I I H June 2015 Mr Gavin Sheridan qavinsblog@gmail.com Re: FOI request 142/2015 Dear Mr. Sheridan, I refer to the request which you made under the Freedom of Information Act 2014 for records held by the Department of Finance in relation to: “Agendas, briefing papers for attendees, minutes, notes and any other documents related to the following Ministerial meetings: Governor Honohan, March 2, 2012 Governor Honohan, May 17, 2012” I, Finian Judge, have now made a final decision to part grant your request. The purpose of this letter is to explain that decision. This explanation has the following parts: 1. 2. 3. a schedule of all of the records covered by your request; an explanation of the relevant findings concerning the records to which access is denied, and a statement of how you can appeal this decision should you wish to do so. This letter addresses each of these three parts in turn. 1. Schedule of records A schedule is enclosed with this letter showing the documents that this body considers relevant to your request. It describes each document and refers to the sections of the FOI Act which apply to prevent release. The schedule also refers you to sections of the detailed explanation given under heading 2 below, which are relevant to the document in question. 2. Findings, particulars and reasons for decisions to deny access The sections of the Act which can apply to deny access to documents are known as its exemption provisions. Record 2 has been redacted under section 33, 36, 40 and 41 of the Freedom of Information Act 2014. Record 9 has been redacted under section 33, 40 and 41 of the Freedom of Information Act 2014. Where appropriate, the Public Interest Test has been applied to these redactions. Tithe an Rialtais Sraid Mhuirfean Uacht Baile Atha Cliath 2 Eire Fon / Tel: 353 1 676 7571 Facs / Fax: 353 1 678 9936 Glao Aitiuil / LoCall:1890 66 10 10 http://www.finance.gov ie Government Buildings Upper Merrion Street Dublin 2 Ireland An Roinn Airgeadais Departm ent of Finance 3. Rights of appeal In the event that you are unhappy with this decision, you may appeal it by writing to the Freedom of Information Unit, Department of Finance, Government Buildings, Upper Merrion Street, Dublin 2 or by e-mail to foi@finance.gov.ie. You should make your appeal within 4 weeks from the date of this notification, where a day is defined as a working day excluding the weekend and public holidays. However, the making of a late appeal may be permitted in appropriate circumstances. The appeal will involve a complete reconsideration of the matter by a more senior member of the staff of this body. Should you have any questions or concerns regarding the above, please contact me by telephone on 01 604 5838. Yours sincerely, Finian Judge Assistant Principal Tithe an Rialtais Sraid Mhuirfean Uacht Baile Atha Cliath 2 Eire Fon / Tel: 353 1 676 7571 Facs / Fax: 353?1 678 9936 Glao Aitiuil / LoCall:1890 66 10 10 http://www finance gov.ie Government Buildings Upper Merrion Street Dublin 2 Ireland FOI Request Reference: 086/2015 Schedule of Records: Summary of Decision Making: Record No. 1 2 Brief Description & Date of Record Tap and swap considerations Email with meeting request for 17 May 2012 No. of Pages 2 2 Decision: Grant/Part Grant/Refuse Grant Part Grant Basis of Refusal Section of Act N/A Section 36, Section 33(l)(d), Section 33(3)(c)(ii), Section 40(1), Section 41(l)(a) Reason for Decision N/A Contains commercially sensitive information; contains information relating to the international relations of the State; Contains information communicated in confidence; contains information that may harm the financial and economic interests of the State; Contains information that is prohibited from Public Interest Consideration (if applicable) N/A Yes 3 4 5 6 7 8 9 Email of 3 May from Sean Kinsella - Meeting with Minister Email of 3 May from Mary McKeogh - meeting with Minister Email of 16 May from Ann Nolan re letter from Governor Email of 16 May from John Cantwell re letter from Governor Tap and swap considerations Letter of 30 April 2012 from Minister Noonan to Governor Honohan Letter of 17 April 2012 from Governor Honohan to Minister Noonan 2 Grant N/A disclosure by EU law N/A 2 Grant N/A N/A N/A 1 Grant N/A N/A N/A 22 Grant N/A N/A N/A 7 1 Grant Grant N/A N/A N/A N/A N/A N/A 2 Part Grant Section 33(3)(c)(ii), Section 40(1), Section 41(l)(a) Contains information communicated in confidence; contains information that may harm the financial and economic interests of the State; Contains information that is prohibited from disclosure by EU law Yes N/A Commercially sensitive for purposes Letter dated 14?" April Summary issues The following observations could be made: 1. Steps have been taken by the Authorities in relation to reducing State support for the banking sector - reduced ELG, clarity of the policy attitude towards State support, increasing deposit levels (although at moderate rates), the introduction of unguaranteed corporate deposit taking 2. However, the banking debt overhang, and the accompanying contingent State exposure, is causing difficulty in a return to the capital market O u r'bottom line' 1. The inability of IBRC to access the ECB directly 'costs' the State (at the least, through cashflow and timing) 2. IBRC is being capitalised to high levels which is an additional cost to the State and creates trapped cash 3. The 'tap' increases our debt/GDP ratio and could affect our deficit as well what is our incentive to do this 4. If the issue is the promissory notes, is the 'swap' creating more problems on a systemic basis? Issues 1. If the portfolios are sold (in short order) what happens to the promissory notes? 2. Do the promissory notes have to be retained within IBRC? 3. Could that 'capital' be transferred to another bank/can other banks capital be sold as well? 4. What 'subsidy' is available from the EU/ECB ? Tactics Work should be done at domestic level such that, if the opportunity arises through Eurozone developments, we can have a fully developed plan. It would be far more advisable to have a plan/series of plans to present rather than hope that a plan is presented to us. Q Niamh Murtagh Subject: G overnor with M inister Start: End: Thu 17/05/2012 10:15 Thu 17/05/2012 11:00 Recurrence: (none) Organizer: M oran, John PH, Ann, Minister.doc Mary Can w e say 10.15 on the morning of the 17 th? Sean From: McKeogh Mary [mailto:Marv.McKeoah(a>centralbank.ie1 Sent: 03 May 2012 11:22 To: Kinsella, Sean Cc: Behan, Anne Subject: RE: Meeting with Minister Governor Honohan will be available on Monday 14 May (between 09:30 and 12:00) and Thursday 17 May (09:30-17:00). Please let me know if either of these dates would suit? Kind regards From: Kinsella, Sean rmailto:sean.kinsella(a)finance.qov.ie1 Sent: 02 May 2012 18:02 To: McKeogh Mary Cc: Behan, Anne Subject: Meeting with Minister Hi Mary In the context of the attached (w hich you should receive soon) you might let me have a general idea of the G overnor’s availability over the next w ee k or 2 . Thanks (2) Niamh Murtagh From: Sent: To: Cc: Subject: Attachments: Kinsella, Sean 03 May 2012 11:26 Nolan, Ann Behan, Anne; Dorgan, Eoin FW: Meeting with Minister ATT00002.txt Ann We will be in Brussels on the 14 th so 17th is only runner - would that work from your side? Sean From: McKeogh Mary [mailto:Mary.McKeogh(g)centralbank.ie] Sent: 03 May 2012 11:22 To: Kinsella, Sean Cc: Behan, Anne Subject: RE: Meeting with Minister Governor Honohan will be available on Monday 14 May (between 09:30 and 12:00) and Thursday 17 May (09:3017:00). Please let me know if either of these dates would suit? Kind regards Mary From: Kinsella, Sean [mailto:sean.kinsella@finance.gov.ie] Sent: 02 May 2012 18:02 To: McKeogh Mary Cc: Behan, Anne Subject: Meeting with Minister Hi Mary In the context of the attached (which you should receive soon) you might let me have a general idea of the Governor’s availability over the next week or 2 . Thanks Sean Attention: This e-mail is privileged and confidential. If you are not the intended recipient please delete the message and notify the sender. Any views or opinions presented are solely those o f the author. This email was scanned by Sophos and has been certified virus free with the pattern file currently in use. This however cannot guarantee that it does not contain malicious content. Tabhair aire: Ta an r-phost seo faoi phribhleid agus faoi run. Mura tusa an duine a bhi beartaithe leis an teachtaireacht seo a fhail, scrios e le do thoil agus cuir an seoltoir ar an eolas. Is leis an udar amhain aon dearcai no tuairirm a leirftear. Scanadh an r-phost seo le Sophos agus deimhm'odh go raibh se saor o vioras leis an bpatrunchomhad ata in usaid faoi lathair. Nf feidir a rathu leis seo afach nach bhfuil abhar mailiseach ann. N jam h ^ M u rta^ h From: Sent: To: Cc: Subject: Attachments: McKeogh Mary 03 May 2012 14:01 Kinsella, Sean Nolan, Ann; Behan, Anne; Fitzgerald, Margaret RE: Meeting with Minister ATT00002.txt Sean Thursday 17 May at 10:15 is now in the Governor's diary. Kind regards Mary From: Kinsella, Sean [mailto:sean.kinsella@finance.gov.ie] Sent: 03 May 2012 13:26 To: McKeogh Mary Cc: Nolan, Ann; Behan, Anne; Fitzgerald, Margaret Subject: RE: Meeting with Minister Mary Can we say 10.15 on the morning of the 17th? Sean From: McKeogh Marv rmailtoiMarv.McKeoahOicentralbank.iel Sent: 03 May 2012 11:22 To: Kinsella, Sean Cc: Behan, Anne Subject: RE: Meeting with Minister Sean Governor Honohan will be available on Monday 14 May (between 09:30 and 12:00) and Thursday 17 May (09:3017:00). Please let me know if either of these dates would suit? Kind regards Mary From: Kinsella, Sean rmailto:sean.kinsella@finance.qov.iel Sent: 02 May 2012 18:02 To: McKeogh Mary Cc: Behan, Anne Subject: Meeting with Minister Hi Mary In the context of the attached (which you should receive soon) you might let me have a general idea of the Governor’s availability over the next week or 2. Thanks Sean Attention: This e-mail is privileged and confidential. If you are not the intended recipient please delete the message and notify the sender. Any views or opinions presented are solely those o f the author. This email was scanned by Sophos and has been certified virus free with the pattern file currently in use. This however cannot guarantee that it does not contain malicious content. Tabhair aire: Ta an r-phost seo faoi phribhleid agus faoi run. Mura tusa an duine a bhi beartaithe leis an teachtaireacht seo a fhail, scrios e le do thoil agus cuir an seoltoir ar an eolas. Is leis an udar amhain aon dearcai no tuairimi a leiritear. Scanadh an r-phost seo le Sophos agus deimhmodh go raibh se saor o vioras leis an bpatrunchomhad ata in usaid faoi lathair. Ni feidir a rathu leis seo afach nach bhfuil abhar mailiseach ann. Attention: This e-mail is privileged and confidential. If you are not the intended recipient please delete the message and notify the sender. Any views or opinions presented are solely those o f the author. This email was scanned by Sophos and has been certified virus free with the pattern file currently in use. This however cannot guarantee that it does not contain malicious content. Tabhair aire: Ta an r-phost seo faoi phribhleid agus faoi run. Mura tusa an duine a bhi beartaithe leis an teachtaireacht seo a fhail, scrios e le do thoil agus cuir an seoltoir ar an eolas. Is leis an udar amhain aon dearcai no tuairimi a leiritear. Scanadh an r-phost seo le Sophos agus deimhniodh go raibh se saor o vioras leis an bpatrunchomhad ata in usaid faoi lathair. Ni feidir a rathu leis seo afach nach bhfuil abhar mailiseach ann. 3 Nlamh^Murtagh From: Sent: To: Subject: Nolan, Ann 16 May 2012 11:39 Torpey, Michael; Ryan, Neil RE: 17th April letter from Governor Maybe the Minister’s office acknowledged it. Can you guys put together a brief for tomorrow covering the tap and swap, the 40 for 40 and the more general position on funding? Thanks. From: Torpey, Michael Sent: 16 May 2012 10:21 To: Nolan, Ann Subject: 17th April letter from Governor Was copied to us - we do not appear to have issued reply from this area. Jticftaet ffoxpey., Banking Division, Department of Finance, Government Buildings, Upper Merrion Street, Dublin 2. Tel: +353-1-6045326 l Niamh Murtagh From: Sent: To: Cc: Subject: Attachments: Cantwell, John 16 May 2012 17:49 Nolan, Ann Torpey, Michael; Ryan, Neil; Buckley, Danny FW: 17th April letter from Governor 090412 40 for 40.pptx; CONFIDENTIAL_Strengthening_Irish_Programme_Overview_vO 15.ppt Ann Please find attached briefing notes on the Tap and Swap and the 40 for 40 as requested. Neil will provide you with a brief on the more general position on funding. Regards From: Nolan, Ann Sent: 16 May 2012 11:39 To: Torpey, Michael; Ryan, Neil Subject: RE: 17th April letter from Governor Maybe the Minister’s office acknowledged it. Can you guys put together a brief for tomorrow covering the tap and swap, the 40 for 40 and the more general position on funding? Thanks. From: Torpey, Michael Sent: 16 May 2012 10:21 To: Nolan, Ann Subject: 17th April letter from Governor Was copied to us - we do not appear to have issued reply from this area. M ichaet Joftpeif, Banking Division, Department of Finance, Government Buildings, Upper Merrion Street, Dublin 2. Tel: +353-1-6045326 Strengthening the Irish Programme Dublin, May 2012 4 - .. . An Roinn Airgeadais Department Of Finance Ireland's Programme: Key achievem ents through 2011 Ireland is ahead on strengthening the overall program me, the banking sector programme and the plan for IBRC Ahead on strengthening overall programme ■ Headline targets for all five quarters of EU/IMF Programme have been met. ■ Budgetary outturn for 2011 is comfortably within target following tough austerity measures since 2008 equivalent to c. 15.5% of GDP (includes budget 2012). ■ A substantial number of Programme actions - over 90 - have already been completed. ■ €17.5 billion of the total programme funding of €85 billion coming from Ireland's own resources. Ahead on banking sector programme ■ Funding requirement for bank recapitalisation was €16.5 billion, below the €24 billion PCAR total capital. ■ Reorganisation of banks completed ahead of deadlines. ■ Deleveraging ahead of schedule: Banks achieved €40.5billion versus the PLAR target of €34.8 billion. ■ ECB/ELA m onetary funding down from February 2011 peak of €153 billion to €110 billion. Eurosystem funding has fallen by €43bn since the peak in Feb. Covered banks ECB and ELA usage, €bn 20 0 bn j-__________ Rang!-" of Barcap 2011 year-end FC — t J lOObn 0 Dec Jan FebM arAprM ayJun Jul AugSep O ctNovDec Jan 2010 2011 2012 Irish usage of ECB facilities has fallen at a tim e when other Eurozone members have drawn more heavily Covered bank usage of ECB Facilities, % 19% 20% 10% Q I I I I I_____ I I ___ !____ J_____ !_____ I_____ I---------1 Jan Feb M arA p rM ayJu n Jul AugSep Oct Nov Dec Jan 2012 2011 Deleveraging targets have been exceeded Ahead on plan for IBRC (formerly Anglo Irish Bank) ■ IBRC launched the disposal of $9.2bn (gross of provisions) US loan assets in mid 20 11 . ■ By year end 2011, $7.7bn (gross) of these loans had been sold at pricing which was broadly regulatory capital neutral. This allowed very significant early repaym ent of Central Bank funding. 1 Year-to-date until November 2G11 Source: Involved banks, Central Bank of Ireland 2011 deleveraging1 of Bol, AIB, IL&P, IBRC (to Nov 11), €bn 40.5 Actual deleveraging 34.8 2011 target Context C o n te x t fo r th e 'Tap & S w a p ' re stru ctu rin g p ro p o sal ■ Ireland attaches the highest priority to the delivery of its Programme commitments. ■ Minimising disruption to social cohesion in Ireland is also very important. ■We want to stand on our own two feet by exiting the Programme when it ends in 2013. ■The measures being considered do not involve any write-off of debt (PSI). ■ From a wider euro area perspective it is essential to have a country successfully complete its Programme. ■A key objective is for the Sovereign and the banks to return to the markets as soon as possible in 2012/2013. ■To facilitate that process it would be very helpful if our existing Programme could be strengthened in a manner which has no direct cost implications for our partners. The 'Tap & Swap' proposal would improve Ireland's position Background ■ Funding support for the capitalisation of IBRC is provided by the ECB through the Central Bank of Ireland acceptance of the Promissory Notes as collateral against ELA funding. ■ Proposal being discussed at a technical level with the Troika involves two elements: - "Tap': Replacement of the existing Promissory Notes in IBRC with EFSF bonds followed by, - "Swap': An exchange of those EFSF bonds by IBRC for portfolios comprising principally residential mortgages held by Allied Irish Banks and PTSB, the banking arm of Irish Life and Permanent. Expected benefits ■ Stabilises and ensures the viability of AIB and PTSB, ■ Enhances the availability of high quality collateral in the Irish system, ■ Does not increase either current ECB funding support or Programme Support from Europe, ■ Increases the ability of banks to raise 3rd party funding to repay Eurosystem, ■ Reinforces market confidence in the stability of Eurosystem funding of the system (including IBRC), ■ Reduces the post-programme funding demands on the Government and aids M echanics of potential 'Tap & Swap' transaction: Step 1 - 'Tap' approved Step 2 - Swap Step 1 - Tap H 3F5F [n o t EFSF Bonds EFSF Bonds Loan Pro Note A ibrc EUk Funding i§ £ i EURO PEA N CEN TRAL BANKI tU RO SYSTEM Step la - EFSF and State exchange identical bonds ■ The EFSF issues par bonds (borrowing at circa 3.5% fixed coupon1) with a long dated maturity to the Irish State ■ The State issues Government instruments (lending at the same notional, coupon and maturity) to the EFSF in return - as a result this entire transaction is cash flow neutral both initially and on an ongoing basis Step lb - State State replaces pro note with the EFSF bonds ■ The State exchanges the IBRC promissory note with EFSF bonds ■ IBRC receives EFSF bonds equal to the value of the pro note on the State's balance sheet (€28.1bn) ■ Once this non cash exchange is complete, the pro note is cancelled ■ No increase in the State's debt arises from these transactions 1 Modelling assumption only, yield will depend on EFSF yield curve at issuance, a variable could also be considered If EFSF bonds w ere unavailable, Governm ent bonds could be used - but with significant shortcomings Key shortcomings of using Government bonds ■ Should no EFSF solution be feasible, Ireland could develop a variant of the 'Tap & Swap' using Government bonds ■ This variant would be superior to the status quo but would have significant shortcomings compared to the EFSF solution ■ However it also has selected advantages over an EFSF solution ■ The Government bond variant has been discussed with the Troika albeit that the EFSF solution is seen as superior Smaller reduction in direct deficit Higher total interest cost to State in case of a sale of either the bonds or the banks holding the bonds Build-up of reserves in banks which might be challenging to distribute Reduce risk of potential cannibalisation of primary issuance of Irish Government bonds Key advantages of using Government bonds Eliminates risk of perception as "second bailout" No expected capital requirements in "tap only" scenario Provision of significant positive carry to the banks 1 Depending on Audience 5 M echanics of potential 'Tap & Swap' transaction: Step 2 - 'Swap' Step 1 - n o t a p p r o v e d _____ Step 2 - Swap Tap AlBRC EFSF Bonds Loan assets AIB permanent tsb ■ IBRC transfers all (or a portion of) the EFSF bonds to AIB, ILP and/or a new bank ■ In exchange, IBRC receives low yielding loan assets of AIB (€20.0bn gross) and PTSB (€14.8bn gross) to be wound-down in IBRC ■ Pure asset swap with funding remaining as before - although AIB and PTSB will now have 'high quality' collateral Irish Authorities have a preference for longer dated EFSF bonds but the Troika propose a maturity aligned with the average duration of the existing assets Assessm ent of T a p & Swap' with the 'EFSF' replacement option vis-a-vis status quo [n o t approved Key advantages of the 'Tap & Swap' ■ Improved viability of AIB and PTSB allowing for a faster return of these banks to private ownership ■ Lower interest costs improve State deficit ■ Debt sustainability is improved - Ireland would reach the 60% debt/GDP target two years quicker (in 2038 rather than 2040) and with a debt burden €27bn lower than status quo by that time ■ Cash flow benefit as 'interest only' annual repayments means a reduction for the annual Exchequer funding requirement from €3.1bn to Cl.Obn (until repayment in 2051) ■ No 'refinancing noise' until maturity as no annual principal repayments directly to IBRC ■ Reducing both the State's Pro Note refinancing requirements and the interest cost and helping remove the 2014 funding cliff would, therefore, support the State's, and by extension the banks', prospects of returning to funding markets ______ ____ 'Tap & Swap' significantly improves viability of AIB and PTSB Status Quo 2015 Post restructuring 2015 Capital AIB Profit before taxes €1.75bn Capital PTSB Profit before taxes Maintaining the Status Quo, without initiating a restructuring, is not seen as a feasible option at this time. Information above is based on preliminary estimates €0.3bn [n o t approved Assessm ent of 'Tap & Swap' with the 'EFSF' replacement option vis-a-vis status quo Key shortcomings of the 'Tap & Swap; A stable long term funding solution for IBRC is required for the solution to be effective and is critical to ensure a return of Ireland to the capital markets Could lead to negative market and public reaction as could be perceived as a re­ opening of discussions on bank recapitalisation if upfront capital required - need for commensurate benefits and careful communications The implementation poses significant operational challenges and operational risk for the banks as transfers of individual portfolios are generally more complex, require more preparation and are higher risk than takeovers of entire banks The 'Tap & Swap' causes a need for additional capital in IBRC. This need would be considerably increased, if only the 'Tap' was implemented - in a Tap only' scenario, the requirement can be reduced if a funding cost lower than the cost of ELA is assumed in a Tap only' scenario 'Tap & Swap' considerably increases debt sustainability - leading to improved creditworthiness Status quo Replacement with EFSF bonds ----- Debt / GDP ratio target Absolute difference in debt level vs. status quo ... improves its creditworthiness The decrease in Ireland's debt / GDP ratio ... ■ Ireland's creditworthiness is improved, positioning the country for bond market re-entry in 2012 Debt / GDP ratio, % ■ In 2015, the forecast government deficit to GDP ratio would reduce from 2.9% to 2.3% ■ Ireland would reach the 60% debt to GDP target in 2037, three years quicker than in the status quo ■ By that time the debt burden would be €28bn lower 0 -50 2015 2020 2025 2030 2035 2040 2045 ASSUMPTIONS: 2051 B Refinancing risk would be reduced dram atically- only ~€lbn annual interest payment with a repayment of principal in 2051 instead of having to fund €3.1bn annual payment to IBRC ECB refinancing cost; NTMA interest cost assumptions for 2011-2015; refinancing and new issuance of all debt at 5.5% after 2015; GDP and debt figures are no DoF estim ates; LR nominal GDP growth rate is 4%; from 2015 onwards, the l/ 2 0 th rule under new fiscal compact is applied; prim ary budget surplus (i.e. excluding interest payments) is 4% of GDP 2016-2020 in d ., 3.5% 2021-2025, and 3% thereafter to 2051 Prelim inary conclusions and next steps Preliminary conclusions Reducing both the State's Promissory Note refinancing requirements and the interest cost would support the Irish State's, and by extension the banks', prospects of returning to funding markets. The proposal involves no direct cost to European partners and no net funding from the EFSF. The EFSF has Irish government risk (not IBRC risk). The proposal has no direct impact on EFSF market capacity. In order to avoid jeopardising Ireland's Programme work successfully completed to date, replacing the Pro Note with EFSF bonds (the 'Tap') to avoid a capital requirement needs to be coupled with a long term funding solution for IBRC at a lower cost than ELA. Next steps ■ Continue discussions with the Troika to further detail and agree a solution feasible both for Ireland and the Troika on 'Tap and Swap' ■ Continue planning and technical work in relation to the 'Tap & Swap' proposal and considering detailed operational issues to implement the transaction TECHNICAL ANNEX Key assum ptions related to modelling of replacement options [n o t approved All considerations assume that IBRC is kept off the State's balance sheet IBRC retains banking license General Replacement of promissory note occurs on 1st January 2013 Capital injection is financed with 5.5% bullet long-term facility. There is no capital buffer assumed in the estimated capital requirement ELA funding assumes a profit at CBI of 175bps on 80% of outstanding ELA Swap Assets transferred at book value and paid for with 'long term economic value'(LTEV) a value that assumes that at no point over the life of the portfolio additional capital is required based on an isolated view of that portfolio Asset data has been provided by the banks: Asset amortization profile, interest income, impairments, operating costs and standardized as well as IRB RWA IBRC's Minimum Regulatory capital requirement is assumed at 8% over the entire life of the portfolio Transfer of assets are assumed to be a "common control" transaction allowing for transfer at book values ■ Calculations are based on a partially outside-in model with limited capabilities (no full balance sheet, no full P&L statement, etc.) ■ Calculations are based on inputs from IBRC IBRC's updated operating plan € billion U p d a te d d e le v e ra g in g s c h e d u le forecast1, Ju ly 2011 IBRC gross customer lending For info: previous (Jan 2011) plan 38.6 40 33.3 31.2 7.3 28.3 30 20 10 28.7 I - 17.4 16.6 26.2 26.5 d 23.3 15.6 14.2 2011 12 Ireland commercial US commercial Ireland residential1 UK commercial 22.3 18.1 19.6 13.9 9.8 9.0 12.1 4.9 4.8 9.0 M ar 2011 HFS/NAMA transfers not included in Jan plan 13 14 15 4.8 2.3 2.3 1.3 1.1 .1.3. - 1.1 . 16 17 18 19 0.0 2020 Capital beyond 8% regulatory requirement, as of March 2012 2.1 1.8 2011 12 1.1 Mar 2011 2.7 13 3.5 14 4.4 15 5.4 16 6.1 17 1 Forecast not updated in operating plan due to sale process 2 Estimated figure only, based on operating plan, forecasting process on a less granular level than for commercial portfolios 6.7 18 7.3 19 7.9 2020 Updated estimates identify a capital need in IBRC following the 'Tap & Swap' Capital impact calculation highly prelim inary; € billion, assuming EFSF bonds Two key changes since January 2012 ... ... lead to a necessary capital injection into IBRC in the 'Tap & Swap' Increased provisions in IBRC Capital shortfall versus PCAR 1.2 ■ IBRC have significantly revised their provisions booked in December 2011 since January 2012 IBRC Capital injection required 1.3 Assumption of execution of Tap on year-end 2012 rather than mid-year 2012 0.8 Replacing the promissory note 6 months later increases the valuation asymmetry as IBRC compounds interest during the State's interest holiday period This leads to a larger Day-1 capital hit for IBRC1 PTSB AIB 2.0 Dependent on out­ come of other issues 1.0 including treatm ent of deferred tax, and the outcome from de-leveraging According to manage­ ment plan there would be no requirem ent to inject capital Losses could potentially be absorbed by capital allocated to remaining deleveraging 1 If the Pro Note is replaced at the State's book value, which is the current assumption 2 The capital impact calculated is highly prelim inary and, given the tight timeline available, is still based on different sets of assumptions (AIB asset data from January assuming June Swap date; PTSB asset data from M arch assuming June Swap date; IBRC capital data from March, assuming end year 'Tap' date). CONFIDENTIAL FOR DISTRIBUTION Preliminary proposal of assets to be swapped into IBRC APPROVED Overview of assets proposed to be swapped from PTSB Overview of assets proposed to be swapped from AIB i. f: I i: l)2!!3rlii 20.0 AIB Rol Tracker mortgages Long term loss making with an average contracted margin of 0.92% over ECB 14.8 . Core Portfolio Rol Residential mortgages 14-0 (of which ?4bn gross 6.0 rac er mortgages) EBS Rol Tracker mortgages Long term loss making with an average contracted margin of Republic of Ireland 108% over ECB Residential Investment 6.6 Non-core portfolio Property loans 40 AIB UK Tracker mortgages Commercial Real Estate 1.02% margin over loans 2'2 2-0 .t - Non-core portfolio I 16 "40 for 40" - Our interpretation P re lim in ary draft paper 09 M ay 2012 f j \0 An Roinn Airgeadais Department of Finance Context and objectives of this document Context and objectives of this document • This document is an initial interpretation of the Governor of the Central Bank's "40 for 40" proposals • No details of the "40 for 40" proposals have been provided, this document sets out potential interpretations and options • None of the proposals in this document have been modelled • Figures included in this paper are not base don actual numbers and are purely for illustrative purposes "40 for 40" what does it mean Illustrative b a lan ce sh e e t-T & S €bn 2012 2015 2020 2030 2040 New loan assets (from Alpha) New loan assets (from lw)ry) New collateral asset Red lending Red Pro note Red Other assets 17.9 11.1 2.4 14 2 5.7 51.4 15 3 9.8 2.4 8.4 3.9 39.8 89 4 7 2.4 00 0.9 16.9 3.4 0.8 2.4 * 6.6 1.3 -0.0 2.4 3.8 ELA Red Customer deposits Other Sub debt Capital 41.4 05 4 2 0.5 4.8 51.4 33.0 0.3 2.8 0.5 3.1 39.8 15.0 0.3 1.6 16 9 6.0 07 6.6 3.4 0.3 3.8 2052 -0.0 • -0.0 ■ As the assets are liquidated (through repaym ent or otherwise) it was assumed that ELA would reduce -0.0 - ■ Reducing ELA in this manner reduces the availability of lower cost funding to the system 0.0 -0.0 Illustrative b a lan ce sheet - T&S including "40 for 40" * €bn New loan assets (from Alpha) New loan assets (from Ivory) New collateral asset Red lending Red Pro note Red Other assets ELA Red Customer deposits Other Sub debt Capital 2012 17.9 11.1 2.4 14 2 • 5.7 51.4 2015 15.3 9.8 10.8 8.4 3.9 48 1 41.4 0.5 42 05 4.8 51 4 41.4 0.3 28 0.5 31 48 1 2020 8.9 47 28.8 0.0 0.9 43 3 41.4 0 3 1.6 43 3 ■ The table above opposite set out the run off balance sheet of IBRC assuming Tap & Swap. This proposal would work equally assuming there was no T&S 2030 3.4 0.8 37.9 42.0 2040 2052 1.3 -0.0 40.4 41.7 -0.0 -0.0 41.4 0.7 42 0 41.4 0.3 41 7 -0.0 0.0 -0.0 * it is assumed for “40 for 40" that the assets invested in have a return equal to ELA ■ The "40 for 40"assumes that, rather than repay ELA, the funds received from assets are retained and invested in new assets. The table below opposite shows this for illustrative purposes ■ These new assets could be investments in Irish Governm ent bonds, providing financing to other banks. Additionally, the liquidity could be used to pay dividends (if there were distributable reserves available) ■ Providing financing to other banks could have a capital impact as they would carry a risk weighting ■ Acquiring Government bonds could provide a needed carry trade to IBRC (currently reserves position declines to nil) Executive summary - "40 for 40" pros and cons Pros & £4 £9 The 40 for 40 would allow long term access to funding at a cost equal to ELA (currently ECB base rate (variable) plus 175bps) This funding could be used for the acquisition of Irish Government bonds or, with potentially less favourable capital implications, could be used to lend to the other Irish banks Proposal works for i) status quo, ii) “Tap” only or iii) “Tap & Swap” Assuming available distributable reserves, this would provide liquidity available to pay dividends Could immediately swap remaining promissory for long term Government paper to term out State’s funding requirements Potential to free up capital if a banking license was not necessary Cons 0 ECB governing council “non objection” is required every two weeks If a unilateral local decision was taken consideration of ramifications would be needed given considerable other ECB support Consideration would need to be given to the impact of such a proposal on any private investors investment decision. While long term funding would be welcomed, the grossing up of the balance sheet may not be. Furthermore if a carry trade is being provided (through the acquisition of Government bonds for example) we would likely need to cap the upside for investors Commercial/y sensitive for purposes Letter dated 14thApril The following observations could be made: 1. Steps have been taken by the Authorities in relation to reducing State support for the banking sector - reduced ELG, clarity of the policy attitude towards State support, increasing deposit levels (although at moderate rates), the introduction of unguaranteed corporate deposit taking 2. However, the banking debt overhang, and the accompanying contingent State exposure, i_s causing difficulty in a return to the capital market O u r'bottom line' 1. The inability of IBRC to access the ECB directly 'costs' the State (at the least, through cashflow and timing) 2. IBRC is being capitalised to high levels which is an additional cost to the State and creates trapped cash 3. The 'tap' increases our debt/GDP ratio and could affect our deficit as well what is our incentive to do this 4. If the issue is the promissory notes, is the 'swap' creating more problems on a systemic basis? Issues 1. If the portfolios are sold (in short order) what happens to the promissory notes? 2. Do the promissory notes have to be retained within IBRC? 3. Could that 'capital' be transferred to another bank/can other banks capital be sold as well? 4. What 'subsidy' is available from the EU/ECB? Tactics Work should be done at domestic level such that, if the opportunity arises through Eurozone developments, w e can have a fully developed plan. It would be far more advisable to have a plan/series of plans to present rather than hope that a plan is presented to us. Summary issues Debt sustainability State aid Competition Market Capnal Summary issues From State?s perspective Summary issues From AlB's perspective a Summary issues From ILP's perspective A n Roinn A irgeadais O ifig an Aire D epartm ent o f Finance O ffice o f the M inister Srdid Mhuirfean Uacht, Baile Atha Cliath 2, fire. Upper Merrion Street, Dublin 2 , Ireland. Teileafbn / Telephone: 353-1 6CM 5626 Facsuimhir / Facsimile: 353-1 676 1951 Glao Aitiilil / LoCall: 1890 66 10 10 http://www.finance.gov.ie Patrick Honohan G o ve rn o r Central Bank of Ireland w \ f- PO Box 559 Dam e Street Dublin 2 'iP April 2012 D ear Patrick M any thanks for yo ur letter of 17 A pril, w hich identified the need for a strategy for discussions on the fu tu re of the prom issory notes w ith the external authorities. I agree w ith the need for planning ahead to avoid recurring short term solutions each year. A coherent approach is required to achieve o ur goals. I w ould like to take up your offer o f fu rth e r discussions on this m atter and suggest that w e m eet with a sm all team of officials to develop our next steps. M y private secretary w ill be in touch to suggest a su itab le tim e and date. Yours sincerely WCHAEL NOONAN M ichael Noonan T.D M in iste r for Finance Paipear 100°'Achchursaike Printed on 100% recycled papei c>‘ Banc Ceannais nu hhir^ann Central Rank of Ireland Mr Michael Noonan T.D. Minister for Finance Department o f Finance Upper Merrion Street Dublin 2 I Ml ■ M' I i'u’i if k llonnluin ■mi 17 April 2 01 2 ii- ■ I "I , >: ■• ■i .i i i t i- h ii- v . ( . i •*, r i Dear Michael The experience of negotiating a deferral o f the end-March Promissory Note payment to IBRC was instructive as well as fruitful. As has been noted by market analysts, including (importantly) the rating :igency M ood) s. the transaction ha.-, made a modest improvement in heland's creditworthiness. Arguably more important than the direct financial gain, though, have been (i) (ii) the signal it has sent that the Irish authorities are serious about securing better terms on the banking debt and the insight the negotiations ha\e provided on the degree and dimensions o f the opposition Ireland faces in achieving a more substantial and lasting deferral o f this burden. There are implications lor lorvvard planning. It would be unwise to sim ph seek an annual repetition o f the exercise just completed to defer the 2 0 1 2 instalment. Some more permanent arrangement must be secured well before the next instalment is due in 12 months’ time. Presumubl} this can best be achieved in the context o f the discussions around the proposed I ap & Swap >cheme even though these discussions have not yet produced anything like what could be acceptable to the Irish authorities. \b o \e all. the need to pi,ice the ( 4 0 billion o f cuitud kink llmdini: ol IBRC on j .secure muUi-dceadk liatiu'unrk has not be’e n coneedeil by the >'i ’li. I his issue is .i complex one. In particular, nuiny people wrongly assume that, because ii involves a long-term bond, the tap and swap proposal would deliver sufficient long-teim funding; it does not. Indeed, although 1 I,A would be reduced considerably, after lap A. Swap. IliRC would be as heavily indebted to the Central Bank and ECB as it is todav. Therefore it would remain vulnerable to constant pressure over the coming years to accelerate the disposal o f its assets despite the difficulty of securing adequate prices. (A further shortcoming oi Tap & Swap is that ii would expose the State to a larger jum p in its measured General Government Debt if and when the threatened statistical reclassification of !HRC as part o f the Government occurs.) I lie C e n t r a l B a n k (it I r e l a n d is c o m m i t t e d t o pvoviJiiiLt ail t he M i p p o r l m u il c a n t o the* I r i sh c J ' l o n in s e c u r e ;i d e a l t h a t w o u l d e n s u r e f i n a n c i a l s t a b i l m . LUii it n o w s e e m s e v i d e n t t h a t t h e e l l o r t s o l t h e C’cnir i i l B a n k a l o n e wi l l n o t ho s u l i l c i e n i . I suspect that we may have a closing c o n c l u s i o n o n lliis c r u c i a l m a t t e r window o f opportunity to rcacii a sui i s l ' a ct or y in l i ght ol t h e i n c r e a s i n g p a s s a g e o f l i m e s i n c e t h e k e y o r i g i n a l d e c i s i o n s u c r e t a k e n h \ t h e I ' C I i in t h i s a r e a a n d d u e to t h e n e e d t o r e s o l v e m a t t e r s in l im e lor a s m o o t h p r o g r e s s i o n to m a r k e t re-entry. I w o u l d b e h a p p y t o d i s c u s s I u n i t e r w i l h v o n s o m e idea-; . , h o u t h o w s u c h a n i n i t i a t i v e c o u l d i. .. u l m . i .... » u u u u i i u Yours sin c ere h L. . : _____i.: v u n .* ! in " i n . i. u i t i n f ' v . v m I j i a t i > tu ifv ...... I I I<*< < u i v l l., ip .