Fianna Fáil Finance spokesperson Michael McGrath has said an explanation is needed from the Central Bank of Ireland as to why it is selling the bonds it holds arising from the liquidation of IBRC at a pace which is up to eight times faster than the schedule which was set out in 2013 when the bonds were issued to replace the Anglo Irish Bank promissory note. This has the potential to cost the State hundreds of millions in additional interest costs in the years ahead.
Deputy McGrath commented “The State entered in to a complex financial transaction in 2013 when it swapped the promissory note issued to recapitalise Anglo Irish Bank for Irish Government bonds. One of the benefits of the transaction put forward at the time was that the Central Bank would, as the holder of the bonds, receive the annual interest payment on them and pay it back to the State through its annual dividend payment. Essentially, this meant that the annual costs of recapitalising the bank would be substantially reduced.
“Accordingly, as the bonds are sold back to the NTMA, the interest cost to the State is going to be higher. This is because interest paid on government bonds held by third parties is a direct cost to the exchequer whereas interest paid on bonds held by the Central Bank essentially comes back to the State. A schedule was set out in 2013 which indicated a minimum level of bond sales of €500 million per annum in each year from 2015 to 2018 when the level was to increase to a minimum of €1 billion per annum up to 2023.
“However figures released recently indicate that the Central Bank has already sold €2.5 billion of the bonds this year and if the current pace is maintained €4 billion will be sold before year end. This follows on from €3 billion in 2016 and €2 billion in 2015. In total €8 billion of the bonds have been sold to date.
“I am concerned that the pace of sale is considerably faster than the level which was indicated in 2013 when the original deal was put in place. In fact this year it would appear to be a rate of eight times faster than the indicated level of €500 million.
“This is not an academic discussion. It has a significant economic impact on Ireland. The faster the bonds are sold the more interest we end up paying annually to 3rd parties through the NTMA and the smaller the annual dividend the Central Bank can pay to the Exchequer.
“The reason why the Central Bank is selling at the current pace has not been explained though the obvious reason is that it is under considerable pressure from the European Central Bank. The much vaunted declaration that the EU would break the link between bank debt and sovereign which raised the prospect of retrospective recapitalisation of the banks was never given effect in practice.
“From an Irish prospective, allowing the Central Bank to hold the bonds for as long as possible went some way to mitigating the cost of recapitalising the banking sector.
“In fact I have argued that it is essential that case be put to the ECB to allow the bonds to be held to maturity as the best means of reducing the cost to Ireland of rescuing the banking sector. The fact that they are being sold at the current accelerated pace indicates that Ireland is losing the battle with the ECB and more of the cost of resolving the banking crisis is being pushed back on the State by stealth.
“Ireland has an unanswerable case for relief from the burden it carried for preventing a collapse of the banking sector; there is mechanism for achieving this through, at a minimum, slowing the sale of the Anglo bonds. It is essential that action is taken now to bring this about,” concluded McGrath.