Garrett Fitzgerald and Senior Bonds

In his column in yesterday’s Irish Times, Garrett FitzGerald wrote the following about the article signed by 46 economists:

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.

39 replies on “Garrett Fitzgerald and Senior Bonds”

Am I right in suggesting then that all senior bondholders who lend to any company in Ireland will in future be guaranteed by the state for fear it will prejudice the State from borrowing in the future.

If this is the case then no company should be allowed to issue senior bonds without government approval as the state has in effect become guarantor.

Otherwise we the taxpayer are going to end up paying out for every badly run large corporate who gets into trouble.

Garret Fitzgerald also leaves it ambiguous as to whether subordinated bondholders should face full losses. One reading of his article is that the only issue is whether senior bondholders should be protected. Looking at the bulk of critical NAMA commentary, most of it (though there are certainly exceptions) accepts that senior bondholders should not face losses even it requires government intervention. Karl himself has certainly been educating people on the distinction between these classes including through lengthy comments and posts here.

As an “invited non-signatory” I have to confess I am still trying from a non-expert position to understand the implications of full realisation of losses on behalf of subordinated bondholders and more debate on this key issue seems neccesary to me. To some extent, Dr. Fitzgerald’s article may even lend steam to the view that these investors should face far greater losses than would be likely under NAMA. Almost all the attacks on people who have come out against NAMA rest on some version of the argument that “ivory tower” economists do not have sufficient information on the real-world market consequences of the main bondholders in Irish banks facing substantial losses. Karl has been by far the most lucid in pointing out that many of the implications of this are being overplayed. Others have made the point that this aspect of NAMA may even harm Ireland’s financial credibility abroad, not to mention the moral hazard aspects that it introduces.

One element of the upcoming debate should involve a far more convincing attempt on behalf of the government to motivate the protection of investors who explicitly entered into a risk-return arrangement with a private company. The Irish taxpayer didn’t sign anything to say it would step in to help them and the unfairness of such a move would certainly drive most people to want to oppose NAMA in the form most currently discussed. However, if Minister Lenihan’s point about international credibility is correct, then it should be drawn out further and given a proper hearing.

@Liam D
Dont get too hung on the subbies. Concentrate on gaining your understanding of the basics. Frankly, the subbies are smallish in value. For me its not the few billion we might save from them as money, its the principle of the thing.

@ Liam Delaney

“The Irish taxpayer didn’t sign anything to say it would step in to help them and the unfairness of such a move would certainly drive most people to want to oppose NAMA in the form most currently discussed.”

Totally agree.

Given the €90bn price tag on NAMA it is not surprising that fairness is a very important consideration for most people in the way the banking crisis will be sorted out. And transparency. And competence. And ……

Given the actions of the main party in the present government in stoking up the debt driven property boom and the arrogant way they have tried to push their NAMA proposal (and the initial TINA approach) I believe they have lost the trust of the citizens of Ireland to strike a fair deal on its behalf.

Brian – my understanding of the amounts of the money involved in that they are by no means small. Also, if by principles you mean principles surrounding issues such as moral hazard, international financial reputation and so on, then yes it is the principles. I am confused by your comment to be honest Brian. This issue seems a perfectly legitimate and unresolved concern in this debate.

I could see some wanting to portray the Gang of 46 as part of a kind of malicious anti-bank, anti investor ivory tower conspiracy. Yet, like Garrett, I’m sure that all the signatories would love to see the investors get their monies back. Cash, however, is likely to prove far scarcer in 2010 than the government would like to admit.

And like Alan Ahearne brilliantly foresaw in 2007 … “you see, when housing markets go bad, lots of money is lost. Be it homeowners, property investors, developers, banks, and taxpayers, someone has to take the hit” (16 Sep 2007, Sunday Independent) (Alan left out from this list, not just the sub, but also the senior bond holders, along with the social welfare recipients, etc).

Alan also wrote, “The Japanese wasted a decade-and-a-half arguing over how to allocate the losses, and their economy stagnated in the meantime. Let’s hope we don’t do that.” Ireland has lost a year now, almost. And looks like losing more time, unless there is a dramatic change in policy.

There is one important assumption that I would make at this stage… (and implicit in some of the anti NAMA talk) that unfortunately the outlook for the economy and public finances offers not the slightest room to show generosity to the rich, to pamper the fortuned. Not if a very substantial and forced macro and/or political adjustment is to be avoided in the future. I am afraid that the penny has not quite dropped, neither for the government, the press nor the public, on this score.

The government it seems has a working hypothesis of a deficit of some €20bn next year. Let’s suppose so. That still works out at nearly €10,000 per employee per annum. No country, ever, has achieved such a feat two years in a row.
And at the same time, this pro-rich, pro-investor government is adding heavily to the state’s future contingent liabilities, with NAMA. And the same government seems to shut the door on extensive and immediate hikes in taxes, even though Irish tax rates and the Irish tax base are all very low in relative terms.

You’d want to be wildly optimistic to believe that this coup can be pulled off, without the forced-feeding of far tougher medicine at some stage.
Little surprise than to see Irish government bonds are still trading cheaper than A-rated Greece. And the further out the yield curve you go, the more Ireland cheapens to Greece. Yikes!
And the government wants us to believe that NAMA will help restore international investor confidence in Irish sovereign debt? If that were really the case, the medicine has not worked so far.

Of course, for banks and many bank investors, government policy has worked brilliantly. The performance of bank debt has been magnificent over the past few months (largely helped of course by optimism that the worst is over for the global economy).

Yet as far as good policy making is concerned, most economists would agree that cancerous banks not to be dealt with very quickly.
“Japan’s biggest problem was that they attempted to sweep the consequences of the housing bust under the carpet”, wrote Alan Ahearne.

NAMA will be seen to work well by international sovereign investors when it deals effectively with the cost of bank liabilities – not over the next 10 or 20 years – but when the costs are taken on the chin.
That is when international credibility will be truly restored. We can look forward to Irish government bonds richening heavily, and trading once again in line with their ratings (and at richer levels than the likes of Greece or Italy too).

Foreign investors *in Irish sovereign debt* share much the same interest as the Irish taxpayer. They want to see the government extricate itself from liability for the banks. At the same time, they need to see sharp cuts in the public deficit, and a banking that works (even if that means, inter alia, flogging off the branch networks).

So if it is credibility of the sovereign you are talking about (the government loves to fudge this notion by the way) then we need penny pinching policies (more on the lines FG propose).
If instead you want to be everybody’s best friend (the quintessential trait of the Irishman in foreign company for me), and you want to try to keep everybody happy (somewhat), at the risk of sinking the whole boat, … than sure, dole out money like there is no tomorrow (or as if on tap from the ECB ad vitam eternam).

These notions are hardly very difficult to understand, are they? Even for those outside the ivory tower? Even for non-economists?
And yet the press – mostly – assure the public there is no alternative.
At the same time the political left ineptly goes on about tired old issues such as nationalisation, rather than highlighting the obvious conflict of interests, and credible policy choices.
And meanwhile, the public looks ever more like sheep on the way to the slaughterhouse, Wednesday 16 September.


The most amazing part of your piece is that you did not state one thing about “cutting” Government expenditure to reduce the 20 Billion euro Government Deficit. If this Government cannot see that we cannot afford 375,000 Civil and Public Servants and related Rolls Royce pensions for themselves and related parties well sorry there is no future for this country. Every business in this country is being devastated by staff cuts but it appears that the Government does not have to do the same.

I would love to see a detailed analysis of our entire banking liabilities.

What is left in shareholders equity, subordinated bonds, senior debt at every Tier of the corporate structure so that we can see exactly where the losses could be shared.

Ciarán O’Hagan
I completely agree. The press are part of the chorus that promoted excessive credit and they gain by way of advertizing revenue. They are by no means independent. Why did they not cover the likelihood of a depression? No bad news it affects revenue!

They are dealing, as with the banks, in other peoples’ money.
When those people make it clear that they do not want a generation to pay for this, they talk down to them. Us.
They are only accountable when voters vote.
They seem to want to lose this Lisbon vote too!

Speaking as a self-confessed subie obsessive, the subie amount is a moving target as the banks have exchanged (or if you wish used some of the money we gave them to partially bail-out subies) some debt to realise a book profit. Included in that were our friends in Anglo Irish bank – surely the best example ever of a book profit in a nationalised bank being at the expense of real money put into it by the taxpayer.

The current amount is about 10 billion, which even in this calamity is not small beer. None of the subie debt is due to be repaid during the guarantee period. Some is undated (perpetual).

Sean Fitzpatrick was(is?) a noted holder of Anglo Irish Bank subordinated bonds.

@Garret FitzG.

We wont run out of cash in the time it takes to have a general election, put a new government in place and get ABNAMA (anything but NAMA) in place.

NTMA runs large cash balances, so while it has a rolling program of raising money, we can afford to sit on our hands in the short term.

Of course his whole argument is deeply flawed.
This is surely a time where the wider international financial community, though they operate to the mantra that past performance is no guarantee of future performance, must at stage however believe that past ineptitude is a guarantee of future ineptitude. A new relatively inexperienced but competent government is less of a risk than the present government.

And given that the difference in cost between NAMA and FG policy is at least 10 billion (by wiping out subies and shareholders), I think we must be absolutely barking mad to continue with NAMA.

Bring on the IMF – time to clear-out the stables – completely and utterly – a 2nd.Republic is required with political,social,fiscal and financial integrity and accountability as its ore value….

Morning Ireland: Mark McSherry FF Senator – has GFitz, IMF and OECD supporting NAMA.

Thats the same chap who is
a) to interrogate the minister today on the details of NAMA and
b) is the man behind this

Great to see that the Seanad can continue its fierce tradition of unbiased, independent analysis….

So according to GF – senior bondholders – lenders earning presumably reasonable returns on their ‘investment’ – must be protected at all costs – so no risk to these lenders at all – only positive returns – we’ll all have some of that thank you…


They don’t earn “investment” returns. They earn closer to deposit returns. FF, FG, Karl Whelan, Brian Lucey and G. FitzGerald are all in agreement that they should be protected.

The mechanisms by which subordinated bondholders will be forced to take losses and when this will occur is unclear. It is quite possible that these guys will be invited to come to the table at the time of the post NAMA recapitalisation. However, I would also like some clarity.

I can understand why the Minister isn’t announcing plans to make subbies take losses far in advance. We are playing the good soldier in international markets. We want to be seen to deal with subbies on a commercial basis rather than on a political basis. With that said, the Minister has been clear that they will have to share the pain.


Not sure I agree with your analysis via the Minister and the subbies. What he has said is that they “have taken” some losses. Past tense.

Prices for sub debt have steadily risen from the annoucement of NAMA particularly as confidence in overpayment grew. The Minister’s assurance that he doesn’t expect the NAMA transfers to wipe out the equity of any of the banks is music to the ears of the subbies. They can’t be dealt with until the equity is wiped out. Fear of nationalisation is what has depressed the price of the subdebt and allowed swaps. The Minister has generally adopted a strategy of reducing these fears, so his actions have not helped with getting the subdebt holders to share the cost. Quite the opposite in fact.

I wonder if the venerable Dr Fitz is hoping to see the demise of FF while he can still enjoy it. Is there an element of wanting FF to dig its own grave? The average citizen doesn’t seem to grasp the scale of the (impending) problems created by reckless fiscal policy over the last decade. Perhaps Dr Fitz realizes the average citizen must see FF introduce the nasty stuff. In a political sense, it’s important to link FF to NAMA. It could guarantee FG the next three terms in office.


I’ll have to double check the Ministers comments again as I had always taken it that NAMA did not extend the guarantee. Personally, I am hopeful that we will have structured bank wind-up legislation on the books prior to both (i) full recapitalisation and (ii) the expiry of the guarantee.

In the meantime, can you explain the mechanics of how NAMA transfers could “wipe out the equity of any of the banks”? I note you posted that before and I honestly don’t fully understand it.

I would have thought that if NAMA left the banks with a hole of €x billion in their accounts then and the Govt recapitalises to the tune of €x bn then the shareholder equity will still exist (in diluted form) notwithstanding that the company was for technically insolvent, i.e. the only way to wipe out shareholders is to nationalise 100% or to wind up the bank. Am I wrong in this? Is there a scenario where the NAMA transfers could cause such a loss that the shareholders would technically lose their equity? If so, can you explain it if you have the time?

It’s a pity that none of the famous 46 were available to talk to PK this am about Garret’s contribution.



Though he is well known for vilyfying Haughey for his flawed pedigree, Garret FitzG is a far less partisan person than most politicians.
In his youth he thought long and hard about joining FF.

Maybe he has come full cycle!

@ Ahura Mazda
this is a good point. and for an old guy gfitz. still knows how to give a very public wedgie.


Garret the Good is as blue as Barney Rock’s underpants. He just sees that if FG manage to defeat NAMA and bring down the Government they will not only do irreperable harm to the State but they also risk scoring the greatest political own-goal of the 21st century.

I think FG are making a mistake in not publishing their submission on the draft legislation. That should be their first step in their retreat from the precipice.


(1) Please look at last Fridays IT for a detailed submission by RB on the FG position.

(2) Irreparable damage to the state will be done by NAMA through taxpayers taking on in excess of 10 billion in losses that should be borne by shareholders and subordinated bondholders. If Minister Hanafin can boast about saving 300,000 in cracking down on benefit tourism, we can surely agree that 10 billion is an enormous sum.

(3) Garret FitzG has fallen for outrageous spin in relation to calling in the IMF if we have a general election before NAMA and the budget are passed. Even if there were any substance in the suggestion, the NTMA holds large cash balances and could go many months without raising any more money.


(1) I had already read R. Bruton’s article. That is where I was coming from. He says that FG has made detailed submissions on how NAMa can be altered. I take it this is not the Good Bank plan but their view on NAMA if NAMA it is to be. I suggest that they publish those detailed submissions.

(2) You are making a huge assumption that NAMA will €10 bn. I don’t share that assumption.

(3) Surely if we were unable to maintain the buffer then we would need to call in the IMF? By the way, the IMF doesn’t have much cash these days so it is unclear what help would be available or how quickly it would materialise.


I refer you to Garret FitzGerald’s article. Do you think there is no risk of irreparable damage if the international markets lose confidence in Ireland?

“Evidence that Ireland is addressing the crisis has been well received in financial markets. Irish bank shares have rallied and the risk premium on Ireland’s sovereign debt has reduced. Back in February, there appeared to be a real possibility that Ireland might default on its foreign debt.”

Not wanting to labour a point BL, but do you think there is no risk of irreparable damage if the international markets lose confidence in Ireland for the reasons referred to by Garret FizGerald?


If you think that the losses to be borne are less than 10 billion, you should work as an estate agent.

Irreparable damage to our reputation is done by an at best incompetent, at worst corrupt, government fawning to vested interests. To suggest the fall of this government would do irreparable damage to the reputation of the country, is to subscribe to a level of hubris more appropriate to the Fuhrerbunker on April 30th 1945.


NAMA is not taking on losses. The idea is for NAMA to make the banks crystallise their losses by selling to NAMA at real economic value (as per EU Commission guidelines). Where are the €10bn in losses coming from?

You will note that Garret FitzGerald has no problem with FG bringing down the Govt in January. His issue is the timing.


If you are reading, I would very much appreciate if you could respond to my post on your article:

I understand you are busy. I just wanted to point you to it in case you had missed it.

@Ahura Mazda “Is there an element of wanting FF to dig its own grave?”.

….. and I’m sure FG are happy to play the waiting game. Apart from NAMA, would you want to deliver the next budget in December? I’m sure George Lee wouldn’t (if indeed my conspiracy theory about Enda Kenny being frightened of Richard Bruton is anywhere near correct ……..and that he has brought in George to replace Richard!).

I see that IT breaking news has Irish property prices down by 24% since 2007 (PTSB/ESRI index). Get real. The house in front of me that has been on the market since 2007 at 540k is now down to 350k……. and still no takers.

24% has a kind of nice ring to it though when we talk about NAMA haircuts. It’s not an obvious round number. It looks to the public like there might be some ‘sums’ behind a figure like that. Surely the two aren’t connected?

I would also like to nominate the following words from the same report (and many very similar phrases pushed out by G20 countries in 2009) as one that is fast becoming cliche of the year……. “However, there is some evidence that the PACE OF DECLINE MAY BE EASING”.

It’s still going down no matter how much it may be ‘easing’. That G20 sure has some spin machine.


NAMA together with the government promise of recapitalisation is designed to ensure that the shareholders are not completely wiped out.
The government has made clear that it will subscribe for additional ordinary shares in any recapitalisation, so as a result the shareholders are not completely wiped out. This guarantee ensures that the subordinated bondholders don’t lose out. There is approx 10 billion in subordinated debt.

Everyone can quote EU guidelines to defend their position.
A special resolution regime applied to banks is also instanced as a policy option in the same document for which you rely on for EU approval.


We are ad idem on the issue of a special resolution regime. I think it is the next step after NAMA and prior to the expiry of the guarantee. The guarantee does not ensure that undated subordinate bonds or subirdinate bonds maturing after the guarantee period won’t be wiped out. I am not an expert in bonds but I think your facts are incorrect on that point.

In any event, the guarantee has been given and has to be honoured. I took you to saying that NAMA will cost us €10 bn on top of the guarantee?

It is disappointing to see personal ridicule of the motives of Dr Garret Fitzgerald being posted here just because certain people here do not like what he had to say on NAMA and 46 signatories issue. Dr Fitzgerald has written on economics matters in the IT for as long as I can remember and that is a good while and I have not seen previously any of this type of criticism laid against him. He has left national politics long enough to be considered neutral.

@KW – just coming back to this for completeness because I noticed the Minister’s most recent statement.

KW: “Not sure I agree with your analysis via the Minister and the subbies. What he has said is that they “have taken” some losses. Past tense.”

Brian Lenihan @ Public finance committe on 31/8/09:
“Tackling subordinated debt is an ongoing process. It is not something one can compel. There are difficulties with it but the banks have made a very big start on it and I have no doubt they will continue to do it. All of this is being done in an international marketplace context. Ireland cannot suddenly jump out of line with regard to debt. That is the point I am trying to get across. This is not Argentina; this is Ireland. We do not have a record of jumping out of line with other countries with regard to what one honours and defers. If we start to get into that terrain, our credit worthiness as a state, as well as the credit worthiness of the banking system, will deteriorate and the speed of the recovery will be less.”

Well, we’ll see. Personally, I can’t see why a subordinated debt holder would be interested in taking cents on the dollar on a bond owed by a bank that’s being recapitalised by NAMA overpayment. Just because the ministers says that this will continue to happen doesn’t mean it will.

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