Bondholders and Restructuring

The completely nebulous nature of last night’s annoucements in relation to bank restructuring means we are no wiser today than yesterday about what is actually going to happen with our banks. However, the following statement from Michael Noonan (not a man given to reckless speculation, I would venture) is worth discussing:

Fine Gael finance spokesman Michael Noonan said there may be conflict between European officials and the International Monetary Fund the restructuring of Ireland’s banks.

Mr Noonan said the IMF may favour more burden sharing with bank bond holders than European officials as a condition of aiding Ireland.

As is this article by John McManus.

168 replies on “Bondholders and Restructuring”

Reposting my comments from Colm McCarthy’s post on bank restructuring:

The Govt has guaranteed the banks’ debts. Generally, a guarantee usually only covers obligations to the extent that the guaranteed party (i.e., the banks) is liable. Therefore, if the creditors of the bank agree to a reduction in their rights, or a majority can vote for a reduction of the debts by using a Collective Action Clause as has happended with Anglo subbies, then a Guarantee would normally only cover the reduced liabilities of the banks. (Obviously there are two different guarantees in force).

The beneficiaries of the Bank Guarantee are now wholly reliant on the funding from the ECB and the IMF to get their money back. The ECB and the IMF are not party to the guarantee. Therefore it is theoretically possible that the IMF/ECB could use the process of agreeing funding to enforce losses on bondholder. For instance, they might say we will give you €x to be loaned to the banks subject to the banks enforcing losses of y% on bondholders of senior debt under guarantee no. 1 and losses of z% on subbies.

Leaving all that aside, it seems that we should welcome the IMF insisting on the banking sector being tidied up once and for all as part of the deal. This gives us leverage with the banks and the international money markets and should speed our recovery. It is probably of great benefit to us that foreign banks, and particularly UK banks, are so exposed to our economy and needful of its recovery.


It is interesting to note that Michael Noonan has ssaid he understands there is a conflict between the IMF and the ECB/EU with the IMF preferring to impose losses on creditors and the ECB/EU opposing that policy.

On the one hand, it would be very damaging if Ireland were to be the one Eurozone country to default. It could also cause a run on Portugal and Spain which couled overwhelm the Eurozone. On the other hand, if some degree of default is necesary to allow us (and the rest of the Eurozone) to get out of this hole then perhaps we should welcome the IMF’s imprimateur. It is hard to see how we can get out without the hole being made smaller rather than bigger by this IMF/EU intervention.

If the ECB prefers a ‘no default’ policy, then the ECB might be able to reduce the risk of default by some sort of QE whereby they puchase Irish bank assets. That would be politically difficult and economically uncertain. In the absence of a willingness to take such steps, perhaps the ECB should allow the IMF to start the surgery. Unsustainable debts are generally overcome by default or inflation, not by further borrowing at increased rates.

It is worrying that there could be an intensification of NAMA. The only positive intensification might be if NAMA assets were transferred to a bad bank that could at least behave as a bank and not an AMC.

I can’t see how it’d be done. They’ve guaranteed the lot. Moreover European leaders, as early as last week have said it wont be done. Where’s the wiggle room?

Could someone with more banking experience please explain what this kind of ‘restructuring’ and ‘downsizing’ might typically mean in these kind of scenarios?

Asset sales? Forced mergers? Job losses?

I made this comment on the previous thread, but I think it’s more relevant here:
“By using the blanket guarantee, rather than calling in the IMF immediately, the Government made sure Ireland took one for the EU team. As some pointed out this board, all the various bank resolution options discussed at great length were futile if pretection from the bond market were not secured. And the IMF was the only institution caable of providing this- and still is, even if the EU has belatedly ponied up some dosh.

Unfortunately and in addition, Ireland is now committed to taking a long and drawn-out battering for a smaller team of stupid bond investors (and the savers they represent) in core EZ countries and the UK. Ken Rogoff (in an article referenced by Philip Lane: which attracted little comment) points out that “with the IMF’s arrival bond holders are off the hook.””

Some politician with a bit of gumption needs to highlight this inequity on behalf of the Irish people.

What bondholders are left other than those coming within the ELG?

I would think that we should be very reticent about agreeing to a cut on anyone who signed up to a bond on the basis of the ELGS Scheme.

@ Joseph

for instance: AIB has a large capital markets team in place. I believe they have around 10 guys trading FX. You could probably reduce that down to 3 just to service the natural customer flow. Overall you could probably reduce down their capital markets and international corporate teams from the 200-250 or so they have right now to 40-50 just to service the domestic customer market. AIB certainly, and BOI to an extent, will be much smaller, much less leveraged, domestic retail and SME/small corporate focused banks in 2 years time. I suspect the IMF may say something along the lines of “you have a balance sheet of 200 bn now, we want this to be 125 bn in 2013”.

Post Lehman, there was a concern about ‘systemic banks’ folding.

Is it correct to say that it’s the Irish Government decided that Anglo was a ‘systemic’ bank, which it wasn’t?

We do not have full informaton about the contacts with the ECB on teh guarantee.

The ECB noted in an opinion on the guarantee in Oct 2008 that uncoordinated decisions to guarantee interbank deposits in some member states should be avoided.

Didn’t the Government two weeks ago ask Angela Merkel to clarify that burden sharing would only apply to new debt from 2013?

Had this over on the previous thread, more apt here!

“Also, on a related note – Anglo sub debt meeting #2 has passed this morning, with 92% voting in favour. This means around 60mio (ie the 8%)of the 750mio 2017 issue will be wiped out to the tune of 1 cent, while the other 690mio will get 20 cents worth of senior 1yr ELG paper paying mid swaps plus 375bps (ie nominal paper of 136.8mio).”

I’d still suggest that the IMF will not be able to treat seniors in this manner, or any ‘reolute’ manner. If Irish bank bondholders are made to pay, then everyone will automatically assume Spanish and Portuguese holders will be next, and German/UK guys are in danger too. Say goodbye to any senior issuance from an even remotely non-bullettproof bank for the next few years. The ECB is trying to wean banks off its liquidity feed, any senior bond losses will only increase that reliance even further.

Old rules.

We need to do things quickly. Reevaluate every mortgage on the books of the banks, apply the old 2.5 times main salary + 1 times second salary rule. Stress test against ECB rate of 5%.

All the mortgages that fail get moved to AIB, all the ones that pass get moved to BoI. Capitalise BoI. Nationalise AIB.

Mid 2013 is the sword of damocles. Thats when the debt restructuring will happen. We need the government to start taking the hits now, so when 2013 comes we can write down the debts in one go while having a functioning bank[ing system].

Danger of getting lost in the trees here. Remember that people like me have been making a free choice to take the extra yield on Irish bank bonds – senior or sub. Even the twenty-odd year olds have been on training courses that tell them that all bonds – even sovereign carry default risk (though interestingly I’m told a couple of years ago the CFA syllabus failed to register default risk as one associated with CDOs!).

Anyone dealing in these who didn’t know that part of their risk calculation had to reflect the political risk of the government guarantee not being honoured, should be doing something different.

Now if you have not done the research, or got it wrong, or just gone with the broker’s note that made out there was no risk, then you either sell, or if your bank is big enough, use all the lobbying at your disposal to get the reality of that risk shifted to where you thought it was.

Opting out of bond risk is a nice trick if you can pull it off.

I can’t see the IMF looking for a debt restructuring against the wishes of the EU and the ECB and those bodies are certainly not looking for senior bondholders to be burnt. (Most Sub debt in Irish banks will suffer 80-90% haircuts as per Anglo). I think everyone agrees with Merkel and the need for a premanent resolution scheme to be put in place going forward but the consequences of a bank like AIB defaulting on senior bonds over the next couple of weeks would be felt across Europe. It would send Portugal and almost certainly Spain into the arms of the IMF.

There aren’t enough details on the banking bailout fund yet. Is it there for liquidty or is purely a contingent fund for recapitalisation if the banks require it?

One key question that remains is how the rating agencies will react to this announcement.

@Celtic Phoenix
“Moreover European leaders, as early as last week have said it wont be done. ”
The suspicion grows that the our European masters have been playing games with us since the “save your banks” (now we know that meant “save our banks”) instruction to BL from trichet. This came to a head with Angela Merkels deliberate precipitation of the more recent funding crisis with her – comment on burning the bondholders.

The guaranteeing of bank bond holders always offended the most basic of principles. Moral hazard after all is hardly a new concept. It should not have been done – not only for moral hazard reasons, and because we simply could never have afforded it – but also because the reasons for it were spurious, as has now been proven.

Since we now know we can not trust our European partners, at least we know where we stand. We now have to hope that the IMF is able to establish it’s apparently more moral authority and overturn the legislation.

@ Enda

“One key question that remains is how the rating agencies will react to this announcement.”

Eh, not great apparently…Moodys just out suggesting a multi notch downgrade, though they said we’ll stay investment grade


Cheers. I haven’t seen it. Nothing on their site. Be interesting to see their thinking considering details are so scarce

Assume they’re waiting to see all the details from both the rescue package as well as the budget/adjustment plan


Moody’s says sees Ireland keeping its investment grade rating

Moody’s says Ireland’s multi-notch downgrade is now the most likely outcome

Moody’s expects overall Irish aid package to be EUR 80bln – EUR 95bln

Moody’s says higher bank burden is credit negative for Ireland

Moody’s says fresh capital would help Irish bank short-term funding

Moody’s says EU/IMF package would shift bank burden to sovereign

Also, dunno what this is about….


@ AMcGrath

The suspicion grows that the our European masters have been playing games with us since the “save your banks” (now we know that meant “save our banks”) instruction to BL from trichet.

A touch of the victim’s cross getting an airing again.

There is no evidence that there was contact with the ECB on Sept 29th and the impression on Sept 30 was pride in taking a unilateral decision.

It’s always denagerous making a serious decision in a panic situation.

Let’s not buy into the Brian from Castleknock stuff here; it was Cowen’s call on the guarantee.

No other member of the 16-country Eurozone guaranteed existing bank debt.


You seem to think that, if (a) the Government had managed its bluff and bluster more professionally, (b) Chancellor Merkel had kept her mouth shout about burning bondholders and (c) the ECB hadn’t indicated its unease about Irish banks’ liquidity support addiction, this outcome would have been avoided.

The Irish Government and the ECB have burst a gut to cover over the deep institutional and procedural deficiencies in the EU. The game couldn’t be sustained indefinitely. It’s Ireland’s misfortune that home-grown greed and stupidity have placed us on the fault-line.

Nov. 22 (Bloomberg) — Moody’s Investors Service said Ireland’s bailout from the European Union and the International Monetary Fund may increase the debt burden and pose a “credit negative” for the country.
The aid package will “crystallize more bank-contingent liabilities on the government balance sheet, and increase the Irish sovereign’s debt burden,” Moody’s senior credit officer Dietmer Hornung said in an e-mailed note today. Increases in state debt “being discussed exceed the expectation we had in October when we put Ireland’s Aa2 rating on review for downgrade. A multi-notch downgrade, leaving the rating of the Republic still within the investment-grade category, is now the most likely outcome of our review of the sovereign credit.”

Also Juncker was out saying this morning that Corporation tax was on the table. You would think they would get their stories straight.

Pah. You get two years after your foolish guarantee to sort the banks out and a goodly portion of that with good market conditions (about a year from mid-2009 to mid-2010). What do you do? You go on holiday for six months of it. You diddle yourself out of an amount of BoI to keep it majority in private hands. You submit ridiculous plan after plan for Anglo. You try and pull a fast one over NAMA. You promissory without asking. You carry on messing around.

This government is behaving as a rogue state. It is a drunk driver that has driven the wrong way up a motorway looking for technicalities and loopholes to get it out of hock.

Who would continue to support that?

While I believe the ECB is going to have to step more up to the plate than it wants to, I don’t think it is credible to suggest that it is going to happen with the current government. They are too closely tied to the banks and the borrowers. If that was not evident before September 2008, it has become so in spades since then.

@ Paul

the ECB is supposed to be the lender of last resort. If they want to shirk that responsibility, then they should let us, in fact order us, to resolve our banks. But they seem to want to have their cake and eat it – no banks go bust, but no more liquidity. I agree with you on the overall nature of the problems, but i cant help feeling we’re being shafted in this, and i never thought it’d be the ECB (rather than the EU) doing it.


The aggregate of Public and Private sector debt is the bigger problem. So far this has not been addressed. Deleveraging can occur by repaying loans or defaulting. It is much easier to default on private debt. By not allowing capitalism function, bank debt which should have been defaulted on, our public debt has ballooned.

The euro has compounded and complicated problems for the profligate PIIGS. Punishing the profligate may please the prudent but eventually hurt all members of the euro club.

European leaders need to get real and take some bold actions. Ireland is not the last domino. If they want to the euro to survive, they must allow the ECB to buy sovereign bonds. And in large quantities. Obviously, any sovereign accessing such a facility would need to cede a good deal of their power. The ECB would buy debt at 0% interest rate, but in return the sovereign would pay down x% of principal. This would continue until a country’s debt to GDP reduced to an agreed level. (this is a rough example. It may make more sense to hold the ‘principal repayments’ in a loss reserve with some strings attached.) If the QE is good for the US, it might be time to copy them. Is it preferable to punish millions of EU citizens?



They discovered an alternative to fossil fuels and we are saved?


‘He feared the changes to the banking system would be done “on a drip feed basis over a long period of time” which would have little effect on the markets’

He’s got some neck after sitting on his hands for two years.


I agree with your point about liquidity support – others have also made it – but the problems are more deep-seated – both institutionally and politically. Once the generation who experienced the last war began to pass on, the EU has been driven forward using a top-down approach that relies on the executive dominance of member-state governments in their national parliaments. Recent popular votes (France and Holland 2005 and Ireland 2008) – irrespective of the question being asked – reflect voter revulsion at this arrogance.

And I agree that we’re being shafted, but, sadly and unfortunately (as I’ve suggested) we’re in the firing line.

A lender of last resort traditionally would lend freely at high rates against good collateral. Neither is it’s intervention meant to be semi-permanent. Despite attaching ourself leech-like to the ECB for the long-haul, at low rates and against poor collateral (and drawing down truly staggering sums to boot), there are some who would attempt to portray current events as a direct result of ECB perfidy.

We’ve been getting an underacknowledged bailout from the ECB. They were quite correct in urging the relevant parties to transfer this bailout from the monetary to the fiscal domain, where it belongs.

@Bond. Eoin Bond

Belated skin saving? Probably too late for them now. I guess the IMF et al might as well hold on until they know who they are going to be negotiating with if there’s going to be an election. Or will there be an element of ramrodding everything through asap before that sort of change happens?

@ The Other Andrew

then surely they should have told us to put losses on the seniors? They didn’t do this, in fact they did the opposite and told us to save the banks and the bondholders. I have been as steadfast as anyone on here in my belief that it is not feasible to put losses on senior bondholders given the structure of the European wholesale funding market, but i think it is bizarre that we have a central bank policy which has decided to make financial losses a sovereign issue at the same time as running a very restrictive, in relative terms, monetary policy and seeking to end its emergency liquidity provisioning before the banking sector problems have actually been fixed.

If the ECB want these to become sovereign backed losses than the price to pay is a bit QE or a bit of moral hazard on their part.

@ Joseph

is any FG/Labour coalition really going to look for very different policies than the IMF are currently expecting?

@The Other Andrew

The ECB stood aside as monetory aggregates increased here at 20 – 30% a year – the goverment had to increase spending on wages as the hyperinflationary shock in the housing market would have prevented goverment workers commuting to work.
You cannot have a negative fiscal debt and indeed on a net basis we did not.
This crisis is a creature of the banks and their shepherds nothing more.
Now you want to drain the swamp of money supply to prevent the inflation created hitting the basic commodity and PM market so that the value of debt money can remain high relative to everything else – what ambition
The write offs happened the moment the banks created credit – now not only do you want to stop credit so that the banks can recapitalise but you also want to reduce wages that even before this fiasco unfolded to the inevitable crunch, credit was used to replace wages to artificially keep demand high.
If wages and credit are no longer growing you cannot pay the compounded debt period unless you want to starve every man woman and child.
This willfull misunderstanding of debt dynamics is painfull to behold.

Besides banks having been doing this sort of pump and dump for 100s of years – perhaps this time they have become overambitious which is indeed a cause for celebration and not depression.

@ All

btw, getting asked this – do the government need to put the IMF/EU package to a Dail vote?

“btw, getting asked this – do the government need to put the IMF/EU package to a Dail vote?”
It seems to be unclear at the moment. The feeling I am getting is “no”. It is, eh, ‘normal’ funding through the NTMA and the NTMA have derogated authority from the MoF and the Dail to borrow as money is required.

The specific measures ‘required’ will be part of normal legislation, so we will not see any specific vote on them as a package.


I am a good deal wiser on the banks. We are being told that they will be restructured. i.e No more interbank/ECB money in the long term.

The only way that is possible is.
1. That State and bondholders to bear the bank losses.
2. The banks will then have to be sold in order to get out of the interbank/ECB mess that they allowed to get into.
3 The price BOI €1. AIB €-5 billion.

The only question is the degree of burden sharing.
Ireland has lost the “Irish” banks.
And with respect good riddance.

@ Mr Bond, agree that something’s got to give. Clearly, ‘no bailouts, no defaults’ is not a stable equilibrium. But I believe this Gordian knot should be tackled at the fiscal level, rather than monetary. That would seem to be the appropriate forum, and that’s where we are today. Cutting through the optics, we’ve simply transferred our bailout from one forum to another. Because there’s more conditionality in this forum, this will act as a catalyst to fix the banking problems, whereas as long as things stayed in the ECB’s domain, putting things on the long finger was always going to be a more attractive option (for us, not the ECB). Where’s the catalyst for change if we’re borrowing 100bn from the ECB on soft terms?

The issue of losses on seniors is still the elephant in the room. At some ppint, I predict that the unthinkable will become thinkable. That’s the nature of crises. Cast your mind back to earlier this year, and it was ‘unthinkable’ that the IMF would become involved in a European bailout…a few weeks later, it was a fait accompli. We’ll probably get there in time with the banks…it won’t be pretty, for sure, but the alternatives won’t look too flash either. It’s ahistorical to present this as an apocalyptic impossibility; it’s happened before and the world’s kept on turning.

@Paddy Orwell

DMcW phrasing is a little worrying when he’s sounding like bank deposits are an asset. Of course he means that the deposit base provides franchise value for the bank but when it’s put the way he puts it, it’s easy meat for the critics.


Whoever takes over can amuse themselves sitting at their desks making paper aeroplanes, because they won’t have any choice over economic and fiscal policy. As I posted elsewhere, there is a strong possibility that the FF vote may go below 10% and as others have pointed out, by not changing their leader when they had the chance last summer, FG have effectively settled for making minimal gains of no more than 10 to 15 seats by ‘losing’ to Labour in Dublin. The ever brilliant Adrian Kavanagh’s number crunching exercise on is well worth a look if you’re interested to know where to place your bets on the outcome of the GE. It all depends on the campaign, but with FF heading for the knackers yard, I think Sinn Fein and Labour – who will transfer heavily to one another in the election – may be in with a shot of forming the next government.

You are right, the ECB edict is clear: the sovereign, any sovereign, must be the ultimate guarantor of senior debt. That’s fine, provided the sovereign has both the taxable capacity and the will to meet the liabilities. We (Europe) will get through this provided each fiscally challenged sovereign meets those two conditions.
You are right, it would help if the ECB helped out with creating a growth environment whereby the fiscal capacity of the state can carry these liabilities (QE, for instance). But the ECB is nowhere near contemplating this kind of help (as opposed to sterilised liquidity support that it has been extending).
What if it turns out that we, or Spain, or Greece, or Portugal, cannot meet the fiscal capacity and political will criteria? More bail-outs for the little guys, but the EFSF will be exhausted long before we get through all of these countries.
So, sovereign default looms? Or an ECB volte-face on QE? Even if the latter is theoretically possible, it would seem to require another large financial crisis to provoke it.
If it turns out that there is too much debt in the system, then debt will be repudiated. I think this is the IMF position. Do you want to do this in an orderly way or via chaos? I think I know the answer to this one, and that’s the answer the market is getting around to.
How can this not involve another financial crisis?

Good analysis. Paddy Power was giving very good odds on that last night. I bet it has shortened considerable today.

@ Eoin
“the ECB is supposed to be the lender of last resort. If they want to shirk that responsibility, then they should let us, in fact order us, to resolve our banks. But they seem to want to have their cake and eat it – no banks go bust, but no more liquidity. I agree with you on the overall nature of the problems, but i cant help feeling we’re being shafted in this, and i never thought it’d be the ECB (rather than the EU) doing it.”

I can remember making the argument that as Jean Claude had told Lenihan No Bank must be allowed to fail prior to the 2008 guarantee, that this meant that they had a responsibility to the Irish Government.

Your response at the time was that Jean Claude only told Lenny to save “Systemic banks” and that saving Anglo was a Lennys own choice.

It looks like the ECB are not going to give us permission to default/restructure. Time to get buy in from IMF and if they wont support us go on a solo offensive against the lying banks and impossible position JC put us in on the weekend before the guarantee?

We are not going to be able to pay this back.
At least if the default is now rather than in 2-3 years time there will be less of a mess in the country over the next few years.

“I think Sinn Fein and Labour – who will transfer heavily to one another in the election – may be in with a shot of forming the next government.”

No Way can I see that happening. They dont have enough candidates.
Actually I wouldnt be surprised if Gilmore opted for FG rather than Sinn Fein even if the numbers stacked up.
Can see Labour being bigger than FG though

Joan Burton just said on Newstalk she’s heard all funding is coming from EFSF.

That’s bad news for us. We need the IMF involvement here. They are our friends in this bondholder business.

@Eamonn Moran
The people in control realise this – however they would like us to continue interest payments for another few years.
This will reduce Irish wealth further – especially if the sell and run down the remaining utilities but the core will have added capital to sustain them for another decade or so.
Remember they can create credit on a whim – but interest income comes from the work of others that cannot be printed.

@Eamonn Moran
The people in control realise this – however they would like us to continue interest payments for another few years.
This will reduce Irish wealth further – especially if the sell and run down the remaining utilities but the core will have added capital to sustain them for another decade or so.
Remember they can create credit on a whim – but interest income comes from the work of others that cannot be printed.

@Eamonn Moran.
Paddy power has Lab / SF 28/1 to be next govt as against 1/10 FG/Lab. A good outside bet right now, particularly if you believe that Lab (27%) will be bigger than FG (33%).

Healey Rae also saying he might withdraw support. Imagine his positions is slightly more flexible…

Not sure if voting against or abstaining
“Responsibilty is national responsibility
Need to pass budget
My perspective Labour and FG need to support it

Gov in waiting needs to support it”

Seems to be trying to pressure them into supporting it. If they dont support it, neither will he

Should we now open separate negotiations with the IMF?
Could we have an IMF backed withdrawal from the Euro?
Is this history repeating with English absentee landlords replaced with European bondholders…

News just in….

Jackie Healy Ray will only support the budget if a Luas is built from Killarney to Kenmare and he gets the contract.
The views from Molls Gap will make this journey a must see.

Very simple. translated Both for Lowry and Healy-Rae their own seats are far more important to them than anything to do with country, bonds or anything else.

‘The budget be damned, the country be damned, what about my seat.’

@Eamonn Moran

I can remember making the argument that as Jean Claude had told Lenihan No Bank must be allowed to fail prior to the 2008 guarantee, that this meant that they had a responsibility to the Irish Government.

Power without responsibility, the prerogative of the ECB.

@ Eamonn Moran /Sarah Carey/Al

There are assumptions being made about what Trichet said in a phone conversation with Lenihan in 2008 and now regarding the IMF on bondholder haircuts where there are no reliable records available as to the actual facts.

Did Trichet say protect ALL banks at all costs or was it systemic ones? A property lending bank with no branches could hardly be systemic.

Again, it’s relevant to state that no other Eurozone country guaranteed bank debt – – so Trichet can hardly be accused of advocating that too.

As to the IMF’s current position, why would it take a contrary view on haircuts now and push up bond yields in other risky economies?

It’s not Goldman Sachs looking for fee opportunities.

As I said earlier wasn’t the official Irish position that Merkel’s position on haircuts wasn’t helpful?

Is this history repeating with English absentee landlords replaced with European bondholders…

I would like to have all the debts forgiven too but this will hardly get far.

@ Veronica & Eamonn

Labour/FF coaliton as Fine Gael will win more seats (just) than Labour so Gilmore will go in to bed with Cowenless FF in order to fulfill his Taoiseach ambition.


Just because no Country gave an explicit guarantee, there was always implicit and in many cases explicit support. No bondholder from any of the German, Belgium, Dutch, UK banks (who all had huge problems) suffered any loss.
It was widely accepted that a bank at that time could not be allowed fail due to the fragility of the market after Lehmans. Anglo might or might not have been systemic but it was a very large institution in an Irish context and would have been seen as a test of Governmental support across Europe for financial institutions.

Ireland is now firmly in the hands of those who think that cutting government deficits is the solution to all problems. Yet if we look at the build up to the crisis, it happened after a long period in which the debt/gdp ratio was massively reduced, from well over 1005 to around 20%. This was accompanied by an explosion of private debt, taking total domestic credit outstanding from 40% of gdp to around 180% of gdp.
(See Carmen Reinhart
Figs 33a and 33b)

This not only fuelled a property bubble, It meant banks that once held safe Irish government bonds now held unsafe property related paper.
No one should ignore the role that fiscal tightness played in causing the current crisis. It was because the government used revenue to pay down debt that the quality of the assets held by banks declined so catastrophically. The ECB, which should have been doing bank supervision, actually spent the early part of this decade pushing for an even tighter policy, which gave even more room for bad lending.

One thing which is being underlined at this point is the foolishness of seeing the ECB and member states (including our own) rip up Title VIII, Chapter 1 of the Lisbon Treaty and trusting that they were going to see us right in the course of their lawbreaking. Laws protect the weak, while there is no honour among thieves. Already in May it was clear, for example, that while the ECB was willing to flout its constitutional prohibition on supporting EU sovereign debts in order to prop up Greece, this didn’t mean that Greece was actually going to be treated fairly.

@ Paddy
No Chance

@ Michael Hennigan

The European Policy was that No Bank should get left behind if the reports in the “fall out” tv programme are correct.

If Trichet thought we should burn Anglo seniors then he should have been explicit.

How many eurozone banks defaulted on seniors btw?


Is this history repeating with English absentee landlords replaced with European bondholders…

I don’t recall the history books telling me that the Irish peasantry borrowed millions from absentee landlords.

The crisis in the State finances and the Irish banks is the 100% creation of the “Irish”.
The ECB has a huge responsibilty for its laxity in allowing the banks to extend their borrowing beyond their deposit base. There is also conflict in their position as referred to by others contributors. The ECB will not extend further liquidity yet is holding the line on not letting any bank fail.

I think Michael Hennigan is nearer to the mark in questioning whetter this was a correct interpretation of Trichet’s position in 2008 in relation to non systemic banks. Howveer his position was good cover for a party that wanted to bail out its friends at the expense of the country.

Ireland must now take its medicine until the patient has recovered sufficiently to tell the doctor what he thinks of him.

@Michael Hennigan

“A property lending bank with no branches could hardly be systemic.”

Well how come all the FF, sinnfein and FG TD’s agreed that it was when they included it in the guarantee?
Letting Anglo go with its massive balance sheet would have caused huge ripples in other European banks. Are you saying trichet would have been ok with that?


If you ever get round to reading this particular thread on your return in January….

I told you a few days ago there were whispers in the corridors (of a general election). You poo-pooed it.

Na na na na na :-p

@Michael Hennigan

As Enda F has said –

No EZ bank was allowed fail
No senior bondholders did get hit

Re: systemic

I think some people have always confused systemic as in retail and systemic as in wider consequences. I think Karl has a post here from about 6 months ago talking about Rock and Hard place re Anglo wind down options. It was systemic in that it had so much money from ECB/CB and all other banks who in Green Jersey mode were told to back it up. There never was a cheap way to wind it down BUT the notion that senior debt had to be protected at all costs was just wrong wrong wrong.

@ Enda

Michael and ( Eoin in the past) are saying the ECB would not have been insistent on saving Anglo.

I think the the policy of no bank left behind was clear and because of this the ECB, are as Eoin said earlier, having their cake and eating it.

@ Joe/MH

I had more in mind the unsustainable costs upon the people.
I am not trying to post contrarian views or utopian avoidance schemes.
But we screwed up the banks situation, clearly not looking after the national interests, what will be different with this situation?
The people in charge are representing EU interest, which isnt necessarily Irish interest?
Sorry for the rambling, all I can manage today…

A thought that keeps coming back to me is that we should do an exercise to see how much bondholders profited from the false profits in the banks. Insofar as such bondholders still have debts outstanding to them then it should be politically acceptable that only their capital be returned to them net of all past dividends. They would make a loss overall because the investment managers will have taken a cut but that is something they could take up with their investment managers. German pensioners would probably commend us! 🙂

@Sarah Carey,

The only player in the game who could contemplate a haircut of senior bond holders, the IMF, wasn’t in the game – and was shut out from participation – when the fateful ‘no senior bondholder left behind’ decision was made. It’s no use crying over spilt milk. Any resructuring/resolution of the banks will impose an on-going fiscal burden on Irish citizens.

We have to take it as a given and focus on getting the economy to recover and prosper down the road so the debt burden may be reduced rapidly and proportionately.

It’s easy to retreat into victim mode when there are some genuine villains out there (but against whom we can do little). We have pursued a policy of self-immolation that has rendered us vulnerable to the slings and arrows of outrageous fortune – and in numerous sectors we continue this policy of self-immolation.

We need to stop the self-immolation, focus on the positive and remove the burdens on final consumers and the productive sectors

e.g. I buy a 10 year bond in 2005 at 4% coupon
By 2010 that has yielded (5 * 4% = 20%).
Given that I invested in an insolvent company, I should be very grateful to get back 80% of my capital thereby leaving me whole save for my cost of funds loss.

“Goldman Sachs Group Inc. Chief European Economist Erik Nielsen said yesterday the government needs 65 billion euros to fund itself for the next three years and a further 30 billion euros for the lenders.”

I though that GS said last week that everything was hunky dory. Maybe, this is just further evidence that they can be on both sides of everything.

Just a generic comment on banking and leadership.

The military of the United States has long subjected officers selected to command this nation’s nuclear weapons with extensive background investigations and rigorous psychological testing to make sure a Doctor Strangelove situation does not occur. I presume other nuclear powers do the same. Officers with personal problems, gambling issues, womanizing or other reckless behavior are going to be passed over for such assignments.

Why nations do not do the same for those who head their largest financial institutions is a mystery to me. Yes, they are private corporations but they are also licensed and regulated by government and given state guarantees. It is also the case that when major banks are driven over a cliff the effect is not much different in economic terms than having a nuclear bomb go off over a major city!

When we have the former CEO of Citibank explain his reckless conduct with the idiotic quip that ‘when the music’s playing you’ve got to dance’ is not the kind of sober, prudent figure you want heading a systemically important bank.
If you want to run a hedge fund and engage in speculative behavior well, there are hedge funds or you can start one. If you want to run a major bank you should be a far more cautious person recognizing you are not risking your money or even investors money. You are risking depositors money and the financial health of the nation you are domiciled in.

@ Enda F

I have seen no evidence that any contact was made with the ECB on Sept 29, 2008 and it was only on the morning of Sept 30th that French finance minister, Christine Lagarde, then chairwoman of the Ecofin council of EU finance ministers, and Luxembourg’s prime minister, Jean Claude Juncker, who headed the Eurogroup of Eurozone finance ministers, were informed about the decision to guarantee the banks.

‘Widely accepted’ it may have been but the Government made the decision without getting any cover from Frankfurt or Brussels.

@ Eamonn Moran

I think the the policy of no bank left behind was clear…

I’m saying it was the Government’s call as regards Anglo.

If there is not a specific Governing Council decision, the Government should not have depended on verbal assurances or hearsay.

So is there an official policy that no bank should be allowed fail?

@ AlL

At a Nov. 4 press conference, Trichet contrasted Merkel’s approach with the International Monetary Fund’s assumption that aid recipients will respect debts to private creditors.

Second, with regard to euro area governance, in the initial proposals you made at the start of this process, you talked about a crisis resolution mechanism and you very deliberately left out any suggestion that this mechanism could oversee a debt restructuring. Can you explain why the ECB opposes the idea of such a mechanism having a debt rescheduling facility?

Trichet: In response to your first question, when we decide on our own policy, we consider all of the parameters that are important. It is clear that all of the information we have on developments in the US economy, the first economy among the advanced economies of the world, as well as all the information we have on the overall economic, financial and monetary situation, is important. I would not say that we have drawn any pre-conclusions about the influence of the decisions taken by the US central bank. I will just say that it seems to me that the majority of observers had the decision very much in their minds.

On your second point, we will clarify our message to Herman Van Rompuy and to the Commission. They have the task of putting both; the Treaty changes itself, and the precise mechanism into a precise form. To my knowledge, this is not yet the case: nobody has delivered a precise mechanism or a precise framework. Comparing with what we are reflecting on in Europe, take, for instance, the International Monetary Fund (IMF), which is, after all, the global mechanism that exists to help countries and economies in difficulty to recover and adjust with very strong conditionality. The IMF does not make necessarily the ex-ante working assumption that the relationship with markets, investors and savers is interrupted. It can be, but it is not the ex-ante compulsory assumption. Let us look back over the past 20 or 30 years, and estimate the proportion of cases in which this kind of intervention by the IMF occurred alongside the interruption of the normal functioning of the financing of the economy through hair-cuts and generalized restructuring. Depending on the period under consideration, the proportion might be the following: in more than 75% of cases there was no such interruption of the normal relationship and only in less than 25% of cases there was. Of course, it can never be excluded, but this assumption is not made as compulsory ex ante. I would say the assumption made is the contrary. I am speaking about the IMF. So, we will reflect on all of that, and I have a great deal of confidence in President Van Rompuy and in the Commission to take into account absolutely all of the elements that are necessary to make a precise proposal, which – again – has so far not yet been made.

@Paul Hunt – “We have to take it as a given ”

Oh? Who says?

Unquestioning acceptance of the status quo seems to be a trait of this land. You can change anything you choose to change as long as you are prepared to accept the consequences.

@ Eamonn

i think you are either misremembering or misunderstanding where i view Anglo. I think the ECB saw them as systemic in the way Sarah Carey has outlined, and in the way, in late Sept 2008, as people realised that the Lehmans collapse had undermined people’s confidence in the broader financial system, the world’s governments and central banks suddenly understood systemic – that is, a large $150bn balance sheet, lots of derivatives (even if vanilla in nature – stand down the death star Greg!), and a focused investor base in terms of Ireland, the UK and German banks/funds.

Anglo going to the wall would have immediately crystalised losses in these institutions, at a time when they were already under severe pressure, and would have created a vicous negative feedback loop which would have seen senior debt collapse in all but the safest of banks. Corporate deposits would also have fled anywhere except the core ultra-capitalised banks (it nearly did anyways), and we would have been staring at the abyss.

Now maybe we could have avoided an outright financial collapse even if we let Anglo go, but i think its an heroic statement to say that we definitely, or even probably, would have avoided it. On that basis, i think it is understandable why the authorities acted in the way that they did. However, what is surprising is that in the intervening period they have not figured out how to handle the whole notion of burden sharing. Every time they even mention it, the market pukes up and investors run for cover. So we either accept that the market cannot handle these losses, and use QE as the only tool to inflict losses via stealth, or we come up with some way for these losses to be handled in a fairer manner. Asking the Irish state to take these losses upfront and with severe fiscal conditionality, is an incredibly harsh way of solving this problem. As i said above, i never thought it would be the ECB doing the shanking, and the IMF being potentially the ‘good guys’. Its a strange outcome that we have been left with.


Irrespective of whether the IMF are the ‘good guys’ or the ‘bad guys’, they were and are the only international institution capable of imposing some orederly restraint on the on-going fiscal burden that bank resolution/re-structuring will impose. Given your preceptive reading of the game over many months I’m a tad surprised you find the outcome ‘strange’.

The ECB was established, similarly to the G&SP, on the basis that we would all behave like good Germans. Even in the US, where the Fed, the SEC and the FDIC are empowered on the basis that, some times, things will go pear-shaped and will be need to be sorted, the system really struggled. (And even the ‘good Germans’ are probably hiding losses that proportionately could be more serious than any Anglo has coughed up.)

The ECB is the child of a top-down polity that lacks democratic legitimacy and is subject to the imperatives of the major political powers who can pull the levers. In this game the small fry don’t count.

Let’s learn the lesson and focus on the ‘real’ economy which has been transformed out of all recognition in the last 20 years, build on the positives and remove the negatives that are within our control..

@ Eoin
Whether the Gov should or should not have included Anglo in the 2008 Guarantee is not the point I am making.

You did say earlier this year as Michael Hennigan has argued today, that
the ECB would not have required the Irish government to guarantee Anglo.
I and others disagree.

Trichet sent a very clear message and tied Lenihans hands.

I am saying because of this the ECB Owe us one.

From what you said in your last paragraph it sounds like we are on the same page now.

Apart from QE, the only stealth way to get German & French money into Ireland is to get two or three of their banks to take two or three of our banks. That way, the losses are as long-fingered as are the Landesbank’s and none of us will be around, or will even notice, when they eventually hit. Not so much kicking the can as burying it.

@Paul Hunt
“We have to take it as a given”

Now thats very defeatist.

And later you accuse Sarah of going into Victim mode?

When she and I and others are saying that we need to make a fight of this to make sure Irish citizens don’t take 100% all of the pain here.

“Moody’s says higher bank burden is credit negative for Ireland

Moody’s says EU/IMF package would shift bank burden to sovereign”

No sh*t, Sherlock

The John McManus article is quite thoughtful and highlights some deep structural issues regarding the role of the ECB – both in this Irish episode and more generally in terms of its policy objectives and responsibilities for the Eurozone.

@Joseph & Eamonn Moran,

My response to Eoin’s finding the outcome strange might help to clarify my thinking. I’m not being defeatist – just realistic. The bank resolution/restructuring process is entirely out of our hands and, in the light of the comments and piece Karl highlighted in his post, I’m resigned to the IMF trying to make a silk purse out of a sow’s ear on our behalf and, possibly, pushing the ECB back a bit. I suspect the IMF sees the ECB as a poorly empowered central bank prey to political desires.

I just want to see the focus on things – good and bad – that remain within our power to address.

@ Eamonn

ah, got ya now. To clarify, i think you are probably right that the ECB would have forced us to guarantee Anglo. I think i was saying, more in hindsight, we should have tried for some sort of guarantee that excluded Anglo. Maybe if we’d been forceful enough we could have gotten that through, but you’re right that we potentially we would not have been able to do so anyway.

@ Paul Hunt

i think im more surprised that we have been somewhat bounced into this in double quick time. I always figured we had a few years to try and fix things. But you’re right, there are still many many positives to focus on in this country, so there’s no point in wallowing in self pity!


All I’m hoping now is that the IMF are doing the fighting for us. I’d love to think DoF were, but with their track record……….



Bond. Eoin Bond

(even if vanilla in nature – stand down the death star Greg!)

OK. For the moment.

I was just on my way to the canteen anyway.

Imposing losses on senior bondholders before wiping out shareholders? Very strange order of imposing losses…

Not totally convinced that the idea can be sold.

@ All

Our representatives guaranteed the debt! Its simply the culmination of easy immature politics. There are no easy ways out. its terrible but it has been done in our name and we need to grow up and suck it up!


That’s the spirit. The IMF has learned lessons from previous episodes where it hasn’t covered itself in glory; it is having a good crisis, has changed its approach and acquired more owers and resources; it is led by a French Socialist, DSK, who has an eye on the French Presidency in 2012; and I amy reaonsbly confident that it will do its best to minimse burdens on citizens and boost what is fundamentally sound in the economy.

In addition, I suspect it is going to make sure it will not be sidelined here the way it was in Greece, where the EC/ECB did the ‘papering over the cracks’ routine and sent the IMF off to bust the truckers’ closed shop. Despite some micro level developments, Greece is worse off now than it was before it entered EFSF protection. Both the IMF and EC/ECB know this and a repeat performance here, in my view, is extremely unlikely.

@ Eamonn Moran

Trichet sent a very clear message and tied Lenihans hands.

Is this Lenihan’s version of a conversation or based on a statement Trichet made?

The reason I ‘m raising this again is that Trichet always seems to be careful in what he says as the representative of the governing council; the ECB issues its own transcript of media interviews and it also publishes the full Q&A at press conferences.

Are you saying that Trichet forced just Ireland from 16 countries in the Eurozone that had some form of bank guarantee for deposits, to also include bank debt, thereby foreclosing options if Anglo did go bust?

Then Anglo was natioanlised and all the losses socialised.

Wouldn’t you wonder if you were forced by some official to take a very big decision, which you were doing without any input from EU ministerial colleagues, that you would consult the individual at the time to at least pin responsibility where it should be?


Obviously burning seniors assumes the wiping out of those below in the pecking order.

@ Paul Hunt
“Greece is worse off now than it was before it entered EFSF protection. Both the IMF and EC/ECB know this and a repeat performance here, in my view, is extremely unlikely.”

On the contrary regardless of how the protection is managed this level of debt is not get-outable.

Paul there is one thing that helps me sleep better at night.

There is only one end game here and it is debt forgiveness for the pigs. Otherwise the euro will fall.

Our reputation for paying all debts, no matter how colossal, private or public, has gone fairly global now. There is an orderly queue forming of the IMF, the Eurozone nations, GB and sweden looking to lend us even more money. I’m just waiting for Zimbabwe or Greece to offer us aid now. In the end they will all make a return on their money cos come what may those are debts we will most certainly have tp re-pay.

If equity holders take losses before senior bondholders, what needs to happen before senior bondholders be hit?

Could a requirement possibly be that equity has to be wiped out?

If equity has to be wiped out, how is that done?

Is it possible that equity is wiped out by recognising losses?

If my logic holds, then it seems more losses has to be recognised before senior bondholders are even touched.

Could it be that a lot of loss recognition forcing losses to be shared but hiding losses does not?

In light of what has happened it is clearly insane to allow the same people to negotiate on behalf of the sovereign. We should at this stage bring in someone with clout and reputation to be the ultimate czar. Something like President Obama did with General Motors.

I Find myself agreeing with most of your contributions but I disagree on this one.
You think The ECB didn’t instruct us to save Anglo.
I think they did.
I think the No Bank left behind policy was fairly explicit

My guess is we will never know the exact words used or what conversations happened.

There were some reports of Brian Cowan Saying “We are not F ing nationalising Anglo” but this was second hand info and they did a few months later anyhow.

But How else could Lenihan have possibly saved all the Banks on that night?

I think he felt the massive guarantee of depositors and creditors was his only option.

Sitting in McWilliams House as McWilliams explained how Maverick a move it was and how it would solve the liquidity problems (as that is what Mcwilliams was trying to help solve) of the banks (read McWilliams own book). He must have seen light at the end of a dark tunnel.

Unfortunitely it was Eamonn Gilmores reaction the next morning that turned out to be most accurate.
When asked why the Labour Party was voting against it. He said “If this guarantee is called on the country is sunk”

@Bond. Eoin Bond

Your comments and those of quite a few others on the original decision to guarantee bank bonds and its renewal in September focuses on the harm the European banking system would have suffered. Many people say the ECB would not have like that. Fine. But if the ECB wanted to avoid that, why shouldn’t the ECB pay instead of the Irish people? Or if it is a problem of losses by the German banks, why shouldn’t the German banks pay direct?
The Irish banks behaved abominably. But they were only able to do so because of foolish lending to them by others. It was absurd for the Irish government to think that the country could handle the bank problem. They finally have admitted it never could. How much better it would have been if they had admitted that at the start.


Has anyone noticed that since JtO has left these shores the country has gone down the tubes?

@michael hennigan

I think I said a couple of weeks ago – and this might tie in better with what your saying

Trichet did say Save your Banks. No Bank was Left Behind.

But he didn’t mean use a blanket guarantee to do it.

And yet…….show me a senior bondholder in the EZ that suffered a default.

So whatever the method, the result was the same.

No special resolution yet. Un-believ-able.

@Eamonn Moran
You say that the ECB instructed Ireland to save Anglo. Where does it say they have a right to give an instruction like that? And where does it say it has to be obeyed if they did?

@Paul Hunt

re: the funnies

Thank you Paul — in Ireland satire truly writes itself.

ICTU maven Paul Sweeney: Ireland could have a very considerable advantage in agriculture over its European neighbours ..
The Morgenthau plan?

Sinéad Pentony — Head of policy at Dublin thinktank TASC: We could be a net exporter of energy…
Saudi Arabia Mark II, just around the corner.
TASC – ‘thinktank’? (laughter)

Wow we have liquidity, first poopers advantage after eating up the ECB funds we are now going to get about 1/6 of the stabilisation funds enough cash to last three years and a crowd that will probably do something about the cosy cartels of barristers, consultants and gamblers who thought they ran this godforsaken rock in the atlantic.

In terms of the senior bonds we all know that whatever happens the ones that mature over the next couple years will probably get most of their cash unless the IMF forces them to take a significant hair-cut. In any event it is their money they will be getting and the gilts will be replaced with IMF/ECB debt. Great let them deal with it. At least they are aware of the stakes and won’t do a bend over Lenny.

In two/three years when Ireland has to “return” to the bondmarkets with a debt/GDP ratio of 160% plus we will see what happens. Maybe before then the euro will have crashed when Hans the plumber from Dusseldorf will have got sick of paying 1k per year to clear up car crashes. In any event we will be fine, either the euro will go up in smoke or we can have an orderly default then. We also tell whatever bondholders are left at that time to put their bits of paper where the sun dosn’t shine. Ha Ha we are even going to get rid of lenny and Biffo.

It is a curious rescue policy that agrees to reduce the minimum wage, raise income tax (probably) further undermining consumption, while leaving corporation tax unchanged. The multinationals benefit hugely from the Irish tax regime, and while they are always keen to advise the government to put ever more money into R&D, an indirect subsidy, perhaps it is time they volunteered to accept a rise on CT of 5%. No amount of restructuring of the banks will obviate the need to increase taxes from all solvent sources. And the mncs are amongst the most solvent.

The line about the benefits of protecting senior bondholders reminds me of that clown from Wicklow on Prime time last week as the house was falling down around him saying “but Miriam if we hadn’t guaranteed the banks the country would be in an awful state”.

Capital has complete power over politics and it is now pushing it too far. I read Kevin Phillips’ wonderful “Wealth and Democracy” about 10 years ago. He writes about the Gilded age and how they tore the ar*e out of it and the post depression backlash that followed. Brideshead Revisited captures the mood well when the tables turned. And we are at the start of a similar process now.

“..I think Sinn Fein and Labour – who will transfer heavily to one another in the election – may be in with a shot of forming the next government.”
What the pickies and the stickies get into bed together? I’ll take a bet against that – too much bad blood (real blood) and too recent, between those two.
@Enda F

“Just because no country gave an explicit guarantee, there was always implicit ..”

If there was an implicit guarantee and it was good enough for everyone else – this is obviously how it was meant to be. The fact that it wasn’t enshrined in law elsewhere, was presumably enough to keep manners on the bondsters. Which makes our guarantee even more incomprehensible and unforgiveable. An implicit guarantee I can handle – with some serious mental reservation. We could never be blamed for walking away from it when it suited us.

I don’t think in the next millenium someone will be able to satisfactorily explain to me why I should pay back debt on someone else’s behalf. I think if we did what they did in iceland and put it to a rerefendum that 99% would say default (I would have said 100 but there a few in this blog seem to thnk we shouldn’t default)


I think you’re being a tad unfairly selective. Numptiness isn’t a prerogative of the left-of-centre.

@ Sarah Carey

David Blake is correct in suggesting that the ECB cannot instruct any government; it would have to act through the Ecofin council of finance ministers.

Under current governance rules, it could still only request.

Anyway, the boat was missed in Q4 2008 because of the blanket guarantee to get haircuts on Anglo debt before it was nationalised.

Now, to impose haircuts would trigger bondholder reactions in other markets.

We wish otherwise but transmuting a wish to reality is the iffy part; why would we not expect bond strikes in other countries like what we had ourselves unless there was a pan-European deal?

The only prospect of restructuring now is in a few years time if both Ireland and Greece are growing at such a slow rate so that debt repayments at a high level are unsustainable.

This could be more palatable when the recovery is more sustaining.

However, didn’t Ireland put pressure on Merkel to say that there would be only haircuts on new sovereign debt from 2013?


Additionally, Gilmore hardly wants to help create a second viable left-wing party to compete with Labour. Better for him to prop up FG.

@Sarah Carey
“Trichet did say Save your Banks. No Bank was Left Behind.

But he didn’t mean use a blanket guarantee to do it.

And yet…….show me a senior bondholder in the EZ that suffered a default.

So whatever the method, the result was the same. ”

Wrong (wrong wrong) – in our case we have i now a guarantee enshrined in law – as I said above the “implicit” guarantee when push comes to shove can be torn up (implicilty of course) thus leaving no recourse to law. How many in here would still argue “don’t burn the bondsters” if all they had was an implicit guarantee?

I now believe the law should be shredded at our convenience

The heads of government did say in Oct 2008 that solvent large banks should be provided with liquidity but of course that was an aspiration.

Irish Nationwide will cost likely more than 1 year’s fiscal adjustment. What was the rationale for saving this commercial property bank?

Trichet hardly meant that such a bank should be bailed out.

Still awaiting concrete eveidence that he said ALL banks should be saved.

@David Blake

Exactly. This “but the ECB said we had to” stuff is terrifying, like some kind of sovereign Milgram experiment:

1. Please continue putting taxpayers’ money in your banks, Mr. Cowen.
2. Central bank policy requires that you continue.
3. It is absolutely essential that you continue.
4. You have no other choice, you must go on propping AIB.

I need to get some kind of uniform and wander about Dublin, stopping people in the streets and demanding that they hand me their wallets for inspection.

@Michael H,

I think you’ve debated yourself to a conclusion. The good Mr. Bond (aka Eoin) thought that the game had a couple of more years to run. I’m amazed that the Government was able to stagger this far. Chancellor Merkel wants her new improved EFSF in place before she meets her voters in Sep. 2013, and there might be some consideration of mercy if she secures her third term. Pres. Sarkozy has a May 2012 rendezvous with his voters, but Chancellor Merkel’s time-line trumps his.

Come on, let’s focus on the things we can change.

The latest production from the National Theatre is Cowen of Athens. Cowen spends all his wealth helping out his neighbours, then is shocked to find that he is bankrupt and nobody is willing to help him pay his creditors.


Among other things, if the ECB was so fully behind our bank-saving efforts, why was some of the Central Bank of Ireland’s “liquidity support” to the banks excluded from the Eurosystem’s consolidated balance sheet? (An unusual step, right?) It certainly looks like “on your own head be it” reaction to an Irish solo run, doesn’t it? Then there are the things, like leaving Eugene Sheehy on his throne, that can’t possibly be justified as something the ECB told us to do or as forced on us by an imperative to cover senior bondholders.

Cowen to stay on, dissolve the Dail after budgetary process is concluded, election in New Year.

“Capital has complete power over politics and it is now pushing it too far. I read Kevin Phillips’ wonderful “Wealth and Democracy” about 10 years ago. He writes about the Gilded age and how they tore the ar*e out of it and the post depression backlash that followed. Brideshead Revisited captures the mood well when the tables turned. And we are at the start of a similar process now.”

I think you could be correct. The problem for Ireland is that as the tide turned, we were following the sick, stupid whales towards the beach. They managed to turn and get back out to sea. The Irish pack unfortunately showed no hint of intelligence. We are now well and truly beached.
We simply have to try to survive until the tide returns.
The water pools are being rationed and it is the whales with the most blubber that will commandeer it.
God help the weaker ones.

Since the government (and EU) say Ireland can’t default on the bank bond holders, can Ireland default on the bailout loans we receive?


All quiet on the western front – must have been the ‘shock’ … imho, his best few minutes of warhol in the past few years ,,,,,,,,

SIGHs from the international financial community – I’d get into Asian stocks early in the morning ………

Taoiseach puts in best performance in two years.

If he does the right thing and gets this budget through he will have redeemed himself somewhat.

Greens are a disgrace. Weasels as usual want it both ways.


’til tmro. (-;

@Sarah Carey

Is this your first step in advocating a Fine Gael/Rump Fianna Fail coalition?

What a shambles.
Markets have rightly dismissed the ‘bailout’ as being useless, misunderstanding the problem and now focussed their attention on Portugal and Spain.
This is a liquidity issue. Most market participants genuinely believe that Ireland is solvent even with the bank losses but believe it has a liquidity problem that will force it to reschedule the debts of the state and banks.
Politicians are dreaming if they think recapitalizing the banks via a loan to the state will solve that issue.
It’s increasingly clear that this is going to end in disaster until the EU acknowledges that the EU banking system is sitting on losses that are going to have to be either brought onto state balance sheets or monetised.
What should happen is that the EU set up an EU NAMA instantly reducing the excessive leverage in the system. So in our case, they decide that for eg the max size of banks we can support is 2x GDP and they hive off portions of the banks balance sheets into this EU NAMA. The state should then be obliged to put equity of say 10 bio into the vehicle. Each country does something similar and what you are left with is
a) The required number of Normal self financing healthy banks in each country, which can support the real economy with little reliance on overseas funding
b) A fixed known cost to each state of the EU wide banking losses, painful but at least you can then address the fiscal issue with certainty
c) A rebasing of monetary union, starting again with proper bank regulations and proper fiscal controls
d) An elephant in the corner in EU NAMA. This issues bonds to fund itself, if it has a shortfall the ECB plugs the gap. In 10/15 years when we find out the true value of this EU NAMA, any profit is distributed to the equity holders, any losses absorbed initially by the equity and if not sufficient, monetised by the ECB

In effect this is what the US did in 2008 with the TARP and QE but via Fannie and Freddie and is also a carbon copy of the RTC for the savings and loans debacle in the 80’s.
It’s what Japan has failed to do to deal with exactly the same prob.

We tried a mini version of this with our own NAMA but the market won’t give us the time to stay liquid.

Fine Gael can’t win this.
Meeja will have a field day no matter what they do.

Oppose -they wreck the IMF deal
Vote for – they are compromised

The right thing to do is get the budget through. An abstention might work but…..

Labour as usual have the comfort of opposing without having to be constructive.

I thought the worst thing the Greens could have done was put FF back in power. I was wrong.

I agree with you and have been saying so for some time. It is only the ECB that can credibly run this. I disagree with you that it is what TARP did, rather I think it is more what the FDIC does or, as you say, what the RTC did.

It could be funded with a Tobin tax.

The main problem that I can see is that the worst assets are not the ones that will be targeted. Like the Fed, the ECB will end up buying up high quality assets to artificially suppress yield. The rotten assets will be left with the banks who will mark-to-imagination and build up reserves for the inevitable losses. A genuine rotten-only assets purchase is what is required, but only after those assets have been put through the wringer – get as much out of the borrower, foreclose and then sell the loss to the ECB. National NAMAs feed their losses into EUAMA.


‘… only the ECB can credibly run this. ……… A genuine rotten-only assets purchase is what is required, but only after those assets have been put through the wringer – get as much out of the borrower, foreclose and then sell the loss to the ECB. National NAMAs feed their losses into EUAMA.’

Has to happen – or something similar(to distinguish from our particular): Time and timing, once again as around here, will be central … How many destroyed economies will it take?_OR which small economy’s political executive might eventually REVOLT and Make It Happen The Following Morning. Europe has the capacity and competence; what’s missing is the political will. Or a Catalyst – and the beauty of being a catalyst is that one is supposed to come out of it the same way one went in. Havoc otherwise …

@Sarah Carey the hem of that blue slip is showing (-; …. and you know what that does to Greg (-;

@Sarah Carey

I appreciate Fine Gael’s dilemma, but allowing the EFSF gavage to pass in order to protect FG’s position is, at best, too clever by half.

Eh, did John Gormley say in his interview with Vincent Brown that they got advice from the ECB for the 2008 guarantee? I didn’t catch it properly.

Now that they are in election mode I guess it is time for the Greens to start blaming everyone but themselves for their part in the debacle (not that they did anything except hang around and vote as directed).

I don’t think there is any evidence that the ECB/Trichet encouraged Lenihan to do a solo run on the bank guarantee, and plenty of evidence that they were not impressed by either the solo run or the blanket nature of the guarantee. This has been referred to by MH above, but I’ll include the comments from the ECB review of the guarantee below. ECOFIN were not at all impressed with the guarantee (“quite irritated” in diplomatic-speak means ‘furious”) and then there was a mad scramble as every other country had to react to it. The view that Trichet made a call to Ireland (and Ireland alone) intended to cause chaos in ECOFIN a couple of days later is not really credible. What is more credible is that Ireland and everybody else were warned about what was going to happen, and that they had better start preparing to put measures in place to prevent a meltdown. However the goal was probably to buy some time, and (try and) develop a common ECOFIN approach, not put in place an irrevocable blanket guarantee without telling anyone in advance. Now I think it highly likely that any such common position would also have been a ‘no bondholder left behind’ one, but the real power in these matters is with the EU Council/ECOFIN rather than the ECB.

As a further general comment, the ECB notes that the Irish authorities have opted for an individual response to the current financial situation and not sought to consult their EU partners. In view of the similarities of the causes and consequences of the current financial distress across EU Member States and the potential interdependencies of policy responses, it would have been advisable to properly consult other EU authorities on the envisaged legislative plans.


A further point relates to the risks to the Government’s budgetary position arising from any financial support to Irish credit institutions. While the ECB appreciates that any guarantees provided by the Minister under the draft law would be contingent in nature, given that the financial exposure of the Irish State under such guarantees is potentially very large, the Irish Government could be obliged to make significant payments in case these guarantees are called over the next two years. At a point in time when the Irish budgetary position is deteriorating and may risk exceeding the 3 % of GDP reference value for public deficits, as specified under Community law12, this is a cause for concern, even when the provision of financial support would, under the draft law, as far as possible ultimately have to be recouped from the credit institution or subsidiary in question.

Bryan G
“Now I think it highly likely that any such common position would also have been a ‘no bondholder left behind’ one, but the real power in these matters is with the EU Council/ECOFIN rather than the ECB.”

Good post.
Does it matter whether or not there was a guarantee if there was “a no senior bondholder left behnd” policy?
Does the current explosion of sovereign risk not illustrate that Ecofin is relatively powerless? Does power not really reside in Berlin in both the Chancellors office and the BUBA?
Doe you analysis not show the complete and utter folly of guaranteeing Anglo? Rhetorical qeustion

In the FT today, Garret FitzGerald attributes the need for a bailout to Angela Merkel and the ECB:

There are always many factors to explain complex situations; putting the principal blame on Merkel is misplaced IMHO:

So, if the problem of competitiveness is being successfully tackled, and there is agreement on the steps being taken to restore Irish public finances, why is aid to Ireland necessary?

Two external factors have brought this about. The first stems from the unfortunate timing of the recent proposal by Angela Merkel, German chancellor, that bondholders should share with taxpayers the burden of future financial crises. Because it was not clear to the markets this would not apply to bonds issued before 2013, financial institutions involved panicked. A clarification had merely a temporary impact on Irish bond interest rates


As I put it above after An Taoiseach’s performance last night – ‘SIGHs from the international financial community – I’d get into Asian stocks early in the morning ………’

And I wake up to find out that North Korea is popping artillery into a South Korean island, and that the South Korean airforce are put on full alert …

Domestic Irish bank assets have to be slashed from the current 550billion level to near the level of domestic mortgages which total 100billion and then the asset size is less than GDP. Start by immediately selling the external loan books of the domestic banks which total 150billion. All the ASIAN banks especially Japanese ones cannot find enough home loan growth and are in dire needs for higher yielding foreign loans. One bank such as MUFJ could buy the total amount in one shot. As the Irish government either owns/directs the banks today the deal can get done in as little as a month.

@Michael H: completely agreed. The factor that FitzGerald conspicuously fails to mention in that piece is the bank guarantee, which is what has ended up bringing the country down. Given the guarantee, our position was unsustainable, which means it was bound to come to an end. Merkel’s statement may have been the trigger, but in the absence of that statement the end outcome would have been the same anyway — there would have been some other trigger.

Besides, Merkel is fundamentally right. We now need this 2013 mechanism to be implemented now. Contagion is spreading, so the only decent argument for our not restructuring Irish bank debt is vanishing in front of our eyes. The solution is a Europe-wide restructuring exercise, as soon as possible, otherwise we will just lurch from one crisis to another and things will get worse and worse.

@David O’Donnell – “And I wake up to find out that North Korea is popping artillery into a South Korean island”

In times of crisis? Start a war and take peoples’ minds of the real problem.


Not only that but I heard Gormless imply to Matt Cooper yesterday that “Paddy” Honahan “was around” during the guarantee and thought it was a good idea. Unfortunately Cooper let it slide.

[sharpening pencil]

The Blue Princess

@Sarah: Merkel certainly didn’t think it was a good idea, she was spitting blood. Nor did most other European political leaders. Care to dig up some of those quotes for your next column Sarah?

Could anyone please explain the following….. Why is Bank of Ireland’s subordinated debt is trading at such a sharp discount? 60c to the euro. (Obviously very easy to understand why AIB lower tier 2 debt is!)

If we were to restructure BOI’s LT2 we would have to wipe c. €4.5bn of equity and all we would gain, if you apply similar discounts that were applied to Anglo’s LT2, would be c. €3bn. No gain there.

Presuming subordinated debt cannot get restructured until all equity is wiped?

Is BOI subordinated debt the buy of a life time!!!!!!!

@ anonym

I read what Eamon Ryan said and I cant find where he implicated The ECB had a hand in the idea of the Blanket Guarantee. Can you give me a quote?

This issue of the ECB is a red herring.

I don’t for an instant believe that Trichet secretly devised a special policy for Irish banks.

It’s foolish to believe that any central bank head would say ALL banks have to be saved.

Just remember, the key issue here was that you had an adviser to the Government whose own bank had been saved from collapse 2 weeks before; another major bank had collapsed in the US and Anglo had run out of money.

What were they thinking? – – that developers who had got a holiday on interest and facility payments, were suddenly in the prevailing climate going to come by manna from heaven.

Was there anyone among them in Merrion Street on Sept 29th, who had thought that the gentlemen from Dame Street were delusional about the strength of the banks; 13 months into an international credit crunch; US bond yields down to WWII levels, credit markets frozen; UK and other European banks under pressure and people still psalming about ‘resilient’ banks.

FitzPatrick and Drumm had spent that Monday trying to stitch up mergers with their arch enemies; oh, it’s just a liquidity problem not a solvency one!

The attitude on Sept 30th was ‘we showed our independence and grit’ and let Europe follow.

As to Eamon Ryan or anyone else who would like to declare the events as inoperative, of course Trichet is an easy target/excuse.

The dog ate my homework Sir!

@Michael Hennigan

“It’s foolish to believe that any central bank head would say ALL banks have to be saved.”

And yet somehow they were.

Do you think the ECB would have been happy with Ireland allowing Anglo to go to the wall that night? This is what many of the dept of finance civil servants had reportedly advised to do. Surely they would have been worried about the ripple effects for the other Euro Banks. Anglos list of Bond holders is quite wide ranging.

@ Eamonn Moran

It transpired on Sept 30th that all IL&P needed was the unlimited deposit guarantee to transfer more than €4bn to Anglo.

So was the guarantee of debt because there was a fear Anglo may not survive anyway?; Trichet had a conversation with Lenihan a week before and there was no need to check with anyone in the ECB, the Eurogroup or Ecofin on this issue on the night of Sept 29th.

After all no other country in the Eurozone had taken such a course of action before Ireland did or after Ireland did.

So much for informality and hearsay and there was no need to wonder about potential losses if Anglo did go bust.

Trichet had told them to do it!

Is this was sovereignty, what have we lost?

@Kevin O’Rourke

‘… Merkel is fundamentally right. We now need this 2013 mechanism to be implemented now. Contagion is spreading, so the only decent argument for our not restructuring Irish bank debt is vanishing in front of our eyes. The solution is a Europe-wide restructuring exercise, as soon as possible, otherwise we will just lurch from one crisis to another and things will get worse and worse.’


hmmm … well Spain won a world cup – how is Spanish political leadership, in an EU context?


A good proposal. It makes a lot of sense.

Eventually to paraphrase Churchill on the Americans, ‘the Europeans will do the right thing, after they have tried everything else’.

Vincent Browne writes in the IT today: ‘We were cajoled into the September 2008 bank bailout by the EU and, in particular, by the European Central Bank, which didn’t want any bank in Europe to fail.”

Anyone still digging to turn a yarn into fact?

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