An Audit of Irish Debt

An Audit of Irish Debt



This is an audit of Irish sovereign debt, and as such seeks to quantify and explain the debts, both real and contingent, for which the Irish people have become responsible. As such, our main focus is bonds issued directly by the Irish government and long-term liabilities of the banks which are guaranteed by the Irish government. In addition to this we examine some market activity including short selling and credit default swaps, in order to explain how they impact on the market for sovereign debt. We have three aims. As an audit, we aim to collate and verify data to produce as comprehensive and accurate a picture of Irish debt as possible, including the origin and scale of the debts. There is a public education role, in which we seek to create an accessible, comprehensible description of Irish debt to help people to understand a very complex situation. Finally, through the provision of detailed references to source material, we hope this provides a useful foundation to others for future work in the area.

Irish government debt, the total of bonds issued directly by government, has increased sharply in recent years, as the domestic banks were recapitalised. The Irish state has not borrowed on the markets since September 2010, but the bonds continue to be traded among investors on the secondary market. Because of the way in which this is done, through a clearing house, the identity of the bondholders at a given time is not known. This anonymity is discussed in the conclusion to this audit, and contrasted with the position of shareholders. The limited information available on the identity of the holders of Irish government bonds, as discussed in Section 2 of the report, indicates that most are not Irish resident.

Apart from directly issuing bonds, the Irish government has contingent liabilities for other debt, including deposits in Irish banks, bonds issued by NAMA, and the bank guarantees of 2008 and 2009. This latter guarantee, known as the ELG scheme, guarantees some of the bonds issued by the covered banks. These are dealt with in Section 4 of the report. It is worth noting at this point that there are other bonds issued by Irish banks, commonly referred to as the unguaranteed bonds, which are not specifically covered by the government guarantee. These may be further divided between senior and subordinated bonds, the latter being higher-risk instruments, which reduced rights to repayment. To date, the state-owned banks have continued to make repayments to the senior bonds.
As well as guaranteeing bonds under the ELG scheme, the Irish state has provided support to the covered banks through the issue of promissory notes throughout 2010 to Anglo Irish Banks, Irish Nationwide and to a lesser extent the EBS. These promissory notes are treated as an asset on the books of the bank, enabling them to use them as collateral to borrow. From the perspective of the Irish government, they are a liability, similar to an IOU, and so need to be repaid to the bank over a period of time.

In addition, the Irish government provides Emergency Liquidity Assistance (ELA) to the covered banks. This is a very short-term lending facility, providing liquidity to the banks for periods from 1 day to a week or two. ELA lending effectively transfers risk away from the banks to the Irish state.

There are several potentially confusing circular relationships in the ownership of bank and government debt. For example, the Irish banks covered by the government guarantee (the "covered institutions") themselves hold Irish government bonds, making them lenders to the government as well as borrowers. It seems likely that the promissory notes issued to the banks by the government are also used by the banks as collateral to borrow more under the ELA scheme. The ECB has been buying Irish bank bonds under their Securities Markets Programme. The covered institutions also hold each other's bonds, and also issue bonds to themselves. These "own use bonds" are both a liability and an asset, and in the latter capacity are used as collateral to borrow money overseas.