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Update: What the Prom Deal does for us

Friday, February 08 11:59:47

Analysts and the NTMA have been busy analysing exactly what yesterday's agreement will mean for Ireland and have generally concluded that the Government have every right to be jubilant.

Yesterday's "Prom deal" will reduce interest costs on Irish sovereign debt by close to E1bn per year over the next ten years and cut the country's borrowing needs by up to E20bn, but don't expect much easing up of austerity.

Ireland's General Government deficit will improve as a result of the new arrangement.

In 2013, it is unlikely to benefit thanks to up-front costs of the liquidation of IBRC all other things equal. But in each of 2014 and 2015, the General Government deficit may narrow by about 0.6 percentage points of GDP, the National Treasury Management Agency (NTMA) confirmed this morning.

Over the next decade, it is estimated that the funding requirement falls by around E20bn as result of this agreement, it said.

General Government debt is likely fall over time compared with the way things were before the Prom Deal.

However, the NTMA cautioned that the extent of the benefit to Ireland will depend on a wide range of outcomes in this case. Among other things, it depends on the holding period of the new Government bonds, the workout of the loan assets destined for NAMA and the path of future interest rates.

The holding period of the new Irish Government bonds has been announced today by the NTMA. The Central Bank of Ireland will sell a minimum of: E0.5bn before end-2014; E0.5bn a year in 2015-2018; E1bn a year in 2019-2023 and E2bn a year after 2024 until all bonds are sold.

"The Central Bank of Ireland may pay an annual dividend to General Government amounting to the majority of the difference between the coupon on the bonds and the main refinancing rate (the rate it pays on its own liabilities to the Eurosystem) on the balance of its Government bonds outstanding. This helps to keep Ireland's ultimate funding cost low. The stated profile of sales also provides certainty from a debt management perspective," the NTMA said today.

Meanwhile, the Government is not expected to bask in glory for much longer as it gears up for the next phase in easing the burden of debt on Ireland's shoulders with negotiation soon to extend the term of the EU/IMF bailout loans.

Minister for Finance Michael Noonan today said that the Promissory Notes deal "eases the burden on everybody" and will ease budget pressures over the next couple of years.

Referring to legacy bank debts other than those from Anglo Irish and Irish Nationwide, he said this was "a different argument for a different day".

The government announcement yesterday that it had secured longer-term monetary finance from the ECB will have a significant but not transformative effect on the public finances. The ECB interest charge remains at 0.75pc on the remaining E28bn of promissory notes, but now with an average repayment term of 15 years. This compares with the E3.1bn reduction in ELA per annum under the old structure, set to expire in 2020 when IBRC was wound up. On average, this will save the government close to E1bn in debt interest per annum (0.6pc of GDP) - a significant reduction but just one piece of the puzzle to guarantee Ireland's debt sustainability.

The extension of ECB monetary finance of the Irish sovereign will reduce funding needs by E6.2bn in 2013 and E3.1bn in 2014. However, the Central Bank is scheduled to start selling newly issued bonds of E0.5bn by end-2014, E0.5bn per annum through to 2018, E1bn per annum through to 2023 and E2bn per annum from 2024. This means that the average Central Bank of Ireland holding period is 15 years, during which any interest on the newly issued government bonds will accrue to the exchequer. So, the effective interest cost is still the ECB's re-financing rate, currently 0.75pc.

In the short term, additional benefits may accrue as IBRC is liquidated. In 2013, these savings will be negated by a likely E1bn charge on the Eligible Liabilities Scheme. As assets are transferred to NAMA further costs may be incurred as the liquidators value IBRC's remaining assets. These benefits will effectively depend on whether IBRC was overly capitalised prior to the liquidation.

An analysis from Davy research this morning said that the deal is certainly a considerable achievement for the government.

"Effectively, ECB monetary finance has been extended out beyond 2030. This brings the ECB to the limit of its legal constraints on finance of sovereign debt. However, while the gains are considerable, they should be seen in context. The July 2011 decision to reduce the interest cost on Ireland's E67.5bn bailout loans will yield far greater interest savings. Similarly, attention will now inevitably turn to the January decision by EU finance ministers to consider extending the term of EU bailout loans. With E6.9bn of EU/IMF debt due to mature in 2015 and E6.1bn in 2016, the Irish government will surely now move to exploit this opportunity."

By Joe Downes