CoalitionÕs contrasting fortunes on swings and roundabouts over promissory notes and polls

Date Published: 13-Feb-2013

what a week it was for the Coalition – a bit like winning the lottery (the promissory note) and breaking your leg when running into the shop to claim your prize (the Irish Times opinion poll). The temporary pain of one will be out-trumped by the sheer scale of the other, but that remains to be seen.

The deal the Coalition secured on the promissory note last week was – unquestionably – the biggest success it has had since entering Government in March 2011.

Let’s get all the conditional stuff out of the way first. Sure, the overall amount of debt stays the same. Fine Gael and Labour threw in the towel on that empty election promise very soon after taking over the reins, when they realised they just couldn’t deliver on that without a dramatic alteration of political direction.

Both are conventional and mainstream parties, an outlook that is shared by most of the electorate. Neither was going to take the chance of leaving Ireland isolated from the rest of Europe on that issue.

To the credit of both parties, they used the tiny bit of wiggle room they had to its fullest extent. In one day, in 23 hours in fact, they managed to get rid of what was left of the hated Anglo Irish Bank, get rid of the almost equally hated promissory notes, and persuade the normally intractable European Central Bank to change an overdraft into a long-term mortgage.

It is quite true that the capital of €28 billion will have to be repaid. But the short-term notes with a horrible annual payment of €3.1bn each March for 10 years have gone.

Instead, there are long term bonds with a couple of nice twists to the benefit of Ireland. Firstly, no capital will have to be paid back until 2038. That means Ireland will pay only interest, which takes down the short-term bill.

Secondly, the promissory notes had a very low interest rate – it was the short time-span of the loan that was the killer. Normally, bonds carry higher interest rates. Indeed it is 3.5% for these bonds, which is much higher.

But what has happened is that the ECB will lend the money to the Irish Central Bank at 1%, which in turn will charge 3.5% interest on the bonds it issues. That means a 2.5% profit margin for the Central Bank, which will go straight back into the Exchequer. The net outcome is that the effective interest rate for Ireland is really only 1%.

It’s not all smelling of roses. Hundreds of ordinary employees of Irish Bank Resolution Corporation have lost their jobs. It will cost an estimated €1 billion to wind up IBRC and there will be other associated costs. In addition, transferring all the €14 billion of assets to other institutions (which will turn out to be mainly NAMA) will be complicated, costly and could encounter big cruxes.

Still, a win is a win and it would have been churlish to present it in any other way. It will have come as a shot in the arm to both Government parties, particularly Labour, which has had an abysmal showing in opinion polls in recent months.

For more, read this week’s Connacht Tribune.