Brian Lenihan Jnr (Dublin West, Fianna Fail)

The purpose of the promissory notes issued to the institutions referred to in the Deputy's question is to enable the State to provide them with the necessary capital to meet regulatory capital requirements in a way that ensures the cash burden on the Exchequer over a period of years is manageable. The promissory note structure was designed to achieve the most efficient financing outcome for the Exchequer and corresponds to that of a conventional Government bond. Under their terms, the notes have fixed annual cash flows and a fixed redemption profile. This meets the Exchequer's objective of having certainty of cash flows. The coupon rates on the notes are set by reference to yields on government bonds at the time of issue. This feature explains the variation in the coupon rates referred to in the Deputy's question.

In order to meet their primary objective, it is essential that the notes are valued at their nominal or face value in the financial accounts of the recipient institutions. The notes must, therefore, bear interest at the appropriate market interest rate to ensure the current value of the cashflows equate to face value. Any lower coupon, set for example as suggested by the Deputy at a zero or short-term money market rate - as applies to NAMA bonds - would under the applicable accounting standards result in a fair value adjustment to the face value of the promissory notes in the financial accounts of the recipient institution. To compensate for this and to ensure the relevant institutions fully met their regulatory capital requirements, a substantial increase in the face value of the notes would have been required.

As set out in the technical note published on my Department's website on 4 November last - which accompanied the publication of the information note on the economic and budgetary outlook for the period 2011 to 2014 - the terms of the promissory notes will provide that no interest will be chargeable in 2011 and 2012. It has been confirmed with EUROSTAT that, as a result, no interest will be recorded on the promissory notes in those years, on either a cash or accrual basis. This means the general Government valance for 2011 and 2012 will be unaffected by interest payments relating to the promissory notes. A higher rate of interest will be chargeable for the remainder of the period - commencing from 2013 onwards - so that the cumulative amount of interest paid over the period of the promissory notes will remain at an average rate sufficient to allow the notes to be recorded in the institutions' balance sheets at face value, notwithstanding the zero rate of interest charged in 2011 and 2012.

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