The economists propose that bank shareholders take some of the “hit” – a view that is widely shared – but also that bondholders do likewise.
However, these economists fail to distinguish between subordinated and senior debt, despite the fact that an attempt to resile from our commitment in respect of the latter could prejudice our capacity to continue to borrow from international markets. Who would want to lend any more to us if we repudiated the senior bonds of our banks?
A similar apparent failure to make this distinction was also a worrying feature of last weekend’s Fine Gael statements on Nama. Fortunately this confusion was clarified by Richard Bruton on this page yesterday. A similar clarification by the 46 economists would be helpful.
The passage from the 46 economists piece that Garrett is referring to summarises the approaches that have been proposed by various economists. The part about bondholders reads as follows:
Second, they propose that certain classes of bondholders also be required to accept reductions in value. It is probable that the losses of the banks are such that even eliminating all equity value would not absorb said losses. Unlike the equity, most of the bonds are in great part covered by the 2008 State guarantee. However, the vast majority of this debt matures outside the September 2010 expiry date for this guarantee.
In relation to the question raised by Garrett, the key phrase here is “certain classes of bondholders” be required to take reductions in value. Since this treatment is only recommended for “certain classes”, I take this to be an explicit statement that “senior classes” of bonds are to be left alone. The phrases “senior” and “subordinated” don’t appear in the paragraph because the piece was aimed at the general public. But, to my mind, the article didn’t “fail to distinguish” between the various classes of debt.
Either way, as a representative of the 46, I hope this can operate as the clarification requested by Garrett.