DUBLIN - 15 February 2013: The Irish Bank Resolution Corporation Bill was unanimously passed in the early hours of Thursday morning, 7 February by both Irish Houses of Parliament after an emergency overnight sitting. Codenamed ‘Project Red’ by the Irish Department of Finance, the secret government plan to liquidate the Irish Bank Resolution Company (IBRC), formerly known as Anglo Irish Bank and Irish Nationwide, was as dramatic as it was controversial. The liquidation of IBRC was the accumulation of delicate but ultimately knife-edge negotiations between the Irish government and the European Central Bank (ECB).

Background

As serendipity would have it, the last occasion that parliament enacted overnight emergency legislation, was the September 2008 blanket bank guarantee. The run on Anglo Irish Bank’s deposits was the catalyst in 2008 for the government’s unlimited guarantee to underwrite an estimated €400bn in loans and borrowings from the six main banking institutions in Ireland, including bondholders. The government were not aware at the time of the full extent of Anglo’s exposure to builders and developers - most of its €73 billion loan book.

This decision ultimately had devastating effects to Ireland’s financial health. Two years later, in 2010, the government were forced to rescue Anglo Irish Bank by injecting considerable funds to pay back their depositors and creditors. Therein, with the approval of the ECB, the concept of a promissory note was invented. The government issued €28bn of promissory notes – in effect state IOUs to senior bondholders such as large institutional investors. The burden of socialising such a large amount of private banking debt threatened the “security of Ireland‘s market access” according to the IMF December 2012 report on Ireland. The promissory notes obliged the government to shell out €3.1 billion, plus interest, every year until 2023 in repayments. The third instalment was due on 31 March.

The deal

In his midnight speech to parliament, the Taoiseach Enda Kenny described the dreaded promissory notes as “a highly onerous and unfair legacy of the banking crisis”. As the Department of Finance has confirmed, the liquidation of IBRC has facilitated the swap of promissory notes for long-term government bonds which do not have to be repaid until at least 2038.

The 3% low interest rate government bonds with maturities of up to 40 years compare favourably to the punitive 8% interest rates on the old promissory notes.  In the short term, borrowing costs have been considerably reduced which will enable Ireland’s exist from the eurozone bailout programme as planned later this year. As a result, there is a €20bn reduction in Ireland’s market borrowing requirements over the next decade as well as a large reduction in the debt servicing costs of the State. This immediate reprieve has knock on effects for an overwhelmed population, facing into its seventh austerity budget this year. Enda Kenny told the Dáil that “expenditure reductions and tax increases will be of the order of €1 billion less” than previously planned.

Project Red passes

The Minister of Finance, Michael Noonan, ordered Project Red to commence following detailed media inquires to the Department of Finance. The Reuters and Bloomberg news agencies published well-informed pieces suggesting that a new deal with the ECB was in the offing with the possible liquation of IBRC.

“As soon as the information relating to the proposal to liquidate IBRC was made public, there was an immediate risk to the bank.” Michael Noonan went on to tell that midnight Dáil sitting that “Given this position, I as Minister for Finance, took immediate action to secure the stability of the Bank and the value of its assets, valued at €12 billion, on behalf of the State.”

Project Red set in train a series of parliamentary procedures that proved both historic and chaotic. The government jet was despatched to collect the President of Ireland, Michael D Higgins, who was on a state visit to Italy. The Irish constitution requires the President’s signature to enact legislation. Parliamentarians were kept in the dark about the contents of the emergency legislation. Frustrated, the leader of the opposition, Michael Martin tweeted before midnight: “Unbelievably, we’re minutes from the start of the debate and still no detail on what we’re to debate.” An hour later, his Fianna Fail colleague Charlie McConclogue tweeted: “Taoiseach offering 30mins adjournment to read a 60 page bill!” Noonan argued that he was forced to act quickly. “Did you ever hear of a liquidation that was announced one day, but not carried out for several days or weeks? If that isn’t done, creditors will line up to strip the company of everything they can lay their hands on,” he told the Dáil.

The Irish Bank Resolution Corporation Bill received just three hours of debate in the Dáil. No amendments were accepted. Shortly before 3am, it passed 113 votes for to 36 with Sinn Fein, the United Left Alliance and independents voting against. The Sinn Fein finance spokesperson, Pearse Doherty tweeted after the vote: “IBRC – Gov is winding up the bank but not winding up the Debt.” The Seanad debate ended at 5am, after two hours of parliamentary deliberation.

The parliamentary debates featured little if any scrutiny on the content of the Bill. Apart from the liquidation of IBRC, the Bill provides for remarkable principles. The preamble contains the stunning statement: “And whereas in the achievement of the winding up of the IBRC, the common good may require permanent or temporary interference with the rights, including the property rights, of persons.” The unintended consequences of interfering in property rights, obsessively scarcest within the Irish constitution, are unknown.

Section 17 of the Bill invests exceptional power in the Minister of Finance to create and issue securities:

“Whenever and so often as the Minister thinks fit, create and issue securities -

1. (a)  bearing interest at such rate as the Minister thinks fit or bearing no interest, and
2. (b)  subject to such conditions as to repayment, redemption or any other matter as the Minister thinks fit,

where such securities are issued in exchange for or in consideration of the redemption, release or cancellation, or the transfer to the Minister, of any other liability or obligation of the Minister to the Bank.”

International response

The international response has largely been positive. The rating agency, Standards & Poor’s responded by upgrading Ireland’s BBB+ rating outlook from “negative” to “stable”. Moody’s rating agency is expected to follow suit. The Financial Times depicted the deal as a “major boost for Ireland.” The yield of the Irish bond maturing in April 2020 has already fallen to 3.64 per cent – the lowest since March 2006.

Although the toxic Anglo Irish Bank, and its successor IBRC, no longer exists, the legacy debt stays the same. There was no write down.  Article 123 of the Treaty on the Functioning of the European Union prohibits “monetary financing”. In layman’s terms, this means that it is illegal within the eurozone to write off loans from central banks to state-owned banks.

Prof Karl Whelan UCD argues that deal was however “monetary financing in spirit if not necessarily according to the letter of the law...  A weakening of unnecessary monetary purity may be required if the euro is to be saved.” Ashoka Mody, the former IMF mission chief to Ireland, argues that Ireland’s underlying legacy debt burden remains unchanged: “The promissory notes deal must not be judged by the relief it provides to the Irish budget; the right benchmark for its achievement is the debt obligations that live on. Why were Irish repayments not reduced further? The debilitating consequence of delays in debt restructuring has been unrelenting fiscal austerity.”

Mody asks the obvious question – “What is the principle that requires the Irish taxpayer to honour the debts of a rogue bank?”

That question has never been answered.