Is the Central Bank accelerating the sell- down of its holdings of bonds taken on at the time of the IBRC liquidation to keep the ECB happy? Or is it a mechanism to “book” profits for the Central Bank, 80 per cent of which are then returned to the State?
The liquidation of IBRC in February 2013 allowed the Government to tear up the much-hated promissory note and replace it with €25 billion of floating rate bonds, to be held by the Central Bank. This spread out the repayments and offered some other advantages to the State, which was financing it all via rock-bottom ECB interest rates and effectively paying the interest due on the bonds to itself.
The ECB wasn’t entirely happy, as it felt the whole arrangement was akin to monetary financing, where a Central Bank finances a government by effectively printing money. It obtained a commitment that our Central Bank would sell at least €500 million of these bonds each year up to 2018 and more thereafter.
So far this year, the Central Bank has sold down €1 billion of this debt, twice the minimum obligation. It already met the 2014 target through a €500 million sale in December.
This may help to keep the ECB on board. However, another factor has entered the equation. Bond interest rates collapsed, so the value of the Central Bank’s holdings rose. This means the NTMA can refinance the bonds at a cheap rate on the markets, selling new fixed-rate debt and buying the floating rate notes from the Central Bank. This yields a profit to the Central Bank. The NTMA pays up, of course, and the interest payments are not made to a third party, and thus that advantage is lost.
Whether the State ends up better off depends on what assumptions you make about how quickly the bonds will be sold – at the minimum agreed or higher – and, crucially, if interest rates will rise in future. If you assume we are now in a golden age of cheap state financing and that bond rates will inevitably rise, an accelerated sell-down of the bonds may, indeed, make sense. Either way the exchequer can look forward to extra dividends from the Central Bank, running into several hundreds of millions of euro.
