Financial Measures (Miscellaneous Provisions) Bill 2009

Thanks to Joan Burton for drawing attention to this bill, which was published on Friday.  It hasn’t received any media attention as far as I can tell.  However, despite its dreary name, it has some important stuff in it.  Among other things, it proposes an extension of the bank liability guarantee.

Section 6(3) of the Credit Institutions Support Act of 2008 had been worded as follows:

(3) Financial support shall not be provided under this section for any period beyond 29 September 2010, and any financial support provided under this section shall not continue beyond that date.

 The new bill proposes replacing this with:

(3) Financial support provided under this section shall not continue beyond—

(a) 29 September 2010, or

(b) a later date specified by the Minister by order.

(3A) The Minister may specify a date under subsection (b) if and only if—

(a) he or she is satisfied, after consulting the Governor and the Regulatory Authority, that the circumstances set out in section 2 exist and are likely to continue to exist until the date to be specified, and

(b) he or she is satisfied that it is necessary in the public interest that assistance continue to be provided under this section until that date.

(3B) The Minister may specify by order a period or periods during which credit institutions may incur borrowings, liabilities and obligations in respect of which financial support may be provided under this section.

My reaction to this proposal is that this (effective) announcement of the extension of the bank guarantee is a bad idea.  Even if some class of extension of the guarantee is deemed appropriate, I would have thought it more appropriate for it to be explicitly more limited in scale than the original guarantee, so as not to include subordinated debt holders. 

By announcing that this almost-blanket guarantee is being extended (which is my reading of this—though I’m happy to be corrected on this if I’m wrong)  the government will end up bidding up the prices of the subordinated debt on the open market.  The ability to buy back subordinated debt at low prices — because their weak capital position could lead to extension and\or default on these bonds — has been one of the few things that has allowed the banks to improve their core capital position without government help.  So it seems somewhat counter-productive to their own strategy for the government to be encouraging certain classes of subdebt holders to believe they’re definitely going to get their money back.

The temporary guarantee was supposed to save a well-capitalised banking system from a temporary liquidity problem.  Now we clearly have an under-capitalised (and perhaps insolvent) banking system that is supposed to fixed by the NAMA-and-recapitalise solution.  One interpretation of this extension of the guarantee is that, even post-NAMA, the government may not have recapitalised the banks properly and that the drip-feed of state support won’t necessarily end with the NAMA process.

10 replies on “Financial Measures (Miscellaneous Provisions) Bill 2009”

Karl, I’m surprised you resisted the temptation to say any extension wouldn’t be necessary if the banks were nationalised.

The absence of a long term strategy for the banking system is worrying. In my opinion the Irish banks failed as they can’t survive without state support. It doesn’t seem clever to introduce Nama or extend the guarantee without a review of what went wrong and measures to ensure a more robust system in the future.

Seems like an awful lot of power to give a Minister via a SI, I wonder is it even constitutional…

The bill was noticed in the Irish Times, but not this aspect of it, which also passed me by. However, given that the original 2008 legislation does not specify which liabilities of banks are to be covered (these are specified by Ministerial Order) I would not recommend to holders of subdebt that they should take too much comfort from this.

One would have thought that the imminent end of the guarantee would motivate the banks to satisfy the market that they had indeed put all their dodgy assets in NAMA and were healthy and credit-worthy again.

One would also have thought that the legislation to permit the extension of the guarantee should only be brought when it was clear that such an extension was necessary, thereby allowing some Dail scrutiny of such a momentous decision.


It’s important to highlight this neatly buried amendment to the Credit Institutions Support Act and full credit to Deputy Burton for spotting it. But it would make sense to stand back briefly and examine the political context. The political strategy of the Government is to sweat it out until 2012 and all tactics are political in intent to support the successful implementation of this strategy. There is no long term strategy for the financial system (agree with Ahura Mazda); nor is there a long term strategy for the economy. On the financial front, as Brian Lucey has highlighted succinctly in the discussion of his IT piece on Anglo Irish, the Government seems to have the ECB over a barrel on the threat to the Euro and, as a result, is counting on indefinite support of the Irish banking system. On the economic front, all we have are the “Smart Economy”, chock-full of aspirations and good intentions. and some fiscal projections, based on wishes and prayers, but couched in a manner to satisfy the European Commission.

The Government doesn’t want to be tied into a strategy in these areas; it wants maximum tactical flexibility to deal unhindered with events as they arise so as to implement the over-riding political strategy. This attempt to grant the Minister unfettered power to change the coverage and duration of the BGS is entirely consistent with this approach.

The Government is viewing the June local and European elections as the nadir of its support and the near certainty of this being replicated if a general election were forced is guaranteed to maintain Dail support. It’s the “hangover phenomenon”; the rest of its term of government can only get better. The Greens will hang in even more determinedly than FF, as they will need the full five years of government to establish difficult-to-change legislative foundations for their green fantasies. Much as the opposition parties might hope that the upcoming review of the programme of government is a cover for an orderly Green retreat from Government, it is more likely to embed more elaborate green fantasies that the Greens can administer as a tonic to their battered troops on the ground.

Most Dail deputies have neither the financial nor economic literacy to fully comprehend the import of the bills they are being whipped to pass, but fear of electoral annihilation is the most effective means of ensuring discipline. However, the Government doesn’t want to whip its battered and uncomprehending troops through the voting lobbies too often, so, to the greatest extent possible, Government decisions will be implemented via SIs.

Is this constitutional (as raised by Andrew)? Probably border-line. But it would be a brave President, as the third house of Oireachtas, who would refer Government legislation, dealing with the impact of this financial and economic crisis and already passed by the other two houses, to the Supreme Court.

We might as well face it. We have an elected dictatorship. It is a dictatorship in that the Government is pursuing policies for which it has not received a democratic mandate and there is no effective means of holding it to account. There is nothing the opposition parties, the media, this blog or anyone else can do to exercise restraint on the actions of the Government.

I’ve sounded off previously on what needs to be done to avoid this happening in the future, but, for now, it’s probably over to the political economists and the political scientists.

If yesterday’s Irish Times is correct (and if I’ve understood it correctly), the buyback of subordinated debt by AIB will be at 50 to 67 cents for paper trading at 35 to 45 cents AND a coupon of 12.5% will be paid on the new debt. 12.5%!!

Nothing that the government / zombie banks do should elicit the least surprise (including the above extension of the guarantee that substantially got our country into this mess), they are turning in the wind and have no clear strategy apart from taking out a mortgage equivalent to 350,000 average priced Irish homes (aka NAMA).

Only a clear and transparent discussion with all stakeholders involving:
1) A near total wipeout of ordinary shareholders,
2) A token (circa 20%) interest in ordinary equity for the Irish State in return for the 7 billion euros it threw away,
3) Substantial debt for equity swaps by sub debt holders with cash out not greater than 20 to 30% of nominal value
4) A significant haircut for senior bond holders, with a significant share of the banks’ equity (1/3 to 1/2) being given to them in exchange for their haircut has any chance whatsoever of getting us out of this mess.

An independent investment bank (being one without a balance sheet interest in equity and debt of commercial banks, such as Lazard I believe) could do a transaction like this on behalf of the state with extreme ease, rather than allow the current clowns bumble in their respective corners.

I’ve stopped posting in the last week as I’ve genuinely started to despair. I think Karl’s posting has the enormous merit of showing us that we must all keep paying attention, they really can keep digging.

@ Paul Hunt.

Agree 100% with you analysis.
Government action is 100% political – after 12 years in office, where they just spent the money when they had it, throwing money at problems, they have no way of dealing with their catastrophe.

The cynical burying of the extension of the guarantee, a matter of generational importance, just shows the depths of their arrogance.

However, in the autumn they face irreconcilable choices to put together a budget for 2010. Welfare or public service pay. And that is when, for a year now I have been forecasting they will collapse.

Is the issue here that NAMA cannot be implemented in sufficient time to allow the banks to rollover debt beyond the end of the guarantee?

If the guarantee ends in Sept 2010 then when is the next rollover that will seek to go beyond that date? If, being arbitrary, such a rollover was necessary 6 months prior to Sept 2010 then the banks would need to have transferred their assets to NAMA and have been recapitalised prior to March 2010 in order to secure a rollover without the State guarantee.

I expect that a full implementation of NAMA is not achievable by March 2010 (an admittedly arbitrary date). In those circumstances a temporary extension of the guarantee in respect of new shorter term bonds (i.e., still excluding pre-exisiting non-guaranteed bonds) will be required.

A question arises though as to how we can buy back the subordinated bonds at a steep discount if the existence of the banks is so secure at that stage. After the next harsh budget and the extension of the guarantee the risk of default will have to reduce in relation to BoI and AIB. Accordingly, they need to buy in their non-guaranteed bonds sooner rather than later.

In relation to Anglo, one suspects that once the bank has been reduced down to a non-systemic size and the crisis has passed then the Anglo will be able to look its non-guaranteed bond-holders in the eye and tell them it’s time to talk turkey because the State can let them fail and will have a political motivation to do so.

@Joan Burton
If you are reading these comments, Can you not get on the RTE news to let people know about this? Surely FG Would want this made public as well?

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