# Anglo Promissory Notes

Just been confirmed that the Anglo promissory notes have a interest payments that will be rolled up and repaid to the bank on the maturity of notes. The rate is linked to the 10 year Irish government bond!

So assuming a 10 year note and assuming 5% rate that is an addiotional €15bn we will have to pay to anglo in 10 years time!

Jesus H Christ

In government non-accrual based accounting would that mean that the interest only appears as a cost in 10 years?

From here:
irisheconomy.ie/index.php/20 … t-payments
Well, it will reduce as the promissories are drawn down, but that just converts them into (presumably) ten year bonds with interest due immediately.

So instead of paying 15 bn at the end, we’ll probably be paying 7.5 bn as we go and 7.5 bn at the end (assuming 5% for ten years all the way through!).

Year 0 - promissories 30 bn, accrual 1.5 bn, bond interest 0, payment 3 bn
Year 1 - promissories 27 bn, accrual 2.85, bond interest 150mn, payment 3 bn

So I make it that the accrued interest will be 8.25 bn and the real interest paid 8.25 (roughly speaking, as there’s a lag between the first year’s accrued interest and the last year’s full interest?). Is this right?

So the interest cost at the end will be something like 8B at 3B a year being paid off

[code]Year Bonds Repaid Balance Int

1 30.00 -3.00 27.00 1.50
2 27.00 -3.00 24.00 1.35
3 24.00 -3.00 21.00 1.20
4 21.00 -3.00 18.00 1.05
5 18.00 -3.00 15.00 0.90
6 15.00 -3.00 12.00 0.75
7 12.00 -3.00 9.00 0.60
8 9.00 -3.00 6.00 0.45
9 6.00 -3.00 3.00 0.30
10 3.00 -3.00 - 0.15

`````` Total Int Payable at and 			 8.25 [/code]
``````

Yep, that looks just like my chart.

And on the other side, you are borrowing from the markets to pay off the promissory note - which comes to 8.25 bn too.

I still don’t quite understand why both come to 8.25 bn, but excel says so…

So there’ll be an increasing annual interest cost as each 3bn in bonds is sold to the market for real cash, with an accrual building up to 8.25bn

Based on the current 10 year yield of 6.3% the average rate works out very close to 5%.

I have asked more questions on how the interest is calculated, how the interest and capital payments are treated and what happens when the final interest lump sum payment is made.

Some more on who said what when (aggregated posts from IrishEconomy):

To be fair, the ESRI flagged this in their july report:
rte.ie/news/2010/0721/esrireport.pdf
“We have also assumed that this promissory note will attract a market interest rate, with the resulting interest payments being added to national debt interest”

It is not clear, however, that Mr. Lenihan understood this:
” BL: No, no, listen, listen. This not good for the country and it’s inaccurate. If next year we’re obliged to include the €8bn, the €8bn will not actually be borrowed next year the device of the promissory note means we borrow…

Ivan Yates: No, I know the promissory note is over ten years. You’re missing the point…

BL: No you’re missing the point! This is an accounting device! This is not real borrowing! What the markets look at is real borrowing. Not accountancy devices… – April 26 2010.”
Newstalk… thestory.ie/quotes-from-brian-lenihan/

And Mr. Gurdgiev also got it back in April:
trueeconomics.blogspot.com/2010/ … ihans.html

And from the Dail reports:
Mr. Lenihan, however, appears to have had a different original idea of the cost:
debates.oireachtas.ie/Xml/30/DAL20100428.PDF
28 April 2010
“As the Deputy is aware, the additional capital of €10.9 billion is being made available by way of promissory notes, payable over a ten to 15-year period. This will increase the general Government debt by the full amount in 2010. However, as regards the actual borrowing that needs to be raised arising from this, it is likely that an additional Exchequer borrowing requirement of approximately €1 billion will now be required in 2011 for Anglo Irish Bank and INBS. A likely indication of the interest
costs associated with this additional borrowing would be in the region of €55 million per annum and, in the context of the overall budgetary numbers, this is manageable.”

This is subject, of course to the usual mangling. Interest of 55 million on 1,000 million is 5.5% No mention is made of interest on the other 9,900 million, one could argue and no doubt, it is manageable “so far”.

It does appear the plan was changed at some point. NAMA-style bonds with low interest payments appear to have been the initial plan, hence the repeated claims that “the use of Promissory Notes means that the institution’s capital requirements are met in a way which spreads the cash payments over a number of years and thereby reduces the funding
burden on the Exchequer that would otherwise arise in the current year.”
(repeated in many places in the Dail record).

Instead we see that there is no reduction in the burden on the Exchequer.

My calc assumes payment at end of year following int charge on full year. The other side should therefore lag a year - so year 1 is 0 and year 10 27. You are overstating the interest by double charging on 3B a year - 3B @ 5% over 10 years is 1.5B - the difference between the 8.25B twice against the expected 15B.

(Pedantic accountant drifts back to some tax work…)

I must be an accountant at heart, because that’s the way I did it too. Of course, starting at 0 is a very assembler programmer thing to do. All numbers start at zero. The first ten numbers end at 9. The next ten end at 00010011 or 13 if you prefer…

PS thank you…

Hmmm. 20 = 13. Could do some binary tax planning.

Tut, tut, it’s 19… nnnnnnnnnineteen… the structural deficit of the Irish state in 2010 was 19 billion euro… nnnnnnnineteen.

Anyway, splitting the promissories out by lender:

[code]Proms Rate Annual Date of issue Part year cost

ANGLO:
8,300 4.17% 346.4835 31/03/2010 260.8705339
2,000 4.57% 91.386 28/05/2010 54.29366735
8,500 5.13% 436.05 23/08/2010 155.1991786
6,400 6% 384 01/12/2010 31.54004107
25,200 1257.9195 - annual total 501.9034209 - year 1 total

INBS:
2,600 4.17% 108.537 31/03/2010 81.71848049
2,700 5.13% 138.51 23/08/2010 49.29856263
5,300 247.047 - annual total 131.0170431 - year 1 total

EBS:
250 4.57% 11.42325 28/05/2010 6.786708419

Total promissories in issue: 30,750 mn
Annual interest: 1,516.39 mn
Year 1 cost: 639.7072[/code]

A piece on this and the interest holiday for 2010/2011 announced today. It’s not really a holiday as the interest will be ‘repaid’ at a higher level once it becomes due in 2012… after FF leave office on assumes…
ftalphaville.ft.com/blog/2010/11 … ory-notes/

Nice chart…

Sorry, that should be no interest payable in 2011 and 2012.

Notes on the prom notes here (how to fuck your date and not let on to her dad):
finance.gov.ie/documents/pub … ry2010.pdf

And there was me thinking… Yes! 20 is equal 13 … well 19 (the 20th number) =13 at least. That’s 19 base 10 is 13 base 16 (or hexadecimal). I think your subconscious must have been telling you that yoganmahew. These days I like to give my age in hex