’s GDP. Or, to put it another way, with an IMFforecast
Exchequer cash deficit for 2013 of EUR
14.5bn, funding the notes will be very costly indeed.
The promissory note issue is intimately bound up with
the provision of emergency liquidity assistance (ELA)
owed to the Central Bank of Ireland. Emergency
liquidity assistance is a form of monetary financing
that the ECB requires to be paid off post haste. The
idea is that as the promissory notes pay up, so they
will be used to pay down the EUR 42.3bn in ELA
funding to the IBRC. The key role of the ECB in
discussions on the promissory notes can, therefore,
be appreciated, as any re-jig of the notes impinges on
commitments to wind down the ELA.
In the past, the ECB has shown some reluctance to
re-open discussions on the promissory notes, though
it appears this reticence has softened somewhat of
late. ECB executive board member Joerg Asmussen
said at a press conference last week that the bank
was in “intense discussions” on the Irish programme.
That shows, at least, that the ECB is engaging on the
issue, which is a change from its previous stance.
David Tinsley 20 September 2012
Market Mover 7
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