But what do you see happening even if they introduced one tomorrow?

you’re right and it is also beside the point.

But we don’t have a bank resolution scheme and you can’t do that under current insolvency law. That’s my point.

There is no need to treat depositors and senior bondholders any differently during an insolvency.
With proper banking resolution legislation they would both get exactly the same proceeds from the sale of the banks assets. However, the state could then top up the depositors claims to the full value of their deposit.

you refer a few times to depositors being protected up to a “guaranteed amount”. But obviously this was never a real, risk free, guarantee, given that the State itself may be unable to make good on it.

I might be wrong on this but I seem to remember that depositors were before the crisis only guaranteed up to a certain amount. Beyond that amount there were no 100% guarantee. Depositors and senior bondholders might be ranked the same, however, the senior bondholder should have been aware of the limit of the guaranteed amount as they did have a risk when making their bond purchase above and beyond the guaranteed amount.

Nobody viewed bank debt as risk free and I agree with you that one of the biggest problems in recent years was the mis-pricing of risk. However, senior bond investors at the end of the day were taking no more risk than depositors. Now you can claim that as professional investors they should be treated differently but that is not how insolvency law as it currently stands works.

as you say, the risk was there. The models that failed to incorporate that risk were and are faulty. The risk professionals that said that there were no risk were incorrect and anyone listening to the so called risk professionals should have known better.

I’ve been offered risk free investments on numerous occasions. I know I’m being lied to but I investigate and analyse what the risk is. That is my responsibility as it is my decision to make the investment.

When the facts are as clear to see as they are now, then anyone claiming that their risk advise and decision was good are either deluded or lying and should therefore be removed from any and all positions of responsibility as they have shown themselves to be untrustworthy.

The implied risk outlook has not been proven correct yet and if rule of law is to be upheld then it won’t.

while we all understand that there is no actual risk free investment, many people would obviously consider some assets (ie Treasuries) to have such a low probability of default that the underlying risk is negligible and approaching zero. As such, they are seen to be essentially “risk free”. In the boom times such assets considered to have near negligible risk attached to them started to encompass cash deposits and some bank debt at systematic institutions. Given how basically zero senior debt has been defaulted on in Europe despite the problems at the banks, it seems like this implied risk outlook has ultimately proven correct, no matter how in theory it should not have been.

If a financial model doesn’t match reality the solution should be to adapt the model to the reality. The suggestion that the reality should be adapted to a model is ludicrous and on the same level as if a map is inaccurate the reality should be changed.

Btw, I believe that the risk professionals claiming there are risk free investments are also by making that claim stating that there is no need for their job. I wouldn’t employ them anyway.

The doctors one is one that seems to get very little attention - not sure if it featured in Bord Snip nua but it certainly didn’t get much air time.

My partner and I have 3 kids and the five of use recieve medical cards. We recieved them list year in July becuase they were held up for some reason (how it could take 7 months to process an application I don’t know).

I work full time so never have the time to go to the doctor and generally work through any colds or flus I get (My doctor doesn’t open on saturdays just 3-4 hours during the week). We generally wouldn’t bring the kids to the doctor unless they were in a bad way. Last year i’d say overall we went 4 times (I never went) and this year we have gone one so far.
OUr doctor gets approx. 250euro per medical card holder. So for my family he gets about €1250 for approx. 1hr work (based on 2009, 4 * 15min visits), courtesy of my(our) children, who will end up paying back the state debt amassed.

Shameful and illogical - the doctor should be paid per visit. Actually they should do away with medical cards altogether and use the tax and SW systems to redistribute wealth further if this is deemed nescessary.

I hope you are not suggesting defulting on AIB seniors to fill the hole in Anglo.

The yield on many if not most assets wasn’t enough to compensate for the risk involved but that doesn’t mean the risk wasn’t there.

Those investors may not have been speculative in nature but they were searching for that extra bit of yield and no yield is free.
Whatever their reasons or motivations they made a poor an investment choice, I see no reason why they should be made whole by the state.

I think €7bn is always worth pursuing tull and it would be more if AIB and INBS was included.

i get your point about there being nothing truly “risk free” in life, but such a position obviously creates major problems for how we go about all our investment decisions. How do we accurately reflect credit risk if there is no risk free alternative to measure against? How would the banking system operate if there was a perceived real risk to deposits? Like it or not, we need risk free investments, even if only in theory, if only so that we can compare to everything else.

I also think you’ll agree that the particular company that didn’t invest in Anglo 5 or 6 years ago was very much in a minority, and those investors buying senior bank debt were very far from being speculative in nature. The yield on bank debt was nowhere near high enough to be considered so.

I have said it before but I seriously doubt that thre is 5bn of senior debt in the hands of outsiders in Anglo. Even if there was there is only 5-7bn max to offset against a likely 30bn loss. The hole in INBS is also getting bigger.

Your point about AIb is interesting. It might be a test bed for a bank resolution but I would not hold my breath.

I stated risk-free as “risk-free” because I don’t believe there is or ever should be any such a thing.

“but most investors assumed they came with a virtual risk free state under-writing.”

They got it wrong Eoin, so why should the state pay for their poor investment decision?

As I’ve said previously on here a particular company I worked for won’t touch Anglo debt about 5-6 years ago because they knew the risks and knew weren’t worth taking for the 20bps extra return.

“If you want a “risk-free” investment buy a government bond not a bank senior bond.”

So you obviously think that Greece should be bailed out by the EU? Do you consider Irish government debt to be “risk free”?

Ireland issued feck all government debt between 2003-2006. If you wanted a play on Ireland, buying Irish bank debt was the obvious route to go. They were more liquid than government debt and paid about 20bps more. Given the systematic failure of the Irish banking sector, many people would view the failure as quasi sovereign in nature. Funding possibly shouldnt be perceived as “risk free”, but most investors assumed they came with a virtual risk free state under-writing. In theory this doesnt make sense and wasn’t written down anywhere, but to deny the reality of the situation is incredibly naive and somewhat fanticiful.

Senior bonds are part of the funding but why or how does that mean that should be considered risk free?
I have never worked anywhere that funding was considered risk free. Senior bonds yielded higher than government debt because they are considered riskier. If you want a “risk-free” investment buy a government bond not a bank senior bond.

Firstly the time has past for us to adopt the perfect solution. The guarantee was an unqualified mistake IMO but we do have to live with it and its consequences and I wouldn’t advocate defaulting on those guaranteed bonds.

But the state should still pursue every option to reduce the cost to them.
There is still €5bn left in senior Anglo bonds and about €2bn in subordinated bonds. These should get virtually nothing back IMO as Anglo is hopelessly insolvent.
It isn’t enough to absorb all the losses but €7bn is €7bn!

There is also plenty of un-guaranteed senior bonds and subordinated bonds excluding BOI, these should all face discounts or forced debt for equity swaps to help with the recapitalization.

Yes, the Anglo losses are equivalent to just 18 months of borrowing but the two are very different.
Filling the €30bn hole in Anglo does very little if anything positive for the economy. Borrowing to pay social welfare and PS wages does have a positive effect on the economy as it is recycled though the economy in spending.
I am not for one second advocating continuing the high spending, it has to be cut, but the two are very very different.

I think while the EU may have operated a “no senior bond left behind policy” at the height of the crisis I think that is changing and rightly so.
As I have pointed out many time here and elsewhere, the IMF is saying we should introduce banking resolution legislation immediately. And it seems to be after discussions at EU level.

IMF
“More immediate attention is needed to establish a special bank resolution
framework. Recent discussions at the European level emphasize timely bank resolution, triggered by more prudent thresholds. This, in turn, requires a legal framework allowing for broader resolution tools such as the establishment of bridge banks and the assumption of liabilities and the purchase of assets. Some European countries have begun to establish special resolution regimes, with the U.K. taking the lead.”

In this cycle, every country has put in public money to shore up the status of senior debt. This has been done through asset protection schemes, prefs, toxic loan purchases, equity injections. Senior Debt has for the most part not been touched for fear or whatever it is the the authorities fear.

We are also members of the EU/EMU which seem to operate a “no senior bond left behind policy”. I can only guess that if there was a default in one country there would be an immediate freezin up of senior debt issuance in other countries. In a system such as EMU that has a funding gap this would require massive deleveraging culminating in a sovereign debt crisis.

A secondary issue arises in Anglo there is not enough senior debt to absorb the losses even if you defaulted on the GG paper.

Beyond that, Anglo, IN are probably going to cost the exchequer 30bn. this represents 18 months borrowing absent any further fiscal adjustment.

I too would rather purchase Irish Sovereigns without bank losses but that is not possible & it is not going to happen. The only way to avoid the bill is to default at the govt level. That of course raises a different set of issues.

Think FAS, CIE, HSE - doctors and dentists earning >500K off medical cards alone - civil servant pension top-ups, - we are not not exactly the same as Greece but you cannot say there is no comparison

Bingo.

I would rather purchase Irish sovereign paper that didn’t have the liability of the banks weighing it down. Rather the sovereign that is “wasting” €15bn of their scarce resources repaying a private companies bonds.

To me repaying debt of hopelessly insolvent banks adds nothing to the states credibility or credit worthiness.

Maybe you worked in a different type of firm but anywhere I have worked the distinction between corporate debt and sovereign debt was clearly understood.

Nollaig mentioned names, and I agree wholeheartedly as to the analysis that Ireland was and probably still is corrupt. Haughey, Ahern, Flynn, Callely, …and that is only a small few …probably the tip of the iceberg. Its likely that a lot more politicians and public servants in Ireland were on the take, corruption is nothing more than a tax on the general population. Why did none of these guys go to jail.? I think because it was beyond Irish consciousness to put these corrupt politicians in jail. Irish people in a flawed reasoning believed that a ‘little bit of corruption was a good thing’ .

The people of Ireland are still hanging onto a little of that reasoning …and this why they are not on the streets, maybe all Irish people feel a little guilty..

In the Irish context active public protest would be a healthy thing and might concentrate the minds of the establishment. The people of Ireland are being hurt and will suffer more. This is not academic., as an emigrant I have seen Irish people suffering the consequences of mismanagement of the Irish economy. In a general sense emigration is a consequence of economic mismanagement where a state cannot create or prevents the creation of circumstances leading to sovereign full employment.

There need to be a complete cleaning out of the political establishment and it takes and engaged public in Ireland to do this….alas this is not apparent in Ireland…YET.

I do really believe this. In a former life, I was a minor bond vigilante. I know that if a default by Irish banks was perceived by the market to be induced by the sovereign then the big international bond funds who hold 60-80% of the Irish paper would not get involved for many years. Remember,for the most part the bank bonds and sovereigns are held by the same firms.
A fund manager might have say 2-3% in Irish sovereigns and a tiny allocation to bank paper. In the event of a bank default, he would have to explain why he holds any Irish paper to his boss and his trustees. He would be going to meetings explaining his case. The easy decision is to opt out.
So he would just leave his Irish position as was and commit new money to some other sovereign. In perhaps 5 years when he gets fired/promoted or leaves, his successor might review. It is not fair but that is the way it is.

you seem to be missing my point about corruption from “top to bottom”. In Ireland we had a lot of corrupt or semi corrupt politicians. No argument there. That constitutes the “top”. In Greece the corruption and/or deliberate mismanagement has spread through to their statistics office, the local tax collector, large scale tax evasion being a fairly standard affair for doctors and accountants, civil servants being paid for 14 months a year, truck drivers being paid the most of anywhere in the world (by some distance - the first new truckers ‘licence’ for 30yrs was issued this week), and an estimate that 20% of Greece’s economy may be “off the books”. And the Greek response to being told that this wasn’t on? Setting fire to some banks and killing a couple of people. Comparing us with the Greeks (or wanting us to react like them) is one of the stupider ideas roling around at the moment.

@ Tull

whoa whoa whoa! If we default on the Anglo/BoI/AIB debt, foreign bondholders will punish us? I’ve read round these parts that they will in fact respect us for this move and seek to replace their now decimated investment with brand spanking new funds! Hmmmm. Also, what do ya mean we’d have to cut 20bn from our spending literally overnight??? We need someone to right a letter pointing out this fact, stat! We could always sell the Anglo depo book to cover that shortfall though i suppose…