TECHNICAL MEMORANDUM:THE REPUBLIC'S €85 million deal with the International Monetary Fund (IMF) and European Union explicitly bans the State from defaulting on guarantees given to the overseas finance institutions that loaned €15 billion in senior bonds to Anglo Irish Bank.
Since 2008, the State has guaranteed €15 billion owed to holders of senior bonds used by Anglo to raise money used to fuel its clients’ property borrowing spree during the last decade.
While there was speculation that these creditors, mainly European finance institutions, would be asked to share the burden of rescuing the Republic’s banks, the deal agreed with Europe and the IMF at the weekend ruled this out.
The memorandum of understanding detailing the terms states that the Government cannot fall into arrears on either its contracted or guaranteed external debts, meaning the debts of the banks that it has guaranteed.
It defines arrears as failing to make a payment within five days of its falling due. If this happens, the National Treasury Management Agency (NTMA), which is responsible for the Republic’s sovereign debt, must report it to the IMF within seven days.
Senior bond holders rank behind deposit holders but before subordinated creditors and shareholders in a liquidation. Because the State had guaranteed these loans, speculation that they may be asked to take a discount drove up the Republic’s own borrowing costs to record levels.
It also contributed to fears about other, so-called, peripheral euro zone nations, destabilising the EU’s financial system, and posing a threat to the euro.
One of the reasons behind the decision to bailout the Republic was to calm these fears, which is why any default on this debt was ruled out.
The ban on any default on contracted or guaranteed debt is contained in the memorandum, the part of the overall document detailing how the Government must meet financial targets set by Europe and the IMF, and how these parties will monitor its performance.
It obliges the Department of Finance to give details of the exchequer balance, that is the State’s income and outgoings, every three months.
It also requires the NTMA to update the IMF on the national debt every three months.
The targets set out in the memo show that the national debt will rise throughout next year, starting at €83.1 billion at the end of this month and rising to €102.2 billion at the end of December next year.
At the same time, the Government is expected to raise a total of €41.9 billion in tax and other receipts through next year.
