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.

No need to leave it to another journalist:

1) Go to: http://www.centralbank.ie/

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’.

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?

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.

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.

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?

@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.

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.

- 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.

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.

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.

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!

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.

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

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

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

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?

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?

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.

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?”

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.

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)?