Bank Debt Versus Sovereign Debt

Last night’s The Week in Politics on RTE featured an important discussion between the Minister for Finance, Brian Lenihan, and Fine Gael finance spokesman, Richard Bruton (The discussion is in the first clip on the webpage after Brian Dowling’s report).  They discussed a number of issues such as NAMA and Anglo Irish Bank.  However, to my mind, the most important discussion related to bank bond holders.

Fine Gael have proposed that the government should announce that the wholesale guarantee on bank liabilities will not be renewed beyond September 2010.  Their plan would most likely see unguaranteed subordinated debt-holders being wiped out at that point and other bond-holders being repaid in order of seniority.  (More likely, an announcement of this sort would “telescope” this process so that the banks could immediately negotiate with exposed bond-holders about paying cents on the dollar for the debt or converting some of the debt to equity, rather than waiting sixteen months.)

The Minister for Finance strongly disagrees with the Fine Gael proposal.  On The Week in Politics (about 8 minutes in) he said the following:

Richard casually mentioned there the idea that investors should take some of the sacrifices as well. I went around Europe and raised a lot of money for Ireland in the last few weeks, and investors would be horrified to know that the main opposition party in this country wants us to default on payments to them in Autumn 2010.

Bruton replied that these investors were bank investors, not state investors.  At this point the Minister made the following points:

These professional investors are the same international investors who invest in our government bonds … We need a lot of government bonds this year … If the idea is out there that Ireland, or its banks, are going to default on international investors, we as a country will not be able to fund ourselves … There is a direct link between the senior debt which is raised by the government and the senior debt that’s raised by the banks. If you start defaulting on one, inevitably it becomes harder to raise the other and your interest rates will go up and up and up.

Bruton responded that one of the reasons sovereign interest rates were so high was the concern that the state would have to pay off all of the bank bonds, so that sovereign interest rates could fall if the bank bonds were not fully paid out on.

The Minister has followed up on his comments on this important issue today.  On Newstalk this afternoon he referred to FG’s plan for bondholders to lose out as “nonsense policy” and dismissed the idea as something thought up by “theoretical economists”.   

Now I’m not a theoretical economist but I guess I’m about to be damned with this accusation because my inclination is to side with Deputy Bruton on this one.  Bonds issued by Irish banks are not the same thing as bonds issued by the Irish government.  A default by an Irish bank does not in any way have to imply that the Irish state will also default on its debt.  Ultimately, sovereign default risk will depend on the fiscal solvency of the state and this will be improved by implementing a solution to the banking crisis that minimises the cost to the taxpayer.

I guess that the most likely response to these points is going to be along the animal spirits lines—yes it doesn’t really make sense for Irish bank debt and Irish government debt to be seen as the same thing but sure that’s the way these funny international investors carry on.  I’m more inclined to reckon that international investors worry about the bottom line and so attempt to focus rationally on the factors that affect sovereign default risk. But perhaps that’s just my inner theorist winning out ….

46 replies on “Bank Debt Versus Sovereign Debt”

The problem however is that the taking on of the guarantee (bank bonds) had an immediate and profound impact on the debt costs of the state.
Anyhow, its all somewhat moot as it seems that the majority of the newly issued debt is being taken up by irish banks, so its a closed loop.

@ B Lucey

Is there any reason why this hasn’t been discussed much? I mean it seems pretty amazing that our state is dependent on the banks, which are dependent on the state. If Irish banks wouldn’t buy the debt, would other banks (i.e. ones not under some measure of Irish state control) step in and use the same ECB lines to buy our new debt? If not, then aren’t we already effectively defaulting?

Our banks seem like a ‘front’ business, where out back Mr. Lenihan runs some sort of pasta-laden racketeering operation…

Well, its being discussed a lot on, and the Times had an editorial on it last week.

It looks like there are two possible outcomes dependent on who is in power with on the surface at least FF good for bonds and FG bad for bonds. The curious thing is that an election this year is odds on. Therefore it is more likely that the FG plan will be implemented than the FF plan. Following on if you were to assume that the bond markets work with these odds as well then i got some questions.
1.What effect if any did the publication of the FG plan have on Bank Bonds.
2.Do people think that the outcome of the election next week can have much of an impact on the Bank Bonds as this has the potential to influence the odds of an election this year.

Surely it’s not too late to start breaking this ‘closed loop’.

Why not begin by considering going beyond the Fine Gael plan and scaling back the guarantee further?

As a State, why not just stand behind the ‘non-professional’ depositors (the relevant regulatory definition of a ‘professional investor’ in this instance is one with more than Euro 125k to invest) ie those with less than Euro 125,00 on deposit?

Lifting this contingent liability off the shoulders of taxpayers and back on to the equity, bond and ‘professional depositors’ where it belongs, would do immediate wonders for our sovereign credit position – contrary to the irrational expectation of our globe-trotting Finance Minister!

There are two seperate guarantees : deposits (up from 100k to infiniti) and bonds (of which there are two seperate conceptual classes, capital and working capital).
In principle, the working capital dont need a guarantee unless they are being used as a source of longterm capital (almost certain that thtis is the case). As we dont have a guarantee on shareholder capital its not clear to me why we need a guarantee on loan capital. so, despite what I said in principle, in practice we would neeed to keep the guarantee on st paper for the banks.

I am constantly amazed that there is such a lack of simple psychology in what investors accept and run from. although I am loath to admit it: the minister got spot on – that institutional investors of many types of investment/debt [stocks, bank debt, & sovereign debt] are often one in the same.

When you burn one hand of an investor, you can’t then expect the same person to lend you cash with the other, it may be two different arms but part of the same body. to deny that is ridiculous, its not theoretical economics, its standard human condition, even kids understand this.

You can’t announce in advance that there is a certain cut off date [while doubt persists] without actually creating a run which will creep in from the day the plan is announced.

Banking is a confidence game, confidence is only partly about the numbers, and when the numbers don’t stack up (as they don’t in many developed countries at the moment) then you have to create that confidence from elsewhere, and overwhelmingly this comes from the state, be it the US, UK, here or elsewhere.

Start toying with the monolith apple cart that is the debt market and you are playing with something massive, upset the somewhat happy medium [if it was strictly unhappy it would already be in failure] and you can’t just ‘undo’ it, its kind of like playing that kids game ‘operation’ but with C4.

whoever wants to be the first to take a turn – work away – hope I’m far away at the time.

Schiller talking in London last week is worth a listen: and his message is strong in that psychology matters


Not sure what you mean by “working capital” and whether it’s a distinction that’s necessary or helpful here.

ALL liabilities should be on the hook for losses — equity gets wiped first, then subordinated debt, then senior debt, then depositors. What I’m suggesting should be at least considered (by re-thinking the September decision before it’s too late!) is whether all bar a subgroup of the latter (the “non professional depositors”) take their pain, in accordance to their position in the capital structure (anyone know where inter-bank funding, for example, comes in this context?).

Why should the taxpayer be on the hook for all of these risk capital providers (who were being compensated for this risk by their “expected” return – as in all rational investor decisions)?

Here’s one possible alternative suggestion:

The government tell funders of the Irish banks on a Monday morning that their money has been frozen for a period of time (1-2 years say), with the exception of the “non-professional” depositors with savings of under E125k. Withdrawals of these smaller deposits would likely take place, which could be funded by selling the liquid assets of the banks (which I think would be more than sufficient to this task). Everyone else would just have to wait until some appointed liquidator (NAMA or whatever) sold off the assets and returned the proceeds (again, to be distributed in accordance to the capital structure).

In the meantime, no new loans would be written by these institutions, so in tandem with this the government could set up a new bank (funded from the ECB if required) to fulfill the demands of borrowers for a fixed period (say 3 years). New (and existing foreign) banks would likely set up here to satisfy the long term needs.

Of course this event may/would hurt the country in the short term. The question I’m asking is whether there are viable alternatives to the current “Nationalisation versus NAMA” choices, which may not leave the Irish state and the taxpayer of the future penalised for as far as the eye can see. I believe this may be one.

Here’s hoping there may be others to broaden this debate, before irrevocable decisions are made in all our names to be foisted on our unsuspecting children and grandchildren!

I am surprised at the reports of the Minister’s comments. I will reserve judgment until I get a chance to view it myself.

More than 30 banks have failed in the USA since the start of the year. Can we assume all their bondholders will get burnt in the orderly wind-ups? Bank of Ireland was able to buy back its own debt at a substantial discount. Does that not suggest that the international bonholders have already made their call? Other corporations’ bonds are trading at a substantial discount.

There is a total lack of clarity as to the identity and holdings of the bondholders and that lack of clarity is hard to bear for the public. Personally, I would be interested to know how many of the non-guaranteed bondholders in Anglo are Irish, how many are individuals, how many are Irish pension funds, how many are foreign pension funds and how many have bought in at a discount to par.

At the same time, I think we are all agreed that Ireland would be better off not making a test case out of itself. This is particularly the case when so much negativity about Ireland has pervaded the international press. A further complication is that the market for sovereign debt is somewhat flooded. When you are small you have to be especially attractive to compete with the big boys.

How and ever, the EU has stated that the effect on fiscal deficits must be taken into account when issuing guarantees and/or sanctioning bank rescue plans. For this reason, I would have thought the EU would support Ireland in allowing defaults on non-guaranteed bonds. If we had the EU’s support then surely we could weather the storm?

The bondholders are much like those who provided funding for leveraged funds prior to the crash of 1929. They saw low risk and good yields and they fuelled the fire. I can’t say whether wiping them out in 1929 helped anything though!

@Karl Deeter

Seems like a little bit of scaremongering going on in your post. Why should those who played an active part in creating the problem be bailed out? Why should we have confidence in a government who were cheerleaders for the building boom to deal with the banking fiasco?

The danger with enmeshing the credit-worthiness of the State and the banks is that the lowest common denominator will apply – i.e. the market will judge the State’s credit-worthiness by reference to the banks it deems too important to fail, not the other way round. We may be a while waiting to see AAA again…

“There is a total lack of clarity as to the identity and holdings of the bondholders and that lack of clarity is hard to bear for the public. Personally, I would be interested to know how many of the non-guaranteed bondholders in Anglo are Irish”

Here we go again. Why does that matter? The State is bailing out the bank’s obligations. Short of splitting the banks into foreign and domestic, and apportioning deposits and liabilities accordingly, and then making the foreign bank someone else’s problem, how are we to solely target bailout cash to domestic interests?

It doesn’t matter who those obligations are to if we want to pretend we’re a member of wider economic communities? It’s going to be far harder to raise capital in the future if domestic creditors are made whole on taxpayer money and foreign investors left holding the bag, assuming any court would find such an arrangement legal, than if everyone takes an equal hit which standard investment risk is supposed to allow for.

Obligations are obligations and if fulfilling them on an equal, if partial, basis is too much for the voters then maybe clarity is overrated. Remember, when foreign banks fail, our pension funds have money there too because the Irish market can’t soak up all the available investment cash.

@ Mark Dowling

You are missing the point of my post.
– If the bond holders are Irish then they are not the international investors which we are so wary of.
– If the bondholders bought in at a discount then they have priced in risk a lot of risk.
– If the bondholders are companies who we will not be looking to in the future then we do not need to take a bath for their sakes.

If a large proportion of bondholders are foreign investors of the type referred to by Lenihan who have been hanging tough with Ireland then it is less insidious having to pay them as it is a deal between Ireland and the rest of the world.

I am aware that all bondholders holding the same type of bond must be treated equally. I certainly make no suggestion that some bondholders should be treated differently to others based on their identity or nationality. I am simply suggest that we should have transparency. I suggested grouping people in categories because I expect that there are confidentiality considerations in identifying individual bondholders.

Good catch Karl for pointing out a deep mental lapse by our minister of finance. On his recent investment tour he thought he was making such a good impression — what was really happening was that he was being snowballed by professional investors eager to pick his (taxpayers) pocket.

He has it wrong. In my opinion does not understand financial markets that well, making such a statement. Professional investors can differentiate between bank bonds and sovereigns and will not be confused — it is our minister of finance who seems confused. Sorry to be so harsh on him (or anyone) in this public forum but sometimes it is necessary to speak clearly and directly.

@Aidan PC

I wouldn’t call it ‘scaremongering’ any more than anything else on this site is, although i would say frankly that initiating said plan does ‘scare’ me. For the sake of clarity – when you talk about ‘those who played an active part’ are you talking about banks or bond holders? I’m specifically talking about bond holders.

@Gregory Connor: I would wager that he does undersand the difference, we just don’t have a profile of ‘who is holding what’ in order to know who we can and can’t burn, and even if we did, would it mean that ‘all bond holders are created equal but some are more equal than others?’

I also saw the programme and had the same reaction as Karl. Lenihan’s line struck me as quite bizarre — as Greg says, the banks are not the state. And, Lenihan’s job is to look after taxpayers, not professional investors of whatever nationality.

Surely two key points in this discussion are that (a) the state guarantee has an explicit end date (as evidenced by the Irish banks having issued guaranteed paper with a maturity within that time period, to this supposedly myopic international investor community who are blind to legal nuance according to our Minister) and (b) subordinated debt is by definition higher risk and accordingly attracts a greater risk premium in the form of higher coupon.

Is the Minister now saying that the government is essentially backing all of the banks liabilities for an indeterminate time because the international community would never have conceived of such a thing as the risk associated with their investment resulting in possible losses? And furthermore that if an investor in a particular tranche of debt issued by one of the banks suffers a loss then the international bond trading community will equate that loss as equivalent to a default of Irish sovereign debt (or as one of the posters has indicated, they would be so aggrieved by the loss that they would not invest in other forms of Irish issuance)?

This view simply does not bear comparison with the realities of sophisticated bond markets. The international bond investment community is much more skilled in distinguishing between the merits of different bond issuers and indeed between the different classes of issuance than our hapless Minister gives it credit for.

Some observations on this subject:
Bond holders will only be capable of being called upon called upon if the bank is liquidated (and either wound down or reconstituted as a new bank, initially under State ownership), and after wiping out ordinary shareholders’ equity and preference shareholders.
There is a material difference between different types of bonds, esp between debt, permanent and term, the terms of which provide that repayment is subordinated (Permanent and Term Subordinated Debt),to the interests of senior debt holders, and senior debt, both deposits and and senior bonds.
Subordinated debt is part of regulatory capital precisely because it is available to pay senior creditors in an insolvency and is remunerated as such whereas senior debt ranks pari passu with depositors legally and is remunerated at standard interbank spreads. This is a key difference.

Holders of all types of debt, will, esp given the size of the amount outstanding, make trenchant arguements why it should be covered by a State Guarantee and indeed term subordinated debt is covered by the existing guarantee, in the event of a failure of a bank before Sept 2010.

Indeed it would be interesting to know what types of liabilities have been covered by bank guarantees provided by other governments during this crisis and what approach has been taken to this issue during previous bank crisis episodes in oher countries.

The four principal institutions to which this scenario may apply have c.20bn in outstanding subordinated debt, with Anglo alone having 5bn.
If the ultimate losses are of a scale which exceed the equity and preference capital of individual banks, then the State is foregoing cover of up to 20bn before the State Guarantee is called upon, if the resolution arrangements don’t provide for subordinated bond holders to be called upon.
My view is that each bank should be given an opportunity to try to deal with it’s own credit issues over time, similar to the views of the IMF official quoted in today’s Independent. If that happens successfully there will have been no direct cost to the State arising from the application of the Guarantee to that bank and the 25% shareholding held thro warrants, together with the preference share dividends will result in more than fair compensation to the State for the Guarantee.
If it becomes obvious that the prevailing equity capital of individual banks, including additional capital which can be generated thro asset disposals,
retained earning or other private mechanisms, is not sufficient to deal with credit write offs, at any given point of time, then there is a strong case for the resolution arrangements for that bank to result in the subordinated debt being called upon.

@ Karl Deeter
“Start toying with the monolith apple cart that is the debt market and you are playing with something massive, upset the somewhat happy medium [if it was strictly unhappy it would already be in failure] and you can’t just ‘undo’ it, its kind of like playing that kids game ‘operation’ but with C4.”
Hardly the best frame of mind when dealing with professional investors, especially if you are the Minister for Finance who is charged with protecting the taxpayers of a sovereign country.

Some bondholders and banks were exceedingly active in buying and selling debt in the boom years. It takes two to tango! They were both happy to take the commissions and bonuses in the good years .I repeat “Why should those who played an active part in creating the problem be bailed out?”

I think Lenihan is being completely fooled by these international bond holders IMO or he is telling us what he wants us to believe.

Why all of a sudden would professional bond investors assume that the state will always bail them you?

I also don’t understand the logic that explains why an investor would prefer to lend to a state that has bailed out bond holders to the tune of €50B but now has €50B in additional debt that they can’t afford to repay. Of course existing lenders will say they wouldn’t continue to lend but the reality is they or new investors would if the risks compensated them for the returns. And a country that has just spent €50B making good bond investors is a much worse risk than a country that hasn’t.

@aidan pc: Some bondholders and banks were exceedingly active in buying and selling debt in the boom years.”

I guess we should purge everybody who dared to invest in anything! lol…
bondholders don’t earn commissions, i think you are blurring the lines on this one.

Sadly, protecting the taxpayer may mean paying a high price in terms of sacrificed value, and giving the market what it wants. it is with absolute sincerity that I would say the aims of the state, banks and taxpayer are not in alignment, they should be, that would be fair, but they aren’t.

@dreaded estate: what effect do you feel a bond failure would have on the market? just to have an idea of where you think it might bring us?

@karl deeter
I think initially the market will react negatively but with the ability to effectively borrow from the ECB the state will we able to get through this first storm.

But after the initial shock the credit worthiness of the country will be vastly improved and we will be able to borrow at better rates.

The cost of bailing out all bond holders is more than €50B, so while I do accept their are some negative consequences of letting the bond holders take their losses they don’t come close to outweighing the benefits of having €50B less in borrowing!

Do you think the cost of letting the bond holder take the losses from the risks they were willing to take will cost the state more than €50B?

@dreaded estate: you have jumped right into the end game with only the first line dedicated to what might happen, ‘adverse at first with sunny weather from there on in’… sorry that doesn’t cut it.

No knock on effects? No adverse reaction in other non-related areas? Do you really think it would be that simple?

I’m not denying that there will be negative consequencs but I fairly sure they won’t amount to €50B.

OK, what do you think are the negative consequences and how much do you think they will cost us?

If the minister is so concerned with the dreaded ‘default’ word, then just create uncertainty and buy up the long dated bonds at a steep discount.

I have to agree with dreaded estate. As I said in other postings. I am not denying there will be negative effects but will they come to 50 billion? or whatever the massive end figure turns out to be.
I also dont think that the negative effects of annoying powerful investors will be as bad as karl Deiter believes.
I do however think that they are a very powerfull lobby and governments never rarely allow them to take a hit. However there are exceptions.
Russia defaulted in the 90’s
UK defaulted after the war. Bono’s cancel the debt for African country campaigns.There are lots of examples.
New investors emerge all the time and they have short memories when it comes to seein their next opertunity.

Thanks Sarah
I read Michael Sommers letter too and was about to ask Brien to clarify as well.

One distant historical comparison worth harking back to (in addition to Argentina, Russia, etc) is Iceland.

A “right-thinking” prime minister guaranteed the liabilities of the countries 3rd largest bank (which was unfortunately bigger than the State).

It didn’t work, the other banks had to be guaranteed and the international markets then (correctly) confused the Icelandic Sovereign with the country’s banks and the country was literally wiped out.

Sorry for the ironic tone – the Fine Gael position is a hard road but a no brainer.

Remember Iceland…..where have I heard that before?

The identity of the bondholders is interesting. As I have said before.

Why are we seriously treating anything that comes out of the mouth of Mr Lenihan et al?

NaMa will fail, as will the banks behind it.

What derivative transactions still exist in relation to the Irish banks and business entities operating in Ireland?

What will happen when these come due?

As Al Jolson said, you ain’t seen nuthin’ yet!

Politicians are the only people in the world who create problems and then campaign against them.

Is it possible to make a reasonable estimate, in euro, of the value to the Irish economy of the goodwill of the bondholders?

Is it possible to make a reasonable estimate of the value to the Irish economy of rescuing the banks as opposed to starting again with the bits left over?

Maybe I’m missing something, but these look to me like questions that should be at the head of the queue for discussion.

I think the scaremongering is largely against nama, the RTC set up in the US in the early 90’s had all the same hype ‘it will cost half a trillion’ etc. etc. and there were graphs, charts, opinions, reasons the whole economy would collapse because of it etc. (bearing in mind this was to deal with the closure of over 700 banks) and in the end it didn’t cost anywhere near that! it was less than a fifth of that amount as I recall, done and dusted in 6 years.

If the same held true now then the situation could be set right for far less than 50bn.

The real problem now isn’t what form the AMC takes, its that we get something up and running to restore some semblance of confidence, at least if there is the widespread belief that something is being done then it beats the deck chair shuffle arguments we are stuck in at the moment. FG plan/FF plan… is that really what it boils down to? Rather I would say that getting started one something and refining it as it proceeds that is more important.

If a recovery specialist were appointed to a set of companies in the sort of situation Ireland and its banks are in now, he would:

– figure out how much cashflow he could generate, moving forward to pay down debt

– figure out how much the whole set of companies owed and to whom and under what conditions

– make sure he had the moral and legal authority he needed to negotiate with creditors

– figure out where he stood legally and strategically (i.e., which creditors were the greatest threat to him) and figure out what the creditors’ priorities were (do they want to settle now, or would they rather defer)

– offer a coherent repayment plan for all the creditors, which would take into account the need for future funding and the need to maintain confidence in the business.

When the process works well, everybody gives a little (or a lot) in order to maximize their return overall. Generally, all the parties want to find a deal where the whole edifice doesn’t collapse and as much value as possible is retained.

The government isn’t really dealing with the recovery in this way as yet. Maybe it feels the situation is not this grave and that it can turn the situation around without engaging in negotiations with the various parties? That is fair enough, but if things take a turn for the worse later, then the government will find itself entirely to blame for not facing up to the problems at this point and calling everybody in.

The Government must understand its responsibilities to the rest of the EU and the Eurozone and must do nothing without their assent. The Government must not make itself a test case no matter how innovative or inspired the plan seems. Similarly, the Minister should not be saying that certain bondholders will be repaid if this has not been sanctioned by the EU.

I suggest that it is implicitly sanctioned by the EU in the case of Institutions which are deemed of systemic importance (which institutions will not be allowed to fail according to the EU and/or the State). I suggest that such a statement it is implicitly prohibited by the EU in respect of institutions which are not systemic and are not too large to fail.

I expect that the Minister is aware of this and is sticking to the plan for EU-wide recovery and the preservation of the common market.

@Sarah C
Sarah : Dr Somers in the times merely reiterated the list of primary dealers ; if the primary dealers WERENT taking up the debt issues that would be a story. The real question is on whose behalf were they purchasing.

@Willie S
Willie : you state “If it becomes obvious that the prevailing equity capital of individual banks, is not sufficient to deal with credit write offs, at any given point of time, then there is a strong case for the resolution arrangements for that bank to result in the subordinated debt being called upon.” Agree completely – part of the problem I think is that the complexity of the capital structures of financial institutions is such that people get honestly confused, esp when we have most, but not all, of one flavour covered by guarantees.

@ Joe
Iceland indeed but Iceland wasnt in the Euro. If we were to go the same route as them we would HAVE to be rescued.

Thanks for the information Brian
So what I think you seem to be saying is that primary dealers are to a great extent purchasing government debt on behalf of Irish banks.

This are probobly a very stupid questions but I am new to this stuff so I have to ask.
Why are Irish banks buying government bonds when they just recieved 7 billion plus (AIB want another 1.5 billion and anglo want some too) in government loans?
Was it part of the deal? Was it written in to the deal?

What kind of interest rates were put on the 7 billion +
Is the rate less than the return on the bonds?

The Minister said John Corrigan of NTMA had made it clear that there is a direct link between senior debt raised by the Government and senior debt raised by the banks. Do all of the unguaranteed bonds constitute senior debt??

The Minister made the point strongly that FG and Labour’s solutions have not been tried anywhere. It is clear he is notwilling to make a test case out of Ireland. It is also understandable that he will not make any noises about possible bank bond defaults without the backing of the EU.

There’s no need to default on anything.

Antoin sums the situation up perfectly above.

You get the information you need, inform the interested parties in a transparent manner, put them all in a room and negotiate.

[…] who are buying Irish government bonds and the monetizing these with the European Central Bank! The Irish Economy Blog Archive Bank Debt Versus Sovereign Debt __________________ My blog:- exposing government, […]

Some observations:

1.The Irish banks purchased Irish Sovereign Bonds by the banks and then lodged them with the ECB at a discount in exchange for cash.
2.The Banks deposits are depleted by the amount of the discount.

3.It is the FF government who gains by getting money indirectly from the ECB (getting it directly violates the Maastricht Treaty) to pay social welfare etc. This is essentially Quantative Easing by the ECB.
4.I think 55% of one recent Bond issue went to Irish Investors(Banks).
In 1998 national debt was 80% owned by Irish investors,20% by foreign investors .
Since our entrance to the EMU in 1998 the composition of national debt has reversed onto a mirror image of itself.
The Primary Dealers (mentioned by Somers in the IT letter) would have been acutely aware that something strange was going on if they were nt forewarned by the government because the investor profile of bids for Sovereign Bonds had changed so drastically.
5.The proposal under NAMA to exchange toxic assets for Sovereign bonds and then to exhcange these for cash at discount in the ECB is if you like Quantative Diseasing.
I say Quantative Diseasing because now two sovereign entities (The Irish State and EU) now share liabilty for the toxic assets of the Irish banks.
Furthermore the Irish State has guaranteed the Banks Bond Holders.

6.This transfer of risk from the banks bond holders to the Irish state and the vicarious transfer of Irish sovereign default risk to the EU (through its holding Irish sovereign bonds) is exactly the delivery mechanism used by CDO’s, mortgage backed securities etc that lead to the credit crunch.

7.The theory behind CDO’s etc was that spreading the risk over several sovereign nations and through several financial entities diminished that risk.The opposite proved to be the case.

8.This is what has happened.All the risks of default are now carried by the Irish State and the EU.

What happens if Nationalisation has to happen? How can EU debt be nationalised?.
The discount given to the banks for Irish sovereign bonds is de facto the rate of exchange for the Irish euro.If there is a crash in Irish bond prices ( a distinct possibility in the USA for US Treasuries at the moment) does this not imply a devaluation in the Irish ‘Euro’ as the assets held by the ECB have crashed in price?

9.How will the secondary market In Irish Bonds react to this PONZI scheme?
Will there be a buyers strike by foreign investors in Irish Bonds when they twig the FF government is using insolvent banks as proxy to raise cash to pay Dole payments in Ireland?
How far will the ECB go to bankroll the FF govt.?Is it to get the Lisbon treaty over the line next Autumn?
As there is no productive use of this debt build up what is the end game?

hmmm so it looks like some determined journalist is going to have to chase Somers and find out on whose behalf the dealers were dealing. Marc – off you go!!!


No need to leave it to another journalist:

1) Go to:

2) Statistics

3) Credit Money and Banking Statistics

4) Latest Monthly Statistics

5) Table C3: Credit Institutions: Aggregate Balance Sheet

6) Holdings of securities – Section 6.2 – Issued by general government – Euro 5.389 bln

Repeat the exercise in the ‘Archive’ from step 3 above, and you’ll see the same figure for October 2008 is just Euro 530 mln.

In plainer english, since the government effectively rescued the Irish ‘covered’ banks with the bank guarantee, they have (miraculously?)seen fit to increase their holdings of Irish Sovereign Bonds/loans to that government by a multiple of 10.

They are likely being enabled to do this/pay for the bonds by accessing the Euro cash from the ECB using said bonds as collateral (as confirmed by the good Doctor from the NTMA in both his recent testimony to the PAC and recent letter to your esteemed employer).

To me, at least the following crucial and to my mind insufficiently aired questions arise from this ‘situation’:

1) Having access to such a facility, why should any government deal decisively with its fiscal deficit, and not just leave the ‘tab’ to the taxpayer of the future?

2) Why is Frankfurt (Berlin) allowing Dublin this facility?

3) Has this facility any relevance to the NAMA vs. Nationalisation debate?

Are our leaders learning anything about the dangers of supressing ‘the truth’ in its dealings with the Irish Public?

To have to ask this question in this week, of all weeks, is beyond ‘funny’.

to answer your questions
1 – they shouldnt
2 – coz its an easy way to keep us solvent
3 – so long as theres a “private” element, this can go on. Nationalise and its not an option

@Sarah and Mark

Is there any chance you guys could send joe loobys mail above in a memo to the economics editors of the national media.
This matter needs to be editorialised in the next couple of days in the national interest. The vast majority of Irish people are not aware of this.

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