The 65 Billion Euro Question

In an Irish Times article that must have much of the country talking, Morgan Kelly calls for a Special Resolution authority to force bank creditors to swap 65 billion of debt for equity (link in Greg’s post below).     The number is €50 billion less than called for in his V0X article earlier in the week, and critically calls for the losses to be imposed after the original guarantee expires in September.   He is thus, as far as I understand, not calling for default on the “quasi-sovereign” guarantee. 

I am sympathetic to the idea of forcing the funders of Ireland’s banking binge to bear a fair share of the resulting losses (some thoughts here).   But if Morgan’s policy suggestion is not to be dismissed, we need more specificity on the source of the €65 billion.   The Anglo accounts revealed that roughly €7 billion of bonds will mature post September.   He must have the big two in his sights. 

Even with Special Resolution authority in place, the proposed debt-equity swap could only be triggered if capital adequacy falls below some critical threshold.   But the two “technocrats” Morgan lauds appear to believe that Bank of Ireland and AIB are on course to reach the new capital adequacy requirements.   Patrick Honohan had this to say in a recent speech:

Over the previous few months, we at the Central Bank have been making a careful assessment of the likely bank loan-losses that are in prospect over the next few years. This is over and above the valuation work being carried out by NAMA, and which gives us a good fix on the likely recoverable value of the larger property loans.  We have been working on the non-NAMA loans and figuring out their likely performance as they suffer from the impact of the overall economic downturn – part of it of course attributable to the global crisis, and not just to the bursting of our own bubble.  This exercise involved working with the banks, but challenging their estimates of loan-loss based on our own more realistic – some may say pessimistic – credit analysis. (I am over-simplifying the exercise, as it also looked at other elements of the profit and loss account over the coming years).  The conclusions of this exercise are worth emphasizing. 

To my relief, and slight surprise, it turns out that most of the banks started the boom with such a comfortable cushion of shareholders’ funds that they would be able to repay their debts on the basis of their own resources.  This includes the two big banks.  It is because of this fact – that their shareholders’ funds will remain positive through the cycle – that one of them, Bank of Ireland, has already been able to tap the private market for an additional equity injection.  Of course they do need additional capital to move forward, but, as has happened in the US and elsewhere, the Government’s capital injections of last year into these two institutions looks like being well-remunerated.

The €65 billion number needs more explanation. 

Update (Sunday, May 23)

In correspondence, Karl Whelan has provided maturity information for the outstanding bonds of the major banks.   The information is drawn from the 2009 accounts, and is based on bonds that mature more than one year after December 31, 2009.   Thus, it does not include bonds that mature in the last quarter of this year.   (It is not clear what fraction of the bonds were issued based on the extended guarantee.)

The numbers are as follows (billions of euro):

BOI:       Senior, 18.5;  Subordinated, 5.3;    Total, 23.8

AIB:       Senior, 8.5;    Subordinated, 4.6;    Total, 13.1

Anglo:    Senior, 4.1;    Subordinated, 2.7;    Total, 6.8

INBS:     Senior, 1.2;    Subordinated, 0.2;    Total, 1.4

ILP:       Senior, 5.1;    Subordinated, 1.6;    Total, 6.7

Totals:   Senior, 37.4;  Subordinated, 14.4;   Total, 51.8

These numbers suggest that Morgan’s €65 billion is in the right ballpark.   But they also highlight the extent to which the money relates to the big two, and especially Bank of Ireland.   The most natural sequence for implementing the loss imposition strategy that Morgan proposes would be: (1) legislate a resolution regime; (2) apply comprehensive stress tests to determine capital adequacy; and (3) trigger resolution tools as required.  Based on the stress tests that have been done so far, which we are told have been quite comprehensive and conservative, the big two would not be put into resolution.   Of course, it is evident that Morgan does not believe these tests were comprehensive or conservative enough, with AIB probably being more suspect than BOI.   Even so, I think it is important not to expect too much in the way of loss imposition on creditors from a resolution regime.  Yet it is still worthwhile to pursue a regime even if the savings to the taxpayer are just a fraction of the €65 billion. 

94 replies on “The 65 Billion Euro Question”

@ John

i gotta be honest – Morgan appears to have read the comments about his original Vox article which were posted on this site, rehashed somewhat his argument to take these into account, and come up with an argument which appears more realistic (65bn, no sov default, resolution regime) but is in fact less clear and more vague. He also keeps saying “i’ll be optimistic here” throughout the article, when his argument appears far closer to the ultimate worst case scenario?

On a related note, Morgan no longer seems to forecast 20-25% unemployment or 80% drops in house prices – do we take this as a tactic admission that he no longer believes these to be the likely outcomes for our economy?

I haven’t read the articles or the previous exchanges in any depth and am in no way knowledgable but here are some figures:
Our national income (GNP) at the end of the year will be about €139 Billion, hopefully.
In the Vox article Kelly says:
“If we assume – optimistically, I believe – that Irish banks eventually lose one third of what they lent to property developers, and one tenth of business loans and mortgages, the net cost to the Irish taxpayer will be nearly one third of GDP.”
That does seem a very optimistic estimate (eg., look at the crash in the Glass Bottle site) and equates to €46.33 Billion. I see from the article that Kelly says nearly €50 Bn is the optimistic scenario so these figures do seem consistent.
“So between developers, businesses, and personal loans, Irish banks are on track to lose nearly €50 billion if we are optimistic (and more likely closer to €70 billion), which translates into a bill for the taxpayer of over 30 per cent of GDP.”
He then says:
“The more than €65 billion in bonds that will be outstanding by the end of September when the guarantee expires could then be turned into shares in the banks: a debt for equity swap.”
Given optimistic losses of €46.33 Billion giving the banks a large portion of €65 Billion to cover them seems prudent.

The key point is this. Who will pay for these losses?
Someone is going to, even if things go well, absorb
€46 Bn of losses, probably more. The country is no longer in a position to spend one third of its GNP protecting bank bondholders. We have had a depression and it will be years before we return to where we were. So will we leave the banks undead for many years, allowing them to recognise the losses over many years, so they can gouge them back from their customers, while we take a huge loss through NAMA, already an entity deeply tarnished with conflicts of interest and with a chief valuer whose estimates of price falls from our megabubble were preposterous, and borrow billions more to invest & napalm into the banks?

Who will pay for these losses? At the moment it looks like leaving the banks undead and letting them gouge their customers may end up being
the central plank of the government’s banking policy. Are the government going to keep the country in a depression and at risk of default indefinitely or will they make the bondholders do what they signed up for and absorb the bank’s losses?

Who will pay for these losses?

P.S. Honohan is no longer free to speak his mind and his assurances need to be read with that in mind.

@ Ollie V

the Honohan (and therefore Elderfield) argument is somewhat self-defeating, no? ie we want a great, foresightful and independent central banker/regulator, but as soon as we find this candidate and install him to office, he obviously becomes part of the “insiders” and therefore can’t be trusted. I mean, this cycle continues forever by that logic, no?

Dr Kelly clearly believes that the Dr Honohan and Mr Elderfield are “first rate people” yet their stress test is second rate at best. That is a bit illogical.

Dr Kelly loss assumptions are too broad brush and we do not know where the numbers are coming from. For example a 5% hit on the mortgage book seems somewhat questionable given that arrears are less than 5% in Ireland and about a third of the mortgages on the Big 2 balance sheet were originated in the UK.

As others have pointed out E150bn Senior debt has become E65bn. Somehow we just convert that to equity. That 65billion consists probably of secured and unsecured senior debt. How do you enforce a debt equity swap? Is some of this debt excluded?

It strikes me we need a third article.

@ Dreaded

Ok your special resolution regime then does what. Discriminates against Senior unsecured bond holders who rank parri passu with depositors. Contravenes the contracts of secured bond holders. I presume you change the law and try and apply it retrospectively. Then I guess the bondholders would sue and tie up the process for years.

What happens if the Seniors just decide no, they don’t want equity thank you. You default presumably and then lose access to the international wholesale markets for our banks. Would that not imply amassive shrinkage of credit.

Presumably, you also have to negotiate with our EU partners and the ECB. They probably would have a view on the EU implications of a default by a systemically important bank or two.

Finally, how do you impose a resolution regime on a bank that has passed a stress test. What does that say about the credibility of the new and lauded regime?

@tull mcadoo
There is no need for the resolution scheme to change the rights of senior bondholders or anyone else. It does allow you to close the bank down in an orderly manner and impose losses on ALL bank liability holders including depositors.

But that doesn’t mean that depositors wouldn’t get 100% of their money back as the state is always free to give extra protection to who ever it chooses after the bank assets are divided up.

And bar BOI none of the banks would survive any stress without massive state capital.

exta protection to depositors contravenes the principal of “parri pasu”.

@tull mcadoo
No it doesn’t.
Depositors had extra protection in Ireland for years before the guarantee scheme was introduced and still do in most other countries.
Ireland used to have a €20k protection on only depositors but nothing for senior bondholders.

The “parri pasu” means that when the assets of the bank are divided up among its creditors depositors and senior bondholders get the same share. I am not suggesting we change that.

But the state is free to give additional or no protection to any, all or none of the creditors after a wind up on whatever basis it chooses.

@ Dreaded

Fair Point. But you are advocating a strategy that the EU/ECB seems unwilling to countenance namely burning liquidity providers in a systemically important bank. Seeing as we have effective ceded sovereignty to Brussels/Frankfurt on fiscal, monetary and regulation, I am sceptical as to whether this would be allowed happen.
In the current febrile markets, I doubt the EU would welcome even allow a member state to burn senior bond holders in a major clearer, given fears of contagion. Burning the remaining 4-5bn senior bondholders post guarantee in Anglo might just be manadated.

I am also very sceptical that a debt quity swap could be negotiated in the case of AIB as we have no leverage over the bond holders given that we would b “encouraged” not to put it into liquidation. Moreover, being bond fund managers they have no mandate to invest in equity.

Perhaps the only option with AIB is for it to fail to raise to raise the required capital, be nationalised and sold off piecemeal to trade buyers, with the domestic franchise given to a foreign player for a nominal amount with the agreement that it be recapped. A version of the Fortis deal could be contemplated.

Why oh why do we keep going around in circles.

A few year ago we decided to build easter island statues. When it became clear that we did not have enough resources internally to the build the statues we approached the ECB, bondholders and others to give us cash to build the statues. Miraculously they gave us the cash. The cute government at the time decided to give tax breaks to encourage the building of statues so that more was built. The statue builders gave income tax to the Government which used the proceeds to take on more public sector workers and double the cost of government services effectively paralyzing any other economic activity in fair isle. They then sent their missionaries around to tell everybody not to talk the statues down.

What has changed – Something happened in America.. and the funders of statues said no more. Then the government realised that ther was a market in paper. Basically they could give bits of paper to ECB (although bizarely not directly to the ECB, they had to set up SPVs to keep the paper off national balance sheet and/or give these bits of paper with harps on to “Private banks”). It all got very complicated and “technical”. They needed this cash to pay for the bloated public sector and the large and growing number of ex statue builders.

We are now in third phase, having dispersed with statue builders we were left with the persistent multinationals and the odd farmer who managed to balance the low tax high statue cost equation in their favour and really didn’t like in climate in New Zealand.

Now we are a country obsessed by the paper. Should we give the bits of paper with hearts to NAMA, or to Mr. X. Is NAMA the right vehicle or should we use a LADA SPV. What if the ECB or Mr. Bond dosn’t like our paper. Arhh sure what we will never be a Switzerland but maybe by shuffling paper we can stabilise at Netherlands, or the U.K. or Italy or god forgive Greece.

Again, I’d love to see the specific piece of Irish law that sets up pari passu as you describe. It keeps getting mentioned on here as a principle, but no pointers to specific law on its implementation in Ireland.

From what I read in the Irish companies acts and some other acts (banking acts) I listed in a previous thread I didn’t see the principle described as you see it. Can you point me at the bits I’m missing? I’d appreciate it!

@tull mcadoo

If the ECB and other Eurogroup states are so desperate to avoid the systemic risk of a proper AIB insolvency – and I agree that very likely they are – then it’s our government that has the upper hand. Tell them that we will not further subsidise our banks and leave them to catch or not catch the hot potato as they wish. There’s a limit to what they can do to retaliate against us by curtailing our handouts from the Eurosystem, largely because that risks bringing on exactly the crisis they are trying to prevent. (Partly also because it would be very hard to explain why, for example, Irish sovereign debt was receiving less generous terms than Greek at the ECB’s repo window.) I believe we could do this in good conscience. Even if one believes that the strategy of indirectly propping up all significant Eurozone banks is a smart and promising one – I tend to doubt it myself – this country has probably already contributed its fair share to the HerculeanSisyphean effort. Continued co-operation in other areas – especially, more progress in reducing our budget deficit – would also soften the insult.

Conversely, if the government does go with the flow, pull on the blue jersey and again cover the bondholders with Exchequer money, there is no guarantee that our friends in Europe will repay our loyalty when the predictable fiscal crisis results, not even with the self-serving and equivocally helpful help they’re now giving to Greece. The recent noises from the German government about demanding orderly sovereign restructurings from now on sharpen this. Even if Merkel really has no such intention now, those words give us public cover for letting AIB restructure (especially at the expiry of the guarantee) while later they will give a German government cover if it does decide to let a sovereign fail. Also, the German public is apparently convinced the current emergency is basically a public debt crisis in the periphery. If the example of Ireland’s tiny public debt and current account surplus back in 2006 isn’t enough to dispel this appealing notion now, it’s unlikely they will rethink when we drag our public debt crisis over to them in 2012. If we explain that we ran up this debt as a favour to them, in the preservation of Deutsche and SocGén, they are likely to ask to see the receipt. In any case, there’s simply no guarantee that the house of cards won’t already have collapsed before our turn to be bailed out ever comes around.

That said, it’s not beyond all hope that the government is in fact doing something not a hundred miles from my suggestion, and is driving a hard bargain behind closed doors. Perhaps there will be surprise good news as AIB raises significantly more funding on the “open” “market” than expected. The major problem with this from the point of view of the public interest is that the government will once again lose the chance to fire all the AIB board members and senior staff. Pity this wouldn’t worry the Irish government too much.

Tough decision.

On the one hand the lazy, stupid, greedy Irish taxpayer, who pays my pension and built many fine statues and who believed Fianna Fail.

On the other, the optimistic, hard working, privately employed and self-employed of many nations who believed that people who invested for them would exercise caution, but maximise yield. But who did not say for “God’s sake don’t invest in Ireland: they are all mad; they eat their own children there”. (They also employ hot headed young folks like Mr Bond to invest OPM!)

Reluctantly, therefore, I back Morgan Kelly on this.

Investor warning:
Did he disclose his interest? That the aforesaid lazy, etc. also will one fine day, pay his pension? I think we should be told!

@Dreaded Estate

I agree with you that it is possible to torch the depositors/bondholders pari passu and then top up the depositors as a separate exercise. Two problems with this course:

1. It greatly dilutes the amount that can be squeezed out of bondholders;

2. It immediately triggers the Deposit Guarantee and a massive call on the taxpayer.

Let’s face it, the bondholders have the depositors as hostages, after all that is why they accepted a measly +20bp in the first place.

@ Tull, Zhou & Eoin
What is your response to the following: the guarantee destroyed the solvency of the sovereign. You have argued, at various times, that the only way to protect the credit rating of the sovereign was to ring fence the bond holders. Have you missed the point?

@ Simpleton

by taking Morgan Kelly’s suggestion (national bankruptcy) and taking it as a definite outcome you are being too, eh, simplistic. You are also missing the point of our argument – it was never about protecting a somewhat meaningless “credit rating”, it was about protecting our much more important credit sourcing ability, at a time when we have the combination of a truly magnificent budget deficit and massive external funding requirement. At the moment approximately 70-75% of our government debt is bought by foreign investors. To think that they would keep buying this while we let our banks go to the wall, a problem that many view as quasi-soveriegn in nature, is heroic in its, eh, simplicity. Still, live the name and all that…

You always come out swinging when your back is up against the wall! An unexpected human trait.

Your argument is getting circular. Provided the guarantee didn’t destroy the solvency of the sovereign we will be OK, seems to be your premise.

let’s make it conditional: IF the guarantee is shown to have destroyed the solvency of the state, which many people said so at the time, and are shouting very loudly today, will you agree that your defence of everything that followed was specious? I’m tempted to say self-serving but that would be taking a swing back.

@Mr. Bond

, a problem that many view as quasi-soveriegn in nature

Can you clarify – are you referring specifically to the bank guarantee here or to the broader claim that foreign investors won’t distinguish too precisely between an AIB and an Irish sovereign default under any circumstances, bank guarantee or no bank guarantee?

@Eoin Bond
“…ie we want a great, foresightful and independent central banker/regulator, but as soon as we find this candidate and install him to office, he obviously becomes part of the “insiders” and therefore can’t be trusted.”
I wasn’t saying that. I was saying that as with any holder of high office Honohan is no longer free to speak his mind. It’s a condition of the job. In any event history will be the final judge and the public can only offer snap reactions.

The real question is who will pay for the €46 Billion, probably more, in bank losses.

@ anonym

the latter, that when an entire banking system (as opposed to just an individual bank) faces near collapse, as is the case with Ireland, that investors who previously gained around 15-20bps in premium (clearly they were high risk speculators!!) over Irish sovereign debt, may decide that the State is to blame for being asleep behind the regulatory oversight wheel. Nation states always implicitly back up their financial systems, so a systematic collapse requires a systematic backstop. Note, that is not to say that the likes of Anglo & INBS, clearly mismanaged to near-criminal levels, should not be treated more agressively. While the state is heavily to blame for allowing those situations to occur, one could reasonably argue that there is a risk distinction between them and the rest of the banking system, and that investors should have realised that to at least some extent. Good bank/bad bank at Anglo (and maybe INBS) is an attempt to that end.

@ Simpleton

self serving? Go take a swing at yourself if you think it’ll help. Please see my previous clarifications that i stand to gain nothing from the bailout of the irish banking system (somewhat the opposite in fact), and my offer to provide full bona fides to the like of Karl and Philip.

As to your actual point, my (our?) argument is that we would/could have gone bankrupt (via a funding freeze on the back of a total collapse of our banking sector) in 2009 without the guarantee, or we can try and fix our problems over a rather longer period via the guarantee. It’s completely unproveable whether we would or would not have gone bankrupt without the guarantee, but at the moment the Irish state appears to be funding itself relatively easily, so its not as if everyone appears to be believing in Morgan Kelly’s assertion that its a case of ‘when’ rather than ‘if’ we’ll default. As such, whether the guarantee ends up causing us to go bust or not, the basic principle behind the guarantee is far from specious.


To be honest, the only bona fides that are relevant on this site are ones that signal proper intellectual engagement with the debate. Did we observe that or did we instead see entrenched positions established immediately from which there was to be no retreat? Evidence of intellectual bona fides emerges when we see changes of mind as new facts emerge.

Or did we see snipers positioned to take potshots at the academics every time they offered an interpretation of emerging evidence that ran counter to the original entrenched – or should that be politicised – position?

‘We could have gone bankrupt without the guarantee’. Lenihan couldn’t have said it better and who could disagree? Nobody, as a matter of fact. But it never was about ‘guarantee or no guarantee’. A much better – restricted – guarantee should have been implemented, one that was far less costly to the taxpayer and far less threatening to the solvency of the state. Similarly, nobody seriously doubted the need for NAMA, just the form that it took, the unnecessary costs to the taxpayer and the equally unnecessary risks to the sovereign borrower.

If you cheerlead every single dreary step that the government takes, you have to forgive those of us who doubt those claimed bona fides.


The guarantee compramised the solvency of the sovereign only becasue as you state in a later post it was broad in that it covered all liablilities up to and including sub debt and more importantly it included ANGLO, apparantly against the advice of officials..but we are being prevented from knowing that.

The reasons I doubt the wisdom of torching senior bond holders are as follows
* I doubt it is legal but Dreaded Estate has a fair point
*I doubt its wisdom as regards AIB & BOI given that the will still be dependent on wholesale funding post the crisis. You would have to have a sub 100% loan deposit ratio so as not to have to deleverage further
*I doubt if our rulers would allow it in the current market envioronment given the risk of contagion. Creditantalt comes to mind.

Moreover, those that claim that nationalising AIB/BOI & then defaulting on senior debt will cause collatoral damage to the sovereign have a legitimate point. It might or might not, who knows. But do you want to do it when you are running a 15% witha 10% primary deficit. As Dirty Harry might say, “do ya feel lucky?”

@ Simpleton

“Or did we see snipers positioned to take potshots at the academics”

“If you cheerlead every single dreary step that the government takes”

Sorry, are you confusing me with someone else? At what stage did i take “potshots” at the academics? Where on earth do you have evidence that i ‘cheerlead’ for the government? Have i ever disagreed that the guarantee was less than perfect and extremely blunt?

And again the snide innuendoes (as opposed to a more ballsy outright assertion) that somehow i’m in this for the politics – neither i nor any of my family have come within even a thought of affiliating ourselves with any political party. There’s some weird logic going on here that if you agree with some of the current government decisions you’re somehow on the take from either the banks or Fianna Fail.

@ Jethro & 007

Come on guys, the bluster doesn’t absolve you from addressing the point: has any evidence emerged in the last two years that caused you to doubt what you previously believed? What is it that gives you such enviable certainty?

Hands up, I’ve changed my mind several times on the same day. But i guess that just makes me a flabby liberal unsuited to fighting the good fight. Now who said that?

Eoin, I didn’t imply or infer that you are polticised. I said it out loud, very clearly. Sorry for the offence.


“Far less costly guarantee”!? sorry, it’s me that must be the simpleton. What has the guarantee cost? There have been no calls on the guarantee. Ok, sovereign funding costs went up a bit but the banks have been charged for this. The “costly” guarantee expires in 4 months time and my guess is it will turn out not to have cost the taxpayer a cent but it did buy valuable time. Of course, come September we have to decide all over again what to do. Kelly argues that we got away with it this time but next time we won’t. But his argument is as of the wall now as it would have been 2 years ago for reasons which it is becoming quite tiresome to repeat. I think even Fine Gael, having originally flirted with the Bondholder “silver bullet”, have backed off this one but Kelly persists that there is a pot of €65Bn (or is it €115Bn) just abegging. Okay he did predict the property collapse but does that give him the credibility to forever peddle these fantasy theories.

@ Simpleton

at the very start i said we couldn’t let a bank fail, or else risk funding crunches at a soveriegn level. More recently I have quite loudly said that we should now seriously consider punishing the bondholders of both Anglo and INBS if there was an orderly way to do this (i’ve been vocal that its not that easy though), the principle being that the markets have stabilised enough that we wouldn’t be scaring off the sovereign investors. Does that not sound like nuancing the argument to the current reality?

The “politicised” comment is funny in its erroniousness. For the record, i’d happily vote for FG is only Enda would step down and Leo V would stop printing cheap tabloid economic headlines. That i think Lenny is doing a stand up job doesn’t make me a FF-er. Biffo is a nice guy, but the wrong guy in the wrong place at the wrong time, and im not entirely sure what the purpose of Mary Coughlan is. I always said that after pushing through NAMA and some massive budget cuts, the best thing for the country would be an election right around now, and that a FG/Lab government would almost certainly be in power after that. Try to work out that political viewpoint if you can.

But im sure all of the above doesn’t fit neatly into you theory that im really typing this from FF HQ…

@ Simpleton

in a similar vein, ive also said that nationalisation of AIB now would not be as problematic as doing it 15 months ago would have been. But im sure this turnabout is just all part of my evil plan…

That’s one of the many bits I don’t get. It has been commonplace in the media and elsewhere to have raised questions, quite fundamental ones, about AIB ever since the night of the guarantee. And we won’t even mention Anglo on the night of the guarantee. In all previous examples of systemic (as opposed to single bank) banking crisis I have never seen it done or advocted that bust banks are kept on life support for a couple of years, pretending that they can be made going concerns, before being appropriately dealt with. It ain’t in any of the text books either. What was so unique about our crisis that it required such an unusal response? Just what have we achieved by doing this?
No doubt you will argue that ‘things would be worse than they are’. As you have argued elsewhere, proving the counterfactual is tough. Just for a laugh, I’ll assert that if we had done things properly – say immediately BOI part nationalised, AIB nationalised, Anglo & the rest shut – we would be in a lot better shape.

@John McHale

“Of course, it is evident that Morgan does not believe these tests were comprehensive or conservative enough…”

In fact, what is interesting is that Kelly and Honohan appear to roughly agree on the potential scale of losses. They both assume bank losses of 50bn+.

We know Honohan took into account losses on loans going to NAMA of (about 50% of 80bn =) 40bn. He surely added to that 10bn+ of losses from the remainder of the loan books.

Kelly writes “So between developers, businesses, and personal loans, Irish banks are on track to lose nearly €50 billion if we are optimistic…”

The difference in conclusions about what this 50bn in losses means for the public finances is that Honohan correctly recognises that half of those losses are borne by shareholderes, whereas Kelly mistakenly claims that all of the 50bn is added to the national debt:

“banks are on track to lose nearly €50 billion… which translates into a bill for the taxpayer of over 30 per cent of GDP.”

Kelly is wrong. The bill for the taxpayer is 25bn, which is 15 percent of GDP. This is the bank-related additon to the national debt that Honohan and the ESRI are projecting. And it all relates to Anglo and INBS. Shareholder funds (and some retained “profits” in the two Mutual Societies) absorb the other 25bn.

So 50bn of losses won’t bust all the banks and turn them all into semi-states as Kelly claims, never mind busting the entire country.

It is one thing for commentators, when discussing bank losses, to ignore banks’ provisions against bad loans, or unrealised capital gains on banks’ balance sheets, but to completely ignore the basic loss absorbing role of shareholders’ funds as Kelly does is poor beyond words.

@ Simpleton

“Just for a laugh, I’ll assert that if we had done things properly – say immediately BOI part nationalised, AIB nationalised, Anglo & the rest shut – we would be in a lot better shape.”

What a radical notion. This might even have been close to the official advice on that fateful night- namely fund AIB/BOI with state money and nationalise and shut down Anglo. It might even have coincided with the advice given by the NTMA, had they been asked. However as Our Leader is reputed to have stated “no F*****g was Anglo going to be nationalised” -according to the Sunday Biz Post anyway.

Yep, many of us have heard similar versions of events. Everything seems to have flowed from a whim, an expresion of financial machismo – at least, that is probably what he thought it was. Once policy has been set, never alter course, never change your mind. Borrow, without any hint of irony, that immortal Thatcherite phrase, Their Is No Alternative. To admit to a mistake is a worse crime than the economic and financial destruction of a country. Hey ho, halcyon days.

Anyway watching Batt O’Keefe in ‘The week in Politics’….. I’m Speechless

Again, can I ask which article of Irish law guarantees that senior bondholders and “regular” deposits are treated the same in the event of an Irish bank failure, at least for the time before the guarantee was in place and after it runs out? What makes it illegal to “torch” senior bondholders?

Again, although I may be misreading, apart from basic Irish companies law, S.I. No. 168 / 1995 seems to give a regulator and even a bank itself quite a bit of leverage to go to creditors of all sorts and negotiate a good solid torching. It’d be a big game, since liquidation is a highly likely outcome, but depositors and senior bondholders, including CoDs, etc., don’t seem likely to need equal amounts of burn ointment afterwards.

Is there another act that’s relevant?

@D Terry
The establishment have issued so much “misleading spin” that I am wary of the sudden emergence of the 25 Bn in shareholders funds. I therefore have a test of your bona fides. Suppose there are only 25 Bn in losses uncovered by shareholder funds. Suppose they do relate only to Anglo and Nationwide. All bondholders knew these were two runaway deposit taking property speculators. Are you then, as any just person would be, in favour of wiping out the subordinate bondholders completely? Are you in favour of then splitting the remaining losses with the senior bondholders parri passu and then making the depositors whole from state funds? A simple yes or no please.

@D Terry
Another question. Why did we have to put €7 Billion into AIB and BOI if they have all these reserves and are only recognising their losses VERY slowly? We put in 4 Billion and then 8.3 billion to Anglo from the government
plus 10 Billion from the Central Bank gives 22.3 Billion plus over 2 Billion for Nationwide gives 25 Billion. So we should already have a healthy AIB, BOI and even Anglo/Nationwide. We shouldn’t even need NAMA. You’re not spinning are you?

From Monday’s IT, – Department of Finance rejects Kelly’s assertions

“The department [of Finance] said Prof Kelly’s assertion, that the international institutions that bought Irish banks’ bonds knew there was a risk of default, was incorrect, as most of the bonds are senior debt and carried no risk premium.The State has guaranteed the bank’s bond debts. [Is there a commercial entity in the world whose senior debt bonds don’t carry ANY risk premium? Given the precarious position of our banks is that wise? Also isn’t it true that 2/3 of the bondholder debt is senior and the other 1/3 subordinate? That’s a fairly substantial amount of money to ignore]

“The department also argued that Prof Kelly’s call to measure the State’s debt against gross national product (GNP) instead of gross domestic product (GDP) made no [this may be sloppy IT reporting but the absolute word ‘no’ is used as opposed to ‘little’ or other relative]. “Prof Kelly should be aware that GDP measures the output of the Irish economy and thus what the Irish Government can tax,” the [DoF] spokesman said. “GNP measures the output of Irish citizens and companies, including that which is earned abroad and taxed abroad.”

Is the DoF on safer ground with this? They’re saying measuring debt against the net earnings of the country after the MNCs have repatriated their profits makes “no sense” because our 12.5% tax is levied on the GDP figure . Given that it is the tax take that will determine our ability to repay the external debt, is that not a fair point?

The full story is here

@ Hugh

Apologies for not answering. As I understand, the prospectuses (?) set out the appropriate ranking in the capital structure. These are, of course subject to company law anyway. Some of these are on corporate websites.

There may have been no risk premium but that does not mean they were risk free. There wasn’t much of a risk premium for but nobody thought it necessary to bail out the misguided investors in that asset, Markets make mistakes.

And the Independent has a slightly different take of the DoF rejection of Prof Kelly’s assertions. In what is a textbook example of an inverse ad hominem argument, the DoF say that because Prof Kelly praises the CB Gov and FR, he should unquestioningly accept their pronouncements on the banks – CB Gov – €25bn is a pessimistic view of bank bailout and FR, the banks will be fit as fiddles by Dec 2010.

Full article here

It’s really quaint that the media still provides anonymity to Departmental spokespersons – – they are usually busy during a Dáil recess when ministers avoid answering media queries.

This spokesperson from the DoF wasn’t from the press office and was able to discuss the distinction between GDP and GNP.

This type of spokesperson when it suits can break cover and pen articles for the media or appear in broadcast interviews.

Here is a transcript of most of what Pat McArdle said on RTE this morning….
“I’ve read the articles [Morgan Kelly and Peter Boone]. Morgan’s just seems to be simply an arithmetical mess in that he assumes that all loans will and he gets multiple of the figure for the central banks.
There are 3 basic errors in it [referring to Peter Boone’s article]. The first one is you should express everything as a % of GNP and not GDP. That ignores the fact that we a couple of billion taxes from the MNC. The correct tax base is GNP, not GDP. That removes a lot of his argument. The other thing he wants to do is default on bank debt. We’ve been through this before. That’s a highly controversial thing. I won’t say anymore on that for the time being. The final thing is leaving the euro. Now most people would recognise that leaving the euro would make the situation a hell of a lot worse. So I don’t have more to say on the article other than that. It is a mish mash of ideas, most of which are either flawed or *** (incomprehensible) “

Just one remark
We should get away from a sterile GDP GDP debate and focus on how to grow tax revenue, cut public spending in euro terms. Having to face that reality however is most uncomfortable for government spokesmen. It’s easier to focus on sterile percentages. That should not be allowed happen

GDP/GNP? Truth is somewhere in between. Let’s assume for simplicity that GDP – GNP = Transfer Pricing by MNCs. Then conceptually the Irish economy is really better measured by the lower as the difference is a mere bookeeping scam. On the other hand we do levy a fee (12.5%) on MNCs for the priviledge of using this scam. But 12.5% is a much lesser tax take than the average tax take on the economy and there sure ain’t any scope to take more, so on balance I prefer to see GNP as the correct measure.

@Ciaran O’Hagan

Whereas there seems to be consensus that cuts are necessary there apeears to be little clarity as to what is the correct target ratio between necessary cuts and required growth. It is also not clear what policy options are being considered, or should be considered, for growth. Is focussing on micro-economic issues and redoubling all efforts to improve regulation and legislative frameworks the only/best policy?

Re Morgan Kelly’s article, two comments:

1. It is not clear which bonds are covered by the guarantee and which aren’t. I understand from a recent conversation with somebody seeking large deposits for one of our banks that such deposits (bonds?) would be covered for maturities long after the Sept 2010 expiry of the Guarantee. Therefore, aggregating the longer maturity bonds fo the three main banks may not be valid. Eoin might clarify.

2. It may be possible to avoid a technical sovereign default, if not a de facto sovereign default, by withdrawing the guarantee from Anglo by Statutory Instrument. Contagion within Ireland could possibly be avoided by EU Commission approval for the move and extraordinary ECB support for the other two banks in the aftermath. This might avoid a lot of the legal difficulties associated de jure default.

3. If bondholders and depositors rank parri passu then such monies as are available from the banks must be divided amongst them equally. Therefore, to the extent that NAMA money has gone into Anglo any amount available for distribution must first be divided equally amongst those who rank parri passu. The Govt may or may not thereafter be able to top up depostors to some degree. Therefore, the total amount of bonds cannot be defaulted on as long as NAMA money remains in the system. NAMA by nature cannot be rolled back though one assumes further transfers could be discontinued.

[@simpleton – You grossly oversimplify what I have said. I suggest you make your own points rather than incorrectly paraphrasing others and then asking them to dance for your amusement.]

GDP v GNP for tax planning purposes.

This year GDP is a better reflection of what the tax take will be. Going forward, given the size of the difference between GDP and GNP, there are risks with using GDP for tax-planning purposes. As we saw with Dell, MNCs are not systemmically rooted in the country and if another state offers a little more leg in terms of state-aid, regulatory relaxedness or low-tax then off they go. And looking around Europe with the UK considering major corporation tax cuts and other jurisdictions getting EU structural funds which are arguably used to compete with our efforts to attract MNCs, you see that there is probably more risk with MNC income than with systemmically rooted industries (though as our ex-pats in Switzerland and Monaco show, there’s no cast-iron guarantee on the natives either).

GDP – GNP = Fairweather friends who might upsticks tomorrow?

In that sense is it more prudent over the long term to use currentyear GNP for planning purposes as a measure of the likely tax base? I don’t know but for the DoF to say there is “no” sense in using GNP seems extreme.

@ Zhou

re deposits – all deposits placed with a participating bank before Sept 29 2010 will be guaranteed til 30th Sept 2015, or until maturity of the deposit, whichever is earlier. All deposits essentially will count as eligible liabilities.

From the NTMA:

“Total Amount Guaranteed under the Eligible Liabilities Guarantee Scheme at 31 March 2010 was €138bn. Of this amount, guaranteed deposits amounted to €106bn.”

So im not entirely sure where either the 65bn or the 115bn figures come from?

There’ll likely be a lot of issuance ahead of the guarantee deadline (assuming the ELG is not extended), but i also hear that BoI are gonna try for a non-g’teed issue once they get all their capital restructuring out of the way.

MK: “So between developers, businesses, and personal loans, Irish banks are on track to lose nearly €50 billion if we are optimistic (and more likely closer to €70 billion), which translates into a bill for the taxpayer of over 30 per cent of GDP. The bank guarantee may have looked like “the cheapest bailout in the world, so far” in September 2008, but it is not looking that way now.”

Is MK assuming that ALL loan losses are to be borne by the tax-payer?

-Firstly, I thought the tax payer was only taking on a certain amount of property development loan losses through NAMA rather than all.
-Secondly, where losses have already been accounted for the isn’t it the case that it might take an injection less than the total amount of the actual losses to re-create solvency?
-Thirdly, didn’t shareholder equity absorb a lot of losses?
-Fourthly, where private equity is raised, e.g. BoI, then don’t the losses fall on the shareholders?

Is MK suggestng another €50bn of losses beyond those already accounted for by Elderfield and Honohan in the recapitalisation requirements which they said made allowance for less propitious economic environment than that predicted by the banks?


Thanks. I guess that means that aggregating bonds is valid because they are a different beast to deposits.

From the IT article:
“The department said Prof Kelly’s assertion, that the international institutions that bought Irish banks’ bonds knew there was a risk of default, was incorrect, as most of the bonds are senior debt and carried no risk premium.”
This is just nonsense – why would the government institute a guarantee on something that there was no risk on?

All Morgan Kelly has done is state what has always appeared obvious to the average man in the street – but most economic and financial commentators, shroud in meaningless jargon.

“The department said Prof Kelly’s assertion, that the international institutions that bought Irish banks’ bonds knew there was a risk of default, was incorrect, as most of the bonds are senior debt and carried no risk premium.”

It is widely acknowledged that financial institutions failed to price risk properly across the board and this was one of the major causes of the international crisis.

Just because risk was not properly priced or assessed by institutions that made decisions to give credit, e.g. senior bond-holders, does not alter the fact that they must be deemed to have knowledge of a risk of default (whether or not they were so stupid and inept that they were incapable of having actual knowledge).

Senior bond-holders should not be able to avail of protections generally reserved for minors and people suffering from a mental disability.


What Morgan Kelly wrote:
“The ability of a government to service its debts depends on its tax base. In Ireland the proper measure of tax base, at least when it comes to increasing taxes, is not GDP (including profits of multinational firms, who will walk if we raise their taxes) but GNP (which is limited to Irish people, who are mostly stuck here). While for most countries the two measures are the same, in Ireland GDP is a quarter larger than GNP. This means our optimistic debt to GDP forecast of 115 per cent translates into a debt to GNP ratio of 140 per cent, worse than where Greece is now.”

What the Department of Finance says:

From Today’s Irish Times:

“The department also argued that Prof Kelly’s call to measure the State’s debt against gross national product (GNP) instead of gross domestic product (GDP) made no sense.”

“Prof Kelly should be aware that GDP measures the output of the Irish economy and thus what the Irish Government can tax,” the spokesman said. “GNP measures the output of Irish citizens and companies, including that which is earned abroad and taxed abroad.”

An interesting bit from Rossa White’s (Davys) response to Kelly’s piece…

” Yet the servicing cost matters more than the debt level. How can the country be “facing bankruptcy” when interest payments consume 5.2% of GNP by 2012 (on our conservative top of consensus estimates)? That compares with 10.4% in 1985 at the previous peak. Note, too, that Ireland has the lowest dependency ratio (people outside the working age groups as % of working age groups) in the EU-27. And we haven’t gotten near the limit of our taxable capacity for a worst-case scenario, even if raising taxes much further is bad economic policy in my view.”

“Yet the servicing cost matters more than the debt level”
Really – I guess that depends on the debt level. The low servicing cost is part of the problem – like the “teaser rates” which sucked people into subprime debt. It’s not what it is now but what it is likely to be in the very near future which is important.

I didn’t know that Rossa White was one of the Cassandras that foresaw the implosion of the property bubble, yet reading his bio for a forthcoming event by the London Irish Business Society, it goes

“Rossa warned of the danger of a correction in the Irish housing market (that began in Autumn 2006) in Davy research reports including: “Ireland’s interest rate should be 6%”, January 2005; “Dublin house prices heading for 100 times rent earned”, March 2006 and “Irish property: Government finances exposed to a correction”, October 2006. ”

@ Aidan

the difference with the teaser rates is that they got moved higher after a couple of years. This will not happen with the existing stock of Irish government debt, the maturity profile of which means that refinancing risk is more of a 2014/2016 issue than a 2011/2012 problem.

Thanks…but the SI I mentioned sets out that if the regulator steps in then “normal” depositors get paid off first, then any remaining assets can be considered as assets free to be disbursed to other creditors under the companies acts, where pari passu etc,. become relevant. i.e. Normal depositors first, everyone else afterwards. I doubt that a debt instrument’s prospectus can overrule an SI.

This would seem to give a regulator pretty strong leverage over any non deposit creditor of the bank, e.g. “you agree to a haircut or I liquidate the bank and you get whatever I give you”. A liquidation is likely to result in a lower payout to creditors, what with the non-linear costs of bankruptcy. Now a liquidation isn’t a small chip to bargain with, but still.

However, the SI is contradictory to what people up to and including Alan Dukes keep saying, which is why I am still left wondering which other law exists…presuming one does. Eoin? Zhou? If not that SI, then which?

From the IT article
“The department said Prof Kelly’s assertion, that the international institutions that bought Irish banks’ bonds knew there was a risk of default, was incorrect, as most of the bonds are senior debt and carried no risk premium”

A claim that the banks bonds do not carry a risk premium I would have thought is patently incorrect. However evidence is mixed, clouded by
1) difficulty in obtaining decent prices (that is true for governments too)
2) the myriad differing bonds – differing levels of seniority, different types of bonds (mortgages are one big group) and contrasting guarantees (CIFS, ELG).

First let’s note that total outstandings are higher than above.
e.g. from Bloomberg – but including mortgage bonds – Bank of Ireland bonds amount to 38bn (so way above what is given above. That 38bn is a minimum in my view but the gap with the figures above might be largely explained by the mortgages (this can easily be checked).
The pricing of any bonds in these troubled times is ambitious, and BKIR’s no exception.

BKIR 4 5/8 04/13 Sr Unsecured Issued Sep/29/09 has showing prices very close to par for all its history.

Idem subordinated BKIR 10 02/12/20, issued 2/11/10 close to par, rose to as much as 115 and is now back to 100 again

BKIR Float 07/18 was 60 start of year, then 80, and now under 70, if we can believe any of what is on screen
Like for many bonds these days, bid asks for these bonds will be sky wide and no depth in quotes.

What is intriguing is that the taxpayer is being implicated ever more in the performance of banks through the gradual extension these days of guarantees through ELG-type issuance.

A debt for equity swap is a result of a negotiation. Liquidation is the key negotiating counter of those seeking the swap. In the case of the banks liquidation simply isn’t on. The bondholders know that so why should they ever agree to a swap? Even Kelly does not suggest liquidating the banks so if even he sees this as a step too far how can we possibly bluff the bondholders that we will comit that economic suicide unless they play ball.

@ Hugh

The bond holders would still have some counter leverage in the event of one of the Irish majors being liquidated and senior unsecured being haircut. The other one would still have demand for term wholesale funding i.e. bond issuance. Could it access markets if it peer had defaulted?

The obvious answer is that it depends on the strength of the balance sheet at the good peer. I am not sure that the market would distinguish between AIB and BOI in the current environment much less between our two champions and Banco Espirito Santo, Inetesa and Unicredit. My contention therefore is that in say December if we attempt to liquidate an Irish bank and haircut senior debt, we would get frantic phone calls form the ECB and the Elysee.

I leave consideration of what would happen to credit in the Irish sytem if one of the remaining two big banks is deemed to have failed.


Agree with you. The benefits of resolution, haircutting seniors, imposing losses on bond holders and other polite terms for default are obvious…you do not have to pay the money back. However, the costs in terms of funding rates, access to markets, impact on credit are rarely considered.


Bank Bonds, no matter how senior or abstractly distinguished, of their nature entail risk. Morgan Kelly’s suggestion on debt-equity deserves some serious consideration; from the serf-perspective, and looking at the direction global forces are going, it is a no-brainer.

In whose interests are local decisions being made?

@Eoin, Tull.
The SI deals with deposit protection and modifies the companies acts in a number of key areas. Article’s 10 and 16 are probably the key ones, covering how depositors get paid out before remaining assets are considered for further disposal to all other creditors. If there’s another act somewhere then I’d love to see it (it’s what I’ve been asking), but this one seems to state that depositors get paid out of assets first, then all other creditors afterwards….and yes, it’s a liquidation scheme and not a resolution scheme.

As per BWIIs concern, my understanding from reading the SI is that the regulator would be the liquidator, potentially allowing quite a lot of latitude on what “liquidation” or “being wound up” meant in practice.

I won’t pretend to understand Irish liquidation law and I fully understand that liquidating one of the major Irish banks would be an extremely serious and scary undertaking, but my question was a more restricted one, i.e. where in pre or post guarantee Irish law is it required that senior bond holders are entitled to equal protection with depositors? It’s been said a lot, but I haven’t been able to get any clarity on why. Conversely, the SI indicates that it isn’t the case. [again, i may be misreading]

Could a resolution scheme have been tacked on to this SI with about ten lines of text…?

@tull macadoo

I doubt if our rulers would allow it in the current market envioronment given the risk of contagion. Creditantalt comes to mind.

This is not responsive to my argument above. How will they force us to bail out the bondholders? Dust off Unternehmen Grün? If the EU core and the Eurosystem are determined that Allied must be bailed out no matter the cost, then let them bail out Allied at whatever cost. If they are going to see us right on this, then let them see us right now. To take on the debt is to run an extremely high risk of being left holding the can. By the time the burden forces us into insolvency there will be no gratitude from Europe: heard anyone thanking the Greeks for keeping SocGén whole by not defaulting? Much more important, by that time there may be no bailouts from Europe anymore either.

senior bond-holders should not be able to avail of protections generally reserved for minors and people suffering from a mental disability. zhou

that is such a good line

Morgan Kelly also had this to say about Nama:

“It is hard to think of any institution since the League of Nations that has become so irrelevant so fast as Nama. Instead of the resurrection of the Irish banking system we were promised, we now have one semi-State body (Nama) buying assets from other semi-states (Anglo) and soon-to-be semi-States (AIB and Bank of Ireland), while funnelling €60 million a year in fees to lawyers, valuers and associated parasites.”

No comments here, can we read that as a general House of Commons type “hear, hear”? . €60 million a year is not to be sneezed at. I suppose you could call it job creation or adding to the GDP.

@ Hugh Sheehy You ask a valid question. Unfortunately I am no legal expert but I think the SI you are citing isn’t really relevant. That SI is all about how the (former) Deposit Guarantee scheme would work but it does not so far as I am aware pronounce on the priority or otherwise of depositors versus bondholders in a liquidation. I guess it depends on the contract. If a Bond contract says that it ranks at least as high as any other creditor then I presume that makes it the equal of a deposit. Using a rather circular argument, if bondholders only gott 20bp over sovereign yields they must surely have understood that they ranked alongside depoitors. A ranking below depositors would have conferred an element of capital at risk to these instruments and we know the regulator did not count these as capital.

Ehm, articles 10 and 16 of the SI seem to pronounce exactly on the priority of depositors and other creditors in a liquidation. That’s why I’m raising it.

Whatever about how the guarantee makes this SI temporarily moot, my question is about pre and post guarantee Irish law and the priority of depositors and other creditors in the law.


An academic economist calling a lawyer a parasite. Oh to be in the UCD common room when the BLs come in.

@Hugh Sheehy

Stepping a bit above my pay grade here but I don’t read anything very significant into those regs. What they seem to be saying is that the liquidator assesses the payout to creditors in the normal way. If depositors are then short he may dip into this Guarantee Account that was held with the Central Bank to top them up. In other words the only thing that is ring-fenced from the normal liquidation process is this 0.2% deposited by the bank win the CB’s Guarantee Scheme.

@tull mcadoo
“An academic economist calling a lawyer a parasite”
In fairness he mentioned “lawyers, valuers and associated parasites”, so it seems that lawyers and valuers are excluded from, but associated with, the class of parasites, which are not identified.
Even if that is what he meant, are you suggesting that there are lawyers who would or could, be offended by it?


Is it possible to offend a lawyer by associating him with some unknown class of parisities….who knows?

How do you gain entrance to the class of unknown parisites…membership of a profession with barriers to entry, overpaid, underworked?

@ tull/AMcG

actually didn’t cop that “parasite” line before. Tad melodramatic.

@ Hugh

like BWII says, i think that SI just clarifies who would be eligible under the deposit protection scheme, i don’t think it could invalidate a voluntary contractural guarantee from a bank that it rank deposits the same as bonds in the event of liquidation. But someone with a more legal background might be minded to clarify one way or the other. As previously suggested, it would seem bizarre that a whole host of sophisticated investors and commentators have gotten this whole situation completely wrong for an entire generation, no?

@ all

The volume of comments, and media coverage, demonstrates that Prof Kelly continues to make a valuable contribution. The pros and cons of the bank guarantee are explored at interesting and edifying length by the various contributors above and elsewhere.

Prof Kelly’s categorisation of lawyers as ‘parasites’ has rightly been questioned. While some legal practices are self serving, it can’t be right to tar an entire profession with that brush.

In discussing the important issue of national sovereignty, Prof Kelly makes disparaging reference to ‘republican headbangers’. The term is disrespectful to the people of Northern Ireland and their elected coalition government. Political bigotry has no place in reasoned economc debate.

Great letter from Moore McDowell in the times this am about the disingenuous spinning coming from (the presumably white in face panicking government). If this country ends up bankrupt after being lied to systematically – they’ll find themselves being spat at in the streets pronto.

Popular Rage in Greece:

“Is MK assuming that ALL loan losses are to be borne by the tax-payer? ”
Yes. I think it is a fair assumption. The banks essentially went into the crash with no loss reserves (unlike, for example, the spanish banks). Their equity was mostly made up of risk-weighted assets and funding with a small proportion of shareholder equity (relative to the size of their balance sheets). As the banks cannot impose losses on their risk-weighted funding, this disappears as a loss reserve.

In addition, the state has decided to recapitalise the banks. Given that equity type and levels have changed to require vastly more unencumbered equity, this means a larger proportion of equity is required than was the case in the past.

So the losses the banks take internally is less than the amount required to put them back into shape to survive, despite their shrinking balance sheets.

(Sorry about the non-financial language, hope I give the idea).

“Is MK suggestng another €50bn of losses beyond those already accounted for by Elderfield and Honohan in the recapitalisation requirements which they said made allowance for less propitious economic environment than that predicted by the banks?”
No, or rather, only if his pessimistic estimate is reached. Using a swedish level of losses, the losses to the banking system would be 50 bn in constant currency terms (about 12% of assets under management). The initial writedowns for NAMA have come in higher than equivalent speculative property losses in Sweden, however. This is before we see what NAMA is able to do with them. The swedish AMC, Securum, lost about 40% (again in constant currency terms). (From memory, so check the figures!).

The sarcasm isn’t necessary. Like many countries Ireland has a legal code that is a confused mess, making it very hard to track down the law that actually applies and which has not been modified by a sub-clause in some other law. I was always asking a question and not asserting a situation, but when things are baldly asserted as general principles it makes me wonder, yes.

As for whether or not a whole host of sophisticated people in Ireland might have gotten something wrong for a whole generation, I have to say that we’d need to clarify the meaning of the word “sophisticated”. Semi-ds at €1million-plus was normal for a while in Dublin too.

Anyway, thanks again to BWII.

@ Hugh

no sarcasm was intended, honestly. I simply mean that its generally considered a core principle across most of Europe (though im sure with certain particular exceptions), and as such it would be quite amazing if everyone had missed some glaring loophole staring us all in the face. But you are quite right to point out that our legal and regulatory framework is confusing at best and maybe even dangerous. That such an important underlying principle is so difficult to categorically “prove” one way or the other only raises questions about other perceived principles im sure.

@Hugh Sheehy

I see where you are going – I’ve been assured in briefings that senior bondholders = depositors in legal terms. The consensus here appears to be they are not. Must go find a lawyer…

i see it like this

a guarantee, not to be confused with an indemnity, means that the government steps into the shoes and assumes the liabilities of the guarenteed. It is a secondary liability that arise when the principal defaults.

if bank losses are such that all equity and sub debt receive nothing in the wind up then, in the absence of the guarentee, remaining losses are shared equally (ie parri passu) between the remaining creditors.

(Secured creditors are in a different position again – they can appoint a receiver over there secured assets. Their liability is secured on an asset and they can appoint a receivor thereover. They are unsecured creditors for any balance owed above and beyond the value of their security.)

However, only one set of these creditors (deposit holders) have the benefit of a guarantee. Theses creditors have any losses reimbursed by the government.

Senior bondholders have no legitimate complaint to make about such an arrangement. Their losses are not increased as a result of paying out on the guarentee.

Legally, in the event of a wind up, the bank is prohibited from discriminating between depositors and senior debt as they rank parri passu. This does not imply that the governemnet must bail out each creditor to the same extent or even at all.

Who the governemnt bails out is their own decision

obviously senior debt do have a guarantee – i meant that if we could extend teh guarentee for deposits but not for senior

@Sarah Carey

From a previous post:
For general interest…

“The general parri-passu rule is in s.275 of the companies act 1963:

275.—Subject to the provisions of this Act as to preferential payments, the property of a company shall, on its winding up, be applied in satisfaction of its liabilities pari passu, and, subject to such application shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company.

If depositors are not to rank parri-passu with other unsecured debtors then one must find an exception to this rule in statute law or in private contract law (i.e. in the contracts entered into by senior debt holders).”

All unsecured creditors rank the same unless the debt agreement says otherwise or there is an overiding statutory provision. Any subordination in priority would be in the bond itself. However, one would expect such bonds to be called subordinated bonds.

Alan Ahearne’s explains the nature of some of the senior debt in his lecture in NUI Galway (Paddy Ryan memorial lecture 2010). I recommend it as providing a good insight to the Government’s thinking (at that stage) on the point.

I think Hugh Sheehy has clarified he is not an expert on how creditors rank.



So, does everyone else accept the point? I’m guilty of scanning comments.

No I bleedin’ don’t.

The deposit guarantee scheme exists entirely separately to the liquidation process in the event of bank failure. The guarantee scheme pays out in three days up to 100k. The liquidator meanwhile goes through and liquidates the bank paying back the deposit scheme and bondholders in equal measure with the proceeds of the bank. Depositors who had more than 100k on deposit have to wait for this liquidation process to see if they get more than their guaranteed deposit back.

The bondholders are parri-passu to the depositors under the banks’ articles – the liquidation of the bank gives them a certain amount.

The depositors, in addition, have a deposit guarantee scheme that provides for a minimum payment without having to go through the liquidator to get. If you like, deposit protection is analagous to CDS on bonds – it exists outside the incorporation of the bank and the contract that depositors and bondholder have with the bank.

Such is the theory anyway.

If I try to summarise what seems to be the answer to my own question..
Irish companies law sets up some basic priorities for creditors, e.g. unpaid salaries and taxes may come first, but all other creditors rank essentially the same unless explicitly subordinated by the terms of the credit agreement.

Next, Ireland has no banking specific act or SI that modifies anything relevant in the companies act. This means that depositors, CoDs, senior bondholders, tradesmen, the ESB, etc, all rank the same and would get the same proportion of their debt paid. In the pre (and post) guarantee situation the state then picks up the tab to refund depositors, with only the small amount in the guarantee protection scheme (as per the SI) to reduce the tab for taxpayers.


Leaving aside the issue of guarantees and deposit insurance, do you agree that what assets the bank does have left after paying preferential creditors must be applied parri passu to senior debt and depositors?

I wonder does any issue arise as to the value of a debt or the amount due where the maturity date is after the date of winding up. I would be very surprised though if such debts do not become payable immediately upon notice of winding up/receivership/examinership or analagous arrangements such as resolution.

Yes, I agree with that.

I don’t think they become payable immediately, they have to wait for the liquidation process to proceed – see the claims of Kaupthing creditors on wikileaks for example. As I understand it, there are different rounds of disbursement with the remaining assets being divvied up to each class of creditor after the preceeding round is completed.

Deposit insurance works differently as do credit default swaps. For deposit insurance, the DGS gives notice of a payout event (for want of a better phrase) and then pays out. For CDS, the international swaps associationg thingy issues a notice of default on the bonds and bilateral payments are made based on auctions of sample debt. Or some such! It is separate to the liquidation process.


I would expect the terms of a long dated bank bond to effectively say “this is repayable in 10 yrs BUT if a winding up event occurs (petition, notice of winding up, creditors meeting etc) then it is it is repayable on demand.”

In practice debts would not be paid on demand but they would rank parri-passu with other debts due at the time and participate equally in any distribution in the liquidation/resolution process.

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