The Irish Times has an article today by Rory Gillen of Merrion Capital. Gillen takes issue with arguments raised in a recent Irish Times article by Fintan O’Toole and also, to a lesser extent, with arguments in the 46 economist piece.
There is one argument in piece that I think is worth highlighting. It relates to subordinated bond holders. The 46 guys piece makes it clear that “certain classes of bondholders” should take a hit. Gillen presents this proposal as disastrous. He says that the
argument that bond holders should also be scalped is, in my view, a very short-sighted one. The cost of Ireland’s debt would most certainly increase, further hitting the majority of mortgage holders and businesses.
In the eyes of the international community, it would also link us to such bedfellows as Argentina, Russia and Iceland. I, and surely our descendents, would rather not be stuck with that particular stigma.
Raising the spectre of Argentina, Russia and Iceland here is unfair and, funnily enough given the title of Gillen’s article, alarmist. An Irish bank defaulting on its subordinated debt is not the same as our government defaulting on its debt (Argentina, Russia) or our banking system refusing to pay up on huge amounts of foreign liabilities (Iceland). And as for the cost of “Ireland’s debt”, some highly respected sovereign bond analysts have repeatedly pointed out that a resolution of the banking crisis in a manner that eases the burden on the taxpayer will have a positive effect on market’s assessment of Irish sovereign debt.
There is the question of the guarantee. However, some of the subordinated debt is not guaranteed while the rest is only guaranteed up until September 2010. A signal that the guarantee will not be extended for this class of assets would in no way be similar to a sovereign default.
More generally, subordinated debt is, by definition, at the back of the debt queue in terms of being paid back when a business gets into trouble. Sometimes businesses default on their subordinated debt—that’s sort of the point—and this happens not just in the countries mentioned by Mr. Gillen but also in the US, the UK and every other capitalist country in the world. We will not automatically turn into Iceland if a few subordinated bond holders don’t get their money back.