During the course of 2009 and 2010 it was determined that Anglo Irish Bank Corporation Limited and Irish Nationwide Building Society (now, together, Irish Bank Resolution Corporation (IBRC)) required significant additional capital. Of this capital, a total of €4.1 billion was provided in the form of equity (or special investment shares for INBS) and a total of €30.6 billion in the form of capital contributions. The consideration provided by the State for the equity was cash and for the capital contribution was promissory notes.
The promissory notes are effectively an IOU to Anglo and INBS. As there was a debt from the State to the institutions, there was associated interest charge. This interest rate was set by reference to Government yields at the date that each tranche of the promissory notes were issued. The interest rate had to be referenced from Government yields to ensure that the promissory notes were booked at full value as an asset on the IBRC balance sheet, without the need for additional capital.
When the final capital contribution was provided on 31 December 2010 an interest holiday was inserted into each of the promissory notes which meant that between 1 January 2011 and 31 December 2012 no interest was payable. Absent the interest holiday the weighted average interest rate on these promissory notes would have been 5.8%. However, as a result of the insertion of the interest holiday the weighted average interest rate from 1 January 2013 is circa 8%.
The Government has been committed to reviewing the arrangements that were put in place to capitalise IBRC. The purpose of this review is to determine if there was a way to reduce the overall cost to the State. The Troika has been engaged in a process with Irish Officials to produce a common paper which will consider all options for re-engineering the notes in terms of the source of funding, the duration of the notes, the interest rate payable etc.
In tandem with this review the Troika have opened a discussion on how best the Irish banking system and the Irish State can benefit from having further improvements to certain elements of the banking sector. The overall purpose would be to enhance the position of banks in which the State has a major investment. A number of approaches are under consideration but it must be emphasised that nothing is agreed at this point.
As already indicated I have met with Commissioner Rehn and Mario Draghi, President of the European Central bank, in this regard. The matter has also been discussed at every opportunity and at various levels in the European arena. As soon as the technical discussions are concluded, and the joint paper is available, a more formal and structured approach will be adopted to ensure political support.
The discussions with the European authorities on the general issue continue but we are now negotiating with the EU authorities on the basis that the €3.06 billion installment due from the Minister to IBRC on 31 March 2012 could be settled by the delivery of a long term Irish Government Bond of equivalent fair value. This settlement process does not involve the variation of any of the terms of the existing promissory notes.
The key benefit of these proposals would be to reduce the 2012 cash out flow from the State by €3.06 billion through settling with the delivery of long term a Government bond.
While this development in relation to the end March payment would be a positive development we must keep our eye on the greater benefits which would derive from the re-engineering of the promissory note and also the potential improvements for the continuing banking sector which could also stem from the ongoing technical discussions.
It is for these reasons that we must look at the recent developments as what would be an initial step to facilitate a project where, if we are successful, it will be in the medium term rather than immediately.
The Government always committed that we would inform the Dáil about any development concerning the payment of the promissory note at the end of this month. I brought the Dáil as up to date as possible last night and I cannot add anything further at this time.