An Audit of Irish Debt

15 September 2011


This is an audit of Irish sovereign debt Sovereign debt Government debts or debts guaranteed by the government. , 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 Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). 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 CDS
Credit Default Swaps
Credit Default Swaps are an insurance that a financial company may purchase to protect itself against non payments.
, 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 Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. , 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 Secondary market The market where institutional investors resell and purchase financial assets. Thus the secondary market is the market where already existing financial assets are traded. . 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 Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). 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 Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). on the books of the bank, enabling them to use them as collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. 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 Emergency Liquidity Assistance
Emergency funds loaned to the private banks by the Eurozone central banks.
(ELA) to the covered banks. This is a very short-term lending facility, providing liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. 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 ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
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.

An Audit of Irish Debt




8 rue Jonfosse
4000 - Liège- Belgique

00324 60 97 96 80