Don’t Start From Here Post author By Philip Lane Post date November 25, 2010 The Economist provides a useful summary of the pros and cons of taking on the holders of senior bank debt: you can read it here. The new issue also has articles on contagion and the funding of Irish banks. Categories In Bailout, Banking Crisis Tags Irish banks 235 Comments on Don’t Start From Here ← Rehn Spokesperson on Bank Senior Debt → The Four-Year National Recovery Plan 235 replies on “Don’t Start From Here” Well, it convinced me. 1) Danger of a depositor run on BoI and AIB. Ouch, but not remotely as serious as what we are letting ourselves in for by shovelling money at the senior bondholders. 2) Contagion. Someone else’s problem, and it’s probably going to happen anyway. 3) Irish banks are big holders of Anglo debt. The losses are already there. Makes no real difference where they are recognised. 4) ECB gets burned. Someone else’s problem (and couldn’t happen to nicer, more helpful folk) Burn them tomorrow. @PL We are now truly GLOBAL. Beyond European, yet the only Strong Action has to come from European Policy, and other ACTION, which remains a political decision. Angela’s future policy, with which I’m broadly in agreement as an interim to the emergence of a EURO_wide bond with real teeth, is our particular now. Why should Irish citizen serfs pay a horrendous price for remaining trapped within an experimental glass jar not of their democratic choosing? Local empirical evidence over a longitudinal time scale suggests that a trong enough tap on the glass jar from the ‘inside’ usually does the trick … negotiations go global. Heidegger’s hammer is both present-at-hand and ready-to-hand. “Second, senior bank bonds from other euro-zone countries, especially Greece, Portugal and perhaps Spain, might suffer contagion.”…… Or put another way, price may have to reflect risk in these countries. “Third, other Irish banks are thought to be big holders of Anglo Irish Bank senior bonds, so they would suffer further losses.”…… If asset managers at these banks are as incompetent as the loan managers apear to have been then they may have exercised bad judgement and mis-alocated the banks capital in this way. If so it is clear evidence that a wholseale clearout at these banks, perhaps via winding up, is appropriate. “And fourth, the European Central Bank would take losses on its reserves of Irish bank bonds and those that it is holding as collateral.”……. The ECB came up with a haircut regime that it applied to the collateral it accepted against the liquidity it advanced. That haircut reflected the possibility of some sort of default, why else would it apply one – extortion? I left a comment on the article. On the Spanish media some commentators speak about how Goldman Sachs and Rothschild are playing with the irish government to make profit via the AIB bonds and the Quinn Direct deal: http://www.cotizalia.com/perlas-kike-vazquez/quienes-responsables-pasado-irlanda-20101125-4457.html They argue that there is a clear conflict of interest. Also they mention how Peter Sutherland (chairman of Goldman Sachs Ireland) is happy to speak about closing universities but he says no to make bondholders take the pain of course, he is one of the bondholders. Has the shepherd taken the advice from the wolves? Protecting senior bondholders from losses is all good and well in theory but if it bankrupts the soveriegn in the process there seems to be a flaw in the plan in practice. @David O’ Connell Good pomo stuff there, keep it coming: Heidegger’s hammer Wittgenstein’s ruler Quine’s gavagai Sartre’s lobster Schopenhauer’s cat Kafka’s dick The postmodern generator is here: http://www.elsewhere.org/pomo/ @Dreaded_Estate Ah, but the question is ‘whose sovereign’, or perhaps even ‘who’s sovereign’? Sorry, Donnell Not Connell I forgot Hegel’s Owl @Carolus You also forgot these little known Irish theoretical constructs: Bertie’s horse Charlie’s parsimony Neary’ stash Drumm’s role Lennie’s uncertainty principle (cheapest bailout at a particular point in time, just don’t look at it) Oh, if only some prominent commentator had suggested toasting seniors! Even as late as September! We would all have rowed in behind someone who said that..wouldn’t we? Again, conquests alternate title comes to mind… @Carolus Galviensis I know where Wittgenstein’s Poker “is”. But I’m holding … (-; WRT the thread title, I think here is exactly the place to start from (from the point of view of external optics). The Irish state and people have proved willing to try; have packed in a load of money as proof of it and for naught. The banks are still bust. It is, therefore, not some random act of senior burning, more a bowing to the inevitable. If rates had not risen with ELG issuance to ridiculous levels, if the interbank markets had more faith, alas, despite our efforts they don’t… @hoganmahew Ta, I’m still chuckling @Brian WTF? Conquest’s The Great Terror? @ Brian you suggested revoking an irrevocable guarantee. I think that was the problem with your fantastical/silver-bullett/insert-your-own-phrase suggestion. Lets not go into this again. @David O’Donnell You present some daunting theoretical challenges. Adopting a broadly social constructionist epistemology and a pluralist ontology, I would guess that your point of departure as introduced here is the set of symmetric and reciprocal relations presupposed in Jurgen Habermas’ Theory of Communicative Action. Am I right in postulating that in this worldview, interaction, as distinct from individual action, becomes the germ-cell or basic unit of theoretical analysis? The relations and validity claims built into the medium of communicative action, viewed here as the nexus of intellectual capital creation, are substantive and real phenomena; they are thus open to empirical investigation. http://www.emeraldinsight.com/journals.htm?articleid=836989&show=html If you see what I mean. 🙂 Eoin you have lost the argument. The steps you recommended and supported have benkrupted the country. Sir, have yo no shame? @ Garo yes, i brought in the guarantee, it was all my fault. Congrats, 10/10 for melodramatics. @Carolus Galviensis I’ve actuallly moved on – but still very much within Frankfurt School tradition (-; still an ontological pluralist, as Habermasian communicative action demands, and now more of an epistemological realist; Kantian Pragmatism would cover it. @anonym thanks for linking to your comment on the Economist article website. It makes sense. More so than The Economist article. A bit off topic but the reported turnout in Donegal of 30-40% demonstrates appalling apathy on the part of the electorate there at a time of national crisis. Also, before we get too far ahead of ourselves in putting losses on bondholders, you’d actually have to prove that the banks are insolvent (or would have been without state recaps) and you’d also have to wipe out equity and the preference shares (though you could possibly keep these intact via legislation). For Anglo its a given, for AIB its probably easily doable given that it hasnt raised the fresh capital yet, but for Bank of Ireland its more difficult – essentially the regulator would have to say that his current PCAR tests of BOI (showing 7%+ tier 1 i think?) are completely and totally wrong and that they have no capital left at all. Not a massively simple task, and not one he’ll easily sign off on. But even the concept of senior loss sharing could create rewarding liability management exercise potential. The other problem as well is that you kinda need to sneak up on people with this stuff – flagging it well in advance runs the risk of an increased deposit run. @ CP do you think the fact that with the looming general election, the by-election is somewhat meaningless, and so that may have contributed to the low turnout? That and the cold weather!! @NoGuru, anonym Yes, anonym has done a fine piece of fisking on The Economist’s bank restructuring article: http://www.economist.com/comment/758845#comment-758845 I’m not so sure about his proposal that the Europeans should provide grants instead of loans in order to ‘recapitalise’ the Irish banks. The Germans have already ‘gone postal’ on lending money they will probably never see again. Suggest just donating the money and they are likely to ‘go nuclear’. Such a proposal may be ethically justifiable from the Irish perspective but it’s implementation would spell the annihilation of any German pols who would even think about thinking about it. @David O’Donnell I would gladly continue this exchange but I plead guilty for going off-topic, so I won’t. Still, perhaps Hegel’s Owl of Minerva, which didn’t get off its butt until the dusk had come and the game was as good as over, is pretty pertinent to Ireland’s predicament. More on the German vs Irish blame game here: http://golemxiv-credo.blogspot.com/2010/11/who-bankrupted-ireland.html (“Who bankrupted Ireland?”) More food for thought when considering what would constitute a fair outcome for various parties. I haven’t seen the Irish media talk about these goings-on to this extent. Maybe it was there and I overlooked it? @ Brian Lucey Well said, but…, we need to talk about the shirt…. It is just to loud, it screams Celtic tiger. @Eoin I still expected that the electorate would welcome the opportunity to voice their anger despite weather, looming general election etc. You get the government you deserve/vote for. As if things were not difficult enough, Bloomberg report ‘The European Commission is pushing to include tests on bank liquidity in next year’s round of European Union stress tests in the wake of Ireland’s financial turmoil, according to two people familiar with the discussions. The possible changes follow concerns that the last tests, made public in July, didn’t show that banks could withstand funding crises, said the people, who declined to be identified because the talks are private.’ @NoGuru Given its scale and Irish registration the coverage of DEPFA in Irish media has been unbelievably small. Unbelievable in the way other Irish scandals remained covered up for so long…”if only we’d known” etc etc. What will be the outcome of these latest negotiations? It is very hard to see a sudden change in the embedded incompetence of this establishment coming in these negotiations. So we will get another policy failure. It looks like a future of austerity followed by eventual default and debt restructuring. When Ireland and Greece are on their knees, the EU feel it’s safe, the remaining unassisted PIIGS have implemented the fiscal retrenchment demanded to avoid bailout, and we have suffered sufficient punishment to avoid accusations that we are a moral hazard to future Eurozone behaviour, there will be a restructuring. It’s just a pity that our national reputation will then be in the gutter and we will be reduced to being the beggars of Europe. The best we can hope for, I believe, is a de facto semi-restructuring/rescue that leaves us off our knees and allows us to totter on until a complete restructuring/rescue takes place. At this stage avoiding a future sovereign default – and without further dire pain – would seem like a successful outcome. @eoin “The other problem as well is that you kinda need to sneak up on people with this stuff – flagging it well in advance runs the risk of an increased deposit run.” Wholesale funds have been out for a bit of a jog for a while now. Money managers generally know that if push came to shove the line 100k might be the only thing that would really count. Politics and the need to avoid having to swap ministerial limmos for snatch landrovers and all that. The gov screwed all the liabilities of the banks together, the screwed them to the state. In fact they screwed up big time. A good way of trying to get the deposits to park might be to unscrew the deposits from the senior bonds (using non-bank funds). Lenihan seemed in the Autumn to have been told that they were the same thing – insisting on it in the interview with vincent browne – (not just pari pasu in a wind up,). The “you can’t do anything different with them” argument is sinking the deposits along with the bonds. Its a bit like the way the sinking banks submerged the sovereign. love the article. Not least because it (along with much FT coverage) recognises the burden we are trying to take on and leaves room for alternatives in the event of failure. Irrevocable: WTF? Laws change. So do governments. Attitudes also. Toast….mmm It is inevitable..Eoin you will be assimilated The main point in the note in the article is that if creditors will lose out in event of bank failure they will not invest or cause run. In my book it is time banks started acting like all other companies, and yes they will have to compete on the basis of being safe. You don’t here investors in mining exploration stocks getting compensated when they don’t find any ore. @BL “Irrevocable: WTF? Laws change. ” agreed – sadly – it was all too easy to fall for the lie that just because it was writ “irrevocable” it was thus rendered irrevocable. It can be constitutionally challenged in an obvious way as that letter writer in todays IT pointed out. Only the credibility of the draughtsmen is at stake. Make that “yesterdays IT” – should be in bed @Galviensis Thank you. I’m certainly not trying to spread enthusiasm for grants; I don’t feel much of it myself. As I’ve mentioned before, I’m a Mellonite lunatic from the Internet. I’d rather see restructurings than grants even if the Germans were placidly handing out the latter. The fact that the German public would loathe EU grants for the Irish banks, while Irish bank haircuts have significant support there already, only reinforces my existing preference for haircuts as both the better policy to implement and the more astute platform to campaign on. My point was that if post-restructuring contagion is unthinkable, then grants are necessary. There is no just (and very likely no effective) third choice rather than restructuring or grants, unless it’s gonzo QE. That said and all, while the basic set of alternatives is small, there are different ways in which they can be organised, perhaps combined, and dressed up for voters. I’ll mention my earlier half-baked idea for handling the banks. @Eoin “…flagging it well in advance runs the risk of an increased deposit run” The risk? NIB is capping deposits at 50k, Rabo takes a week to issue a new account number they are so snowed under, 18 year old tellers in the banks tell you to check out ntma.ie or itsyourmoney.ie because “it’s all guaranteed” whether you are withdrawing 800 euro or 800,000 euro and Anglo makes “human errors” and now routinely forgets to transfer funds…. It’s just as well it hasn’t been flagged so. @Pa Bandit Yes, I think the secret is out somewhat, though I’m sure it could be more universally known yet. (The Nationwide is also fishing the troubled waters.) Who did not bankrupt Ireland not the EMU not the ECB. Who did bankrupt Ireland ? The sovereign Irish Gov’t the same one that has governed the country with minor interruptions since 1936. Who elected them repeatedly? Every single one us who has reached voting age is equeally responsible. It would be a despicable act for the Irish Gov’t to weasel out of its mandatory sovereign obligations at this stage. To my eyes our sovereign obligations do not include bailing out banks that flagrantly avoided risk management. The banks are private sector entities operating in a state protected bubble with a duty to act prudently. The oligopoly could have continued to function profitably for decades instead they decided to act as recklessly as the worst actor Anglo-Irish who dominated the commercial/property lending sector. The banks should be pushed into receivership immediately and a half dozen Cabinet Ministers should be put in jail for even suggesting the taxpayers are responsible for Irish bank debts. The last thing I want to hear now is we should join GB in a joint currency arrangement. We should negotiate a deal with the EMU members and put it to a referendum against a return to the Irish Punt and our own bank note and bond printing press. We have to stop acting like weasels and gutless wasters give the EMU and the Irish voters a say in the outcome. Ve need to bild more of theese 😆 Looks like *perhaps* some good sense is emerging from the folks trying to bail us into rescuing the EU’s banking system. “The source said there was a “common understanding” between delegations from the EU Commission, the European Central Bank and the IMF that senior and junior bondholders should each pay a share of the rescue costs.” http://www.irishtimes.com/newspaper/frontpage/2010/1126/1224284184012.html @BCT The IT reads very much like a bond burn is on – “…In the first, bank debt would be converted into equity shares. In the second, bond investors would be given the choice of injecting fresh capital into banks or face a cut in their investment.” Let’s hope it is significant and not designed to impose a little pain on the bondholders but not enough to hurt anyone in the EZ. http://ceditora.com/en/irish-money/ good perspective on Irish money from a weirdo hippy dippy californian publisher @Pa Bandit Let’s hope it is significant and not designed to impose a little pain on the bondholders but not enough to hurt anyone in the EZ. Very true, but these things have a tendency to get out of hand. 🙂 In particular, once senior debt has been taken off its pedestal, it should be more difficult to resist political pressure for meaningful haircuts. Let’s hope so; in fact let’s try to help make it so. We should of course thank Dr. Merkel for her pioneering work on our behalf here. Speaking of whom, have Sarkozy and she received this particular memo yet, and what will they say now? It was not only foreign bond investors who supported the banks in boomtime but overseas institutional and corporate depositors in search of yield. The Economist says some €179bn of Irish bank deposits belong to customers from outside the Eurozone and are larger than domestic deposits. It was striking during the boom years that among the major three Irish banks, Anglo Irish Bank invariably offered the highest deposit rates. It was likely making a loss on some of these deposits but it was presumably considered a good strategy as reported profits were for a decade among the best in European banking. Anglo was able to brag in it 2006 Annual Report: ‘Ten year compounded annual growth rate in profit before tax of 39%; 21 years of successive profit growth.’ It would be bad news if these overseas depositors continued to withdraw funds. @ Michael H. I believe a very large proportion of these non EZ depositors is/was from the UK IT on senior debt taking some pain http://www.irishtimes.com/newspaper/breaking/2010/1126/breaking6.html @Eoin “Let’s not go into this again” Sorry, on this one you were dead wrong. Lucey was bang on. Trying to bury it does you no credit. @ Simpleton please re-read that particular thread/article. It was based on revoking an irrevocable guarantee. It was talking about burning sovereign-backed credit. This is not actually what we are talking about doing here. @Eoin, Come off it Eoin, you waged a two-person war, with Zhou, (perhaps three if you include Tull who has now honourably changed his mind) over many months and many threads, against burning bondholders in any shape or form. Man up and admit you were wrong. In principle and now in fact. @ Simpleton and im not trying to “bury” it. I simply think that the 400+ comments on that particular thread are probably enough. But please, if we want to re-open it, know yourselves out… @ Simpleton we have various issues here: 1. burning of guaranteed seniors. This has still not been suggested in any of the current discussions, and was pretty much ruled out even by the now uber-hawk Noonan the other day. But this was core to much of Lucey’s argument. In fact, it was THE core principle and dramatic silver bullett behind the IT article which generated the 400 comments on here – “How do we do it? We revoke the guarantee”. 2. burning of unguaranteed seniors. This has been suggested by quite a few people over the last year or two, but was somewhat pointless while the guarantee was in place. It was also somewhat pointless while the situation looked painful-but-bearable: at the end of the day, the EU would simply not accept one of the wealthiest nations in Europe defaulting on its banking debts while it was still physically capable of repaying. Simply walking about from our senior liabilities was not an option at that stage, even FG believed that was the case up until a couple of weeks ago. I mean, think about it – we’re on the verge of a collapse, and the EU has only NOW even started to discuss it? However, with the nation now clearly on the precipe of default (even if it doesnt actually arrive until some time later), the notion that we “have” to repay the banking debts is very much irrelevant if we “cant”. Its a “wont pay” vs “cant pay” question, one that we could not have debated before when things were far more stable. It is also far more achievable if the restructuring of senior debt is done under the cover of an EU/IMF deal, rather than just us doing it by ourselves. It will also, if it goes ahead, i believe, mark the first time in the history of the OECD that a financial institution has managed to default or restructure senior debt while not being either completely broken up or liquidated. To call it a precedent is a bit of an understatement when you consider that there is 2 trillion Euro in senior debt to be refinance in the EU over the next 2yrs alone. It is also therefore not some trivial matter only affecting us. The facts and figures have quite clearly changed in the last few months, from stable to apocalyptic, and so my opinion on the merits of burning bondholders have also changed. Calling for senior debt losses when it was not possible or practical does not make you necessarily “right” now, especially when much of your argument is different to what is actually occurring now, ie unguaranteed vs guaranteed. Btw, i still believe that any losses will be imposed voluntarily rather than via a legislative option, but the pressure and danger of a legislative option will be used to strong arm seniors into a haircut. I also believe that there is a strong possibility that any senior debt haircuts may still be avoided via a QE-lite cheap bailout package for Ireland. Guess we’ll find out one way or the other on Sunday. Im gutted that the whole sorry, stinking mess has proven to be worse than my imaginings. I suspect Morgan, Constantin, Karl, Peter etc are similarly. This is a massive massive governance and government failure. My only consolation is that I have been trend correct – so too was Cassandra and that worked out well for her didn’t it. Look in the mirror Eoin and ask : what side was I on in the fall of the republic? Coz that’s where we are now. To seniors: I normally do not engage in “nah nah nah told ya so” but im on a day off, heading to a wedding of the daughter of a friend in the lunchtime so here goes. On 2 Sept I published an oped where I explicitly suggested burning, not lightly toasting, incenerating, Anglo (and by extention all other) seniors. I think that the reaction still has the record for comments at 380+ Now, alas, and to all our shame, we are exactly where I feared and suggested we would be. Its also interesting that we are now getting around, two years almost on from when people like Karl and myself and others suggested it, to nationalising recapitalising restructuring and reselling the banks. Im sure BW2 will crawl out soon yapping and yammering about deposits; im going to be in Caragh at Jills nuptials and a lovely day for it, but BW2 and Eoin need to look in the mirror and ask that question. Shills, trolls, sockpuppets, im feckin disgusted at how this has turned out and would dearly love to have been 1000% wrong. Simpleton, Eoin, the only arguments for standing over the guarantee and protecting seniors is preventing a bank run & maintaining access to markets. Both of these issues are off the table now. That said to get at seniors in BoI involves writing off 3.5bn of the NPRF and admitting the PCAR was a fraud. THat is an “appalling vista”. If so I wd expect Dr H would have to resign inter alia. Sardonic wit. http://www.nytimes.com/2010/11/26/opinion/26krugman.html?src=ISMR_AP_LO_MST_FB “The facts and figures have quite clearly changed in the last few months, from stable to apocalyptic, and so my opinion on the merits of burning bondholders have also changed. Calling for senior debt losses when it was not possible or practical does not make you necessarily “right” now, especially when much of your argument is different to what is actually occurring now, ie unguaranteed vs guaranteed.” honest of you to admit that you have changed your mind Eoin and kudos for that. But….you still seem to think we could have dodged ducked and bertied (a word for blustering foolishness) out of it. We couldnt, and didnt. If we had shown some gonads months ago, we MIGHT be better off. We couldnt have been worse off. Cop on, get real and toast the bstards. What would they do? lock us out of the bond market..? Cut banks off from liquidity…? Trash our international reputation..? FFS… @Tull “Simpleton, Eoin, the only arguments for standing over the guarantee and protecting seniors is preventing a bank run & maintaining access to markets. Both of these issues are off the table now. That said to get at seniors in BoI involves writing off 3.5bn of the NPRF and admitting the PCAR was a fraud. THat is an “appalling vista”. If so I wd expect Dr H would have to resign inter alia.” Exactly. Shift happens. 3.5b now is peanuts in the overall context. As for the not-very-stressful tests…i think Eoin Dha Aimim is the only person in the spiral arm who thinks they were anything other than smoke and mirrors. Right, Eoin BTW – JtO must be in montana or idaho or somewhere else. Im sure he is gleaning some morass of data to fling at us akin to our simian cousins… Surely enough is enough. In the Lisbon Treaty the charter of rights asserts that disability is a human rights issue. I would like the position of the special needs Irish who are cared for in their homes to be strengthened and kept sacred in all fiscal adjustments. Pax Romana or not. If this threatens the budgets of other groups then I might refer them to the document from a permanent and gallant ally: dignatas humanae, December 7th, 1965, Rome. I agree with all people of tolerant and inclusive faith. Pluralism should be defended. That encyclical is a personal constitution of many but my public constitution is the one we all share together. As I believe in trying to live lives ‘God desire for us’ (Eamonn De Valera) I respect the law, local and international. My people would come from every part of Dail Eireann, and every part of the island. I admire http://www.socialjustice.ie that is why I would like to see Fine Gael and Labour in government as soon as is possible. mise le meas, firstname.lastname@example.org http://ftalphaville.ft.com/blog/2010/11/26/417166/setting-sights-on-senior-irish-bank-investors/ @ Pa Bandit, You mentioned NIB capping deposits at 50K. Is this just a recent development, I was on the nationalirishbank.ie website a few minutes ago and it only mentioned 100K. Maybe NIB were slow in updating their website, but if you have more info I would be much obliged. @Brian Lucey & Eoin, The reality is that you were both right. Brian, you were right on the need for restructuring and burden-sharing. Eoin, you were right that, once the gurantee had been issued, Ireland and the EU were in medium term containment mode with the ECB providing liquidity. Nothing unilateral could be done without either pre-guarantee support of the IMF or, has transpired susbequently, the ill-formed EFSF. Things are possible now because the EU is slowly getting a handle and the IMF is on board. And I might add that it appears the IMF has no intention of being made to look stupid as it has been in the Greek fiasco. @Brian Lucey “My only consolation is that I have been trend correct” The worst form of plámás is self plámás. I’m sure your being “trend correct” will be of great comfort to the legions of unemployed now looking at a €30 per week cut in benefits . Seniors getting destroyed by the markets this morning btw… “There are very powerful arguments to support the default view, and the strongest argument against it, from Ireland’s perspective, evaporated last week – that argument was that any default on bank bonds would cause lenders to stop giving money to the Government to fund its deficit. That has now happened anyway.” http://www.irishtimes.com/newspaper/opinion/2010/1126/1224284180165.html But, of course the taoiseach and the minister for finance will make us pay whatever price (note : they wont pay a cent…) to save their face. Which aint worth diddy @Seafroid What sort of gibberish is that? Seriously, get over the ad homs. I suspect you didnt bother to read my comments did you? @Eoin Yes…and not before time. @ Brian “and would dearly loved to have been 1000% wrong” eh, please let us remember where you stood when the first republic fell – you were on record as wanting it to fall, were you not? @Tull “the only arguments for standing over the guarantee and protecting seniors is preventing a bank run & maintaining access to markets. Both of these issues are off the table now.” Precisely. I’m not sure you other arguments totally follow. The preference shares would also be converted to equity, before the senior debt. It would be dilution, not write-off. As for Mr. Honohan and Mr. Elderfield. I believe that they are substantially correct that the big two banks are capitalised to meet losses. The problem is that those losses are likely. If the banks are to be going concerns, they would need to be recapitalised again. That is the problem with a snapshot stress test (as I tried to point out over the European stress tests…). Looking at capital only gives an idea of how much in losses can be absorbed before recapitalisation is required. It doesn’t mean at all that no future recapitalisation is necessary. EUROZONE SOURCES 09:48 26Nov10 RTRS-OUT OF 85 BLN EUROS EU/IMF AID TO IRELAND, 35 BLN FOR FINANCIAL SECTOR, 50 BLN FOR GOVERNMENT- EUROZONE SOURCE So…how much now to anglo? @Eoin Yes. I was. And it has. But the same gobdaw system will patch it up all thoough this your only input has been unwavering support for the official line. Comical Eoin indeed. “There are good grounds not to: first, if they face losses then depositors, who in theory have the same seniority, might start a run. Second, senior bank bonds from other euro-zone countries, especially Greece, Portugal and perhaps Spain, might suffer contagion. Third, other Irish banks are thought to be big holders of Anglo Irish Bank senior bonds, so they would suffer further losses. And fourth, the European Central Bank would take losses on its reserves of Irish bank bonds and those that it is holding as collateral.” 1. A run on Anglo. I am shitless that the last 10 cents in deposits from the morons institute and the 20 cents from Mary who dosn’t read newspapers is going to destabilise the country. 2. Greece, Portugal, Spain contagion. Bring it on, the best thing that happened last year for ireland was the greek problem. The Euro devalued reducing the level of our fatal deflation and our exports became more competitive leading to export spurt. 3. Other Irish banks. We can recapitalize them for the losses using some IMF/EU funds. Isn’t that why we are talking to these guys. Assuming it 10bn of 50bn Anglo Senior bonds we are already up 40 bn on the national balance sheet. 4. ECB. They volunteered to become part of the problem when they started to take derivative NAMA bonds as Tier 1. NAMA was trumpeted at the time as raid on the ECB turning bits of paper into euro cash. We would not have the monster that is NAMA without their cooperation. This article is a good argument on why we should negotiate with the Anglo and INBS. These guys after all are systemic if we take on their 50 bn we will tip the country into the non-recoverable 150% debt/GNP making default on the sovereign inevitable. As i said two years ago you could not get much more systemic than that. These CoCo’s seem like an unnecessary complication Why not just make the bank hold that funding in the form of equity? Triggering the conversion of the cocos will be seen as a sign of distress in a crisis and I suspect there will never be enough of them to make a big enough difference. @christy If you are paying 5% for 30 bn to recapitalise the banks, you need some way of paying interest to the IMF. CoCos provide that mechanism (by having a coupon) whereas equity is reliant on profitability and dividends. @ Brian so you’ve basically been hoping for this day all along? Well congrats, guess its a double celebratory day for you then eh? Meanwhile, away from the petty self-back-patting, the world goes on… Eoin newsflash – the government, nay, the governance, of the state is not the state. Politics 101 must have been skipped. Your a shill, a troll and not even amusing. Even Tull has given up, BW2 has crept back into his viaduct and JtO has gone to PalinLand. You are Hiroo Onoda… Like Churchill’s dreary steeples of Fermanagh and Tyrone it appears the integrity of this quarrel shall remain undiminished. Others, though, are looking at political reform: http://www.irishtimes.com/newspaper/opinion/2010/1126/1224284180307.html What about coco Nama cake and a TSB/EBS cocktail that is surely the solution. Nope the answer is default, devalue or negotiate with the senior bondholers and/or a combination of all three. When is process going to start. @Bond. Eoin Bond – “Guess we’ll find out one way or the other on Sunday” (Serious question) Why Sunday? Did I miss some announcement (I got up late this morning)? Or is it just the normal run of putting things out before markets open on Monday? @All – it’s jolly heated in here this morning which is just as well as my heating packed up last night. I nice big bill to face just before Christmas 🙁 I wonder if the 10 year will go over 9.5% today… Hopefully the nation will have much to be thankful to the IMF for in a few year’s time. Isn’t there going to be some cost in elevated rates for Irish and Greek sovereign/bank debt for some years, after the crisis? @Eoin “the facts and figures have quite clearly changed in the last few months, from stable to apocalyptic, and so my opinion on the merits of burning bondholders have also changed.” Fair play Eoin but I have to disagree that facts and figures were ever stable. If you are basing this on what was coming from official sources, government or otherwise it explains why you were behind the curve. But in all honesty I don’t believe that cos you are way too smart. There are some on this sight who are very conservative and were just acting like teachers pets unable to see that just trusting in official sources and going along with the constant over positive spin coming from government was not very realistic. They were, I believe, in denial. But there were others who had a monetary interest. By the way how can you describe the guarantee as irrevocable? The banks very obviously lied about their financial positions. Legally and morally we have a very good case. The ECB’s policy was no bank gets left behind so they also pushed the government into a corner. But the most important reason of all that it is not irrevocable is because the government can change its mind. Yes there are consequences but as i and others have been arguing for a long time taking upfront pain now is much better for the Irish people in the medium term than kicking the can down the road and making things worse as we continue to live in denial. I say burn the seniors in full now. Suds and his mates need to be thought a lesson. They are bullies but if we actually strike back (as opposed to threatening to strike back) they will scuttle off and take the minuscule ( by these guys standards) losses. I don’t want the ECB to ride to rescue with QE cos then the seniors get off the hook again. @ Brian forever with the ad hom’s from the guy who whines about ad homs. At least you’re consistent. Just to be clear: i do not, nor ever have, care about what you think about me, so you can say what you want if it makes you feel ever so warm and smug. Your self-congratulatory tone this morning, as the nation stands on the precipe, says far more about you than me being wrong about current events says about me. I suggest we leave it at that, but i highly doubt your triumphalism-in-the-face-of-despair is anywhere nearly finished yet. Why is the DoF calling a government minister a liar? http://www.irishexaminer.ie/home/gormley-europe-sought-minimum-wage-cut-137666.html @ Joseph Sunday night has been suggested today as the likely timeline, but yes, basically to get out ahead of the markets on Monday @ Eamonn i’ve explained this before – i thought the situation was stable enough for us to play this problem out over a number of years via the ECB, rather than having it come to a head so quickly over the last few months. If growth etc had managed to pull us out of it, it would have been bearable. This is what every other country across Europe is doing, less transperently, and over a longer period. Re irrevocability – the common understanding of our very strict private property rights laws is less than whole. The government cannot just “change its mind” as has been suggested, it would be unconstitutional to do so. We had some legal scholars comment on here about this (Gadge and another who’s name i can’t remember – sorry!). There is a potential (note*) loophole for any right which imperils the finance of the State, but im sure this would be vigourously challenged in court. And it would still be seen by the markets as a sovereign default, whether proved constitutionally legal or not. And it would still be seen by the markets as a sovereign default, whether proved constitutionally legal or not. So. What.? And I wouldn’t start from here either (protest march tomorrow): “Mr Begg said the march and rally would be a family-friendly event which would be peaceful, good humoured and very well stewarded.” This march bears all the hallmarks of attracting every lunatic fringe and nutter from across the country and as much as I would like to protest, I think I will leave it to the ballot box rather than risking my children at this ‘family-friendly’ protest. @Joseph, The Greens are facing annihilation. What do you expect? I don’t think the Troika were very bothered about the NRP once it satisfied the optics in terms of front-loading the €15 billion adjustment over 4 years. If they had been seriously involved it would have been a very different document. They may be unelected, but they know the people will have to sign on and that something very different will be put to them and agreed after an election. I expect FG and Labour will get more direction – if these warring tribes agree to cohabit. More witticisms. mpettis.com/2010/11/chinese-inflation-and-european-defaults/ @ Brian at some stage we will need to go back to the markets. Still being considered a sovereign default will make that somewhat harder. It may also be considered a step too far by even our EU/IMF overlords. As i said way above, at the moment it is only unguaranteed debt that seems to be under discussion from the IMF, they are not advocating a sovereign default. @Brian Lucey Looks like jesuitical preening of the “pari passu” brigade has given way to outright hysteria! Congratulations on getting so much right, you will not be thanked for it. @ Eoin What % of unguranteed senior debt would you gestimate is not held by either Irish banks or ECB? Anyone know how much unguaranteed bank senior debt is outstanding? Trying to burn the guaranteed bondholders will likely be tied up in the courts for years – “unconditional and irrevocable” is pretty hard to work around, unless perhaps the sovereign also defaults. With the right legal framework in place however, burning bondholders is easy. Take the USA for example – the OTS/FDIC can basically do anything they want. When there was a run on WaMu they took over, wiped out the shareholders and junior and senior debt, and sold the rest to JP Morgan. It only took a few days. You can read the views of a disgruntled bondholder here . @ Brian Lucey You’d be a great addition to the Big Brother house with that personality of yours. Were you like that at school as well ? How did the other kids respond ? @Seafroid I lost teeth but saved face. Literally. I learned early – stand up to bullies. You may limp away but they usually back down in the end. Sockpuppets of the senior bondholders are bullies. We are where we are and its not pretty. So, time to share the pain. ‘Bryan G “With the right legal framework in place however, burning bondholders is easy” yes, funny that we dont have any legal framework. Curious that. Qui bono from it? I dont. Even Eoin the Willing Stooge doesnt. BW2 doesnt even under that bridge. In whose interest is it that the government has not put in place a banking resolution scheme? If we can answer that we may find the core of the problem. Sorry I read this thread. That’s 20 minutes of my life I will never get back. I don’t think anyone including Eoin was ever fundamentally against the idea of making bondholders pay. All he has pointed out as I have is that not one person ever pointed out a way to do this except to suddenly declare that ‘we won’t pay’. Even now the IMF/EU are trying to come up with a way to encourage bondholders to participate in the cost of the bailout or if they refuse, to force them to in a way that doesn’t lead to a legal challenge in the Courts. I am very curious to see what they come up with. I think the turn out could be very big tomorrow. @ Bryan G its not just the legal framework in the US – its the way the bank are incorporated too. Usually you have a non-bank holding company, Bryan G Ltd if you will, and that owns a Federally-licenced bank, Bryan G FDIC Ltd. Thats what enabled the WaMu takeover/bond-burning to be done so easily. Interestingly, seniors of the Holding Co got burnt, but juniors of the Federally licenced bank did not. We do not have similar strcutures of incorporation here. @ ED its finger in the air stuff. ECB does not own any Irish bank senior, but they may own some Irish bank covered bonds. Irish/foreign ownership guestimate is 20/80. Total unguaranteed is around 20bn across all the banks (think 19.5bn, but assume there’s little bits and bobs missing from that). Just to be clear – seniors at BOI and AIB will not be getting “eviserated”, haircut levels could only amount to 20-30% max, and you will find it more difficult to haircut ILP seniors, but overall, assuming near-total treatment of Anglo (4.2bn o/s), you could expect to save 9-10bn maybe. Add in much more agressive eviseration of subs and you can probably raise another 8-9bn. Basically enough to recap the sector fully. @Eoin “i’ve explained this before – i thought the situation was stable enough for us to play this problem out over a number of years via the ECB, rather than having it come to a head so quickly over the last few months. If growth etc had managed to pull us out of it, it would have been bearable. This is what every other country across Europe is doing, less transperently, and over a longer period.” The problem with that analysis was the Irish situation was nothing like other countries. The levels of losses within the Irish banking system will proportionally dwarf anything the other EU countries have at the moment, and may possibly be a histrorical record bar causes of extreme fraud. Growth was never going to be sufficient to pull this off unless it hit double digits for a few years @Eoin I make it about €19 billion senior unsecured and the same again in guaranteed paper for the six banks covered so you would have to wonder if the possible savings are worth the damge it will cause to bank funding costs across Europe. (Might be better for the EU to just suck up the cost collectively instead of placing the burden soley on Irish taxpayer) Do we have the breakdown between: 1. Senior debt covered by the ELGS. 2. Deposits covered by the ELGS (does it include the ECB?). 3. Senior debt owed to other Irish Banks not covered by the ELGS. 4. Other Senior Debt (excluding deposits up to €50m) not covered by ELGS. 5. Subordinated debt. ?? I think we need it for this debate. I think the CIFS is dead at this stage? @Brian Lucey I agree with Eoin’s post above: http://www.irisheconomy.ie/index.php/2010/11/25/dont-start-from-here/#comment-98729 It has always been the case that deafulting on senior debt without EU co-operation woudl be treacherous for Ireland and for the rest of the EU. I cannot agree with your analysis that what has transpired suggests your previous prescriptions were correct. I don’t think you have ever properly dealt with sequencing, contagion in finanacial markets, risk to the EU/Euro or long-term political consequences save that you did agree that your policies could cause economic collapse but that it might not be a bad thing to revert to year zero in Irish politics. I expect we all wish we could review posts by poster to see what they said and when! It is clear that the guarantee was too wide and that Anglo should probably have been nationalised rather than guaranteed. However, it is not clear that this would have substantially lessened the state’s ultimate exposure, although it would have helped and couldn’t really have harmed us. If we had a restructuring system in place to beginour hand would have been a lot stronger, but we still would have had to keep an eye on cantagion internally and internationally. You opposed NAMA because you said it would be an unfair wealth transfer from the State to the Banks and the haircut would be artificially small. This seems to be forgotten now. NAMA has played a big role in making the banks admit their problems. If Sovereign default was inevitable then this is probably the way to do it. I think people should realise that second Lehman Brothers event could have been catastrophic for international economic recovery which in turn could have been catastrophic for international peace. There are a lot more than 4 million people to be considered, even if one was willing, like BL, to crash and reboot the Irish system. @Zhou – “which in turn could have been catastrophic for international peace” This perhaps more than anything is what keeps me awake at night. @Zhou “It is clear that the guarantee was too wide and that Anglo should probably have been nationalised rather than guaranteed. However, it is not clear that this would have substantially lessened the state’s ultimate exposure, although it would have helped and couldn’t really have harmed us. If we had a restructuring system in place to beginour hand would have been a lot stronger, but we still would have had to keep an eye on cantagion internally and internationally.” I think you are spot on that the guarantee was FAR too wide but I disagree that a smaller guarantee might have decreased the cost to the state, I think it definitely would have. And PH said as much in his report on the issue where he said the guarantee of existing senior bondholders was unnecessary and added to the state’s likely share of the total losses. @ Enda in particular, i see far less ability to hit BOI seniors than the rest. I would assume its the only one we are completely unwilling to mess around with in terms of breaking it up. Even with UK-sytle resolution laws, we’re not exactly going to carve out the deposit book are we? @ Enda “Even now the IMF/EU are trying to come up with a way to encourage bondholders to participate in the cost of the bailout or if they refuse, to force them to in a way that doesn’t lead to a legal challenge in the Courts.” Enda this is no time to be conservative. The possibility of Bondholders going to court is very small. Which courts by the way Irish or European? You are acting like a victim afraid the bully might hit them in more unusual ways. Classic playground stuff. Grow a pair and punch back. Not only will you feel a bit more human but you will regain your self worth. I would also add I was never the EU was as full behind the no senior left behind as we were. Yes, they said “save our banks” but banks can be saved without saving seniors. Yes, no other country has imposed losses on seniors but no other country has banks as hopelessly insolvent as the Irish banks. @Eamonn “The possibility of Bondholders going to court is very small. Which courts by the way Irish or European? ” It is a certainity that there will be a legal challenge if the EU/IMF can’t come up with some amazing scheme that no-one has thought of so far. Not going to comment on your bizarre ‘grow a pair’ remark. This isn’t the playground and this isn’t a game. @Paul Hunt – Paul, Normally you write very sensible stuff (if I’m not confusing you wih another of the same name), but this ‘Citizen Assembly’ proposal you recommend seems like (snap judgment) pure balderdash. I had a quick glance at the Citizen Assembly website and browsed their PowerPoint presentation on some kind of experiment in British Columbia: The BC Citizen Assembly includes: 160 citizens drawn at random from the voter’s list (politicians excluded) and is: Gender and age-balanced : representative of the diverse population (occupation, education, origin, ethnicity) J. H. Christ wept bitterly: – citizens drawn at random? – including people who go out in public in their pyjamas and Limerick’s pond life? – including school dropouts and druggies? – etc. You must be joking. THe last thing Ireland needs are decision-makers who are ‘representative’ of our population. We’ve had them for almost 90 years. Look at where it led us. Only ‘political scientists’ could think up rubbish like this. The big fear I see at the moment is that I think those negotiating on our behalf are a lot more of the conservative victim state of mind. 100% of the employees in the Dept of finance for starters. Honahan looks like the type who got his lunch money taken regularly. Easy guys. There have been loads of stupid mistakes going back to the late 1990s. Pandering to the bondholders, guaranteeing existing ones back in ’08, fixing it so that regulation occured in word only, thinking 2006 wasn’t a crystal meth powered property bubble that had to pop, accepting corruption as cool, going into the Euro at obviously the wrong time, I could go on and on and on. In Ireland you generally are easily dismissed if you don’t agree with the consensus (that consensus may move somewhere else now , but be equally as stifling), partly because the public have never really taken ownership of government – local or national. Even if you persuade people the response is usually “well, there’ll do whatever they want” They don’t feel responsible in any way for what happens. What do you get if you combine a laissez faire government with a population that doesn’t give a sh!t?…..Ireland. @Eoin The FT Lex column yesterday suggested the full nationalisation of BoI to facilitiate the burning of BoI subbies. I don’t think there is any question of burning BoI seniors. I also don’t think there is any willingness to default on the ELGS. @DE It was a mistake and a narrower guarantee would have reduced our debt. However, it is not wholly clear by how much it would have reduced it. I’m curious as to what is going to happen to the ECB/Central Bank deposits/repos if this comes to pass. Apparently, these account for 60-70% of Anglo’s ‘deposit’ liabilities. If the Senior Debt holders were to challenge any move to devalue their debt, and succeeded in forcing a liquidation, both the ECB and CB would be exposed to massive losses. Seems like a pretty high stakes poker game, and the bondholders have all the cards. People should stop knocking the voters. It is impossible for voters to be able to second guess the govt on all technical issues, including issues of regulation. Kenny and Rabbitte were promising reduced stamp duty and reduced income tax to kep the bubble going at the last election. The people rejected those policies. We’re not as thick as we look. @ Zhou the real problem with BOI is that you have to burn through a lot of equity and sub to get to senior. I dont think the Regulator is going to easily say “yeah, we were at 7%+ capital yesterday, we’re at -10% today.” @ Enda “this isn’t a game” Cop on. Senior bond holders who have so much power that telling them that the rules of capitalism may have to be applied to them is seen as unthinkable. That Irish citizens are being asked to saddle the losses of the bad decisions they made with their investments in Irish banks. Selling off Government Bonds in an act of financial terrorism in order to persuade Euro leader not listen to Angela Merkels comments. It is very much a game to them. @ Brian Lucey Uaisleacht or nobility is always more effective than name calling I think. You still get to make your point. And it doesn’t get lost. @zhou Obviously FF central have given you a day off @all Whats all this about “legals” we elect governments to change the laws. Look how they rammed through the NAMA legislation despite the fact that it was on the face of unconstitutional. At the time we had our overpaid ejjits blowing shite about how Nama was going to make to money for the exchequer. How it could when it was moving one bunch of deeds from one desk of the government to another. In courier costs alone it has to lose money. If it makes money it simply transfers cash from the banks to NAMA a neutral transfer in the National accounts. So the banks need more money (isn’t that what is happening already) and even the junior bond holders can hold a writ to the government claiming that their only assets in Anglo was stolen away by Nama. They are right it was legalised theft. I hate to see the high court result if that happened. In the much more likely event that NAMA losses money then we lose to. That is the problem with the junta economic policies. Head we lose, tails we lose. @Brian Lucey Have a good wedding, you really deserve it. You are one of the few people i admire in this country. Keep it up @CG, I’m just drawaing attention to a debate that’s going on at politcialreform.ie and elsewhere. I do see a role for CAs, but not to the extent some others do. The need for action in this area is as pressing as it is in the economic and financial area – and the two are not unrelated. If the Irish Times report is correct, then it does seem that there has been a radical shift on the part of the EU insofar as the treatment of bondholders is concerned. It is a moot point as to whether Eoin is right to say that this shift has only come about as a result of recent events (and would have been unthinkable before), or whether Brian Lucey is vindicated. Now that the economic argument appears to have shifted, a difficult question arises as to the legal argument. Does the existence of the extended bank guarantee (ELG) mean that Ireland might not be able to benefit fully from any change in policy re: bondholders. The Irish Times article suggests that there is a concern as to the legality of a move against senior debt. The current legal position is that the beneficiaries of the ELG have a statutory guarantee in their favour which is expressly stated to be “irrevocable”. Any change to this would almost certainly be challenged before the Irish courts. This Government has been particularly sensitive on “retrospective” legislation: see, for example, the treatment of judges’ pension contribution etc. Brian Lenihan was very clear on this at the time of the extension of the guarantee in September, and warned of legal challenges in Europe. I do not think that the Government would be prepared to renege on the guarantee. This means that any change in the EU policy will be of limited effect: it will, as Eoin suggest, be confined to un’guaranteed debt. @gadge I’d imagine the legal status of the senior debt is pretty strong regardless if its covered by the ELG or not, so if you’re going down this road, you may as well go for the whole lot. You might as well be hung for a sheep as a lamb. The State can always get over the ‘irrevocable’ hurdle by using the ‘exigiences of the common good’ defence. It all sounds like a lot of bluff and brinkmanship to me, in an attempt to get the senior bondholders to agree to some minor losses. The absence of any detail re. what might happen to the ECB and CB funds in the event of a liquidation secured by the BHs seems a bit conspicious. This is all uncharted territory in the eurozone. The whole thing might still fall as flat as a pancake. Hope not, though. @Eoin Although the corporate structure of banks is quite different in the USA, I think some of the same regulatory principles used there could apply to Ireland. Many of the far-reaching powers of the OTS/FDIC were introduced after the Savings and Loan crisis of the late 80s (e.g. depositor preference over senior debt). The Irish crisis was, in American terms, really a 1980s-style crisis rather than a 2008-style crisis in the sense that it did not revolve around CDOs, CDSs, and a massive shadow banking system. As such many of the mechanisms/regulations that were introduced in the 1990s in the USA would seem to be relevant to Ireland today (if anyone in government cared to look). Of course in the USA the goalposts were moved and with deregulation and the rise of the shadow banking system the regulators were still regulating like it was 1999 all through the 2000s. However there’s 20 years of experience with bank resolution mechanisms for ‘old-style’ bank crises to take as prior art when putting a new scheme in place in Ireland. @Carolus: “The last thing Ireland needs are decision-makers who are ‘representative’ of our population.” If I’ve understood the idea correctly, Citizens’ Assemblies are not for making decisions: they are deliberative assemblies, whose job is to get some thinking done about options and possibilities. Clearly, they’re not for short-term crisis decisions, but in designing the second republic we might benefit from some thinking. FF doesn’t like thought (see É Ó Cuív’s comment yesterday), but then look where FF has got us. bjg @Bryan G, While I agree about the relevance of US experience (building during the ’80s on the structures developed during the ’30s, but which they are now seeking to rebuild following the senseless dismantling from 1998), I think you are labouring under a misapprehension that Ireland retains any unilateral sovereignty to address these issues. Any new arrangements for bank resolution and financial regulation will be established in primary EU legislation and transposed into Irish legislation. @Zhou: “I expect we all wish we could review posts by poster to see what they said and when!” No we don’t: enough already. Nobody gets everything right, but different perspectives add value. There’s enough future stuff (short term and long term) to worry about without raking over old coals. [FFmode]We are where we are; time to move on.[/FFmode] bjg @gadge, We’ve missed your insights. I think your instincts are correct. Despite my doubts about its democratic legitimacy, the EU is constrained by the rule of law and what the treaties allow it to do. I expect what we will see after the weekend will be limited in burden-reducing terms (as Eoin suggests), but it will be politically symbolic. In addition, similar to Gordon Brown’s ability to lean on the then chairman of Lloyds to swallow HBOS, is there not a possibility that Merkel/Sarkozy/whoever’s in charge in Belgium might not be able to lean on some of their implicated banks to step up to the chair for a little light haircutting? @gadge I think we can take it that any default would be a default by the banks on unguaranteed debt. I don’t think any one in the political classes (or amongst economists?) is suggesting a sovereign default on the ELGS is desirable. @BJG Fair enough – It’s just that people are being accused of saying things they didn’t say while others are looking for credit for foresight they didn’t display. @sporthog I know 2 people it happened to this week. Not sure if the limit is new but the queue was so large (even though they are now cashless I understand) that it was like buying lotto tickets at 50k a pop. But what are the odds the DOF and Gov don’t get their act together by Monday morning? It’s also funny that this announcement that must be made before the markets open on Monday is telegraphed publicly before the same markets open on Friday. Remember the UK recapitalised Lloyds and RBS in a weekend plus added an insurance scheme. Announced at 7am Peston only got about 12 hours notice of it. We give 3 days notice 2 years later and we don’t do 7am press conferences, sure you’d only be in the leaba at that time! @gadge gov certainly has had no problem with retrospectively removing tax liabilities for past events in recent legislation. Legalities raised in FT here http://ftalphaville.ft.com/blog/2010/11/26/417316/bondholders-will-sue-every-sovereign/#comments On the market, notable that the last 2 weeks of bailout talk has had less effect on 10Y than 2Y bonds. Suggests market take is bailout short term fix. This is similar to Greek bailout. @ Grumpy most Irish bank bonds are issued under UK law i believe. @eoin Sovs under irish, regardless of listings? @Eoin “most Irish bank bonds are issued under UK law i believe.” If that is the case maybe we can use the UK resolution legislation. This is the sovs document. http://www.icmagroup.org/ICMAGroup/files/c3/c37b864f-2279-4cab-9f38-47077deb2cee.pdf @ DE i dont think so. The rights of the bondholder are covered by UK law, but the ability to perform the actual mechanics on the bank itself would be covered by Irish law. Interesting though. @ grumpy assume so yes, they dont provide a prospectus! @ All reports of imminent subdebt buybacks from AIB and BOI *ALLIED IRISH SAID TO WEIGH SUBORDINATED BOND BUYBACKS, SWAPS *BANK OF IRELAND SAID TO WEIGH SUBORDINATED BOND BUYBACKS, SWAPS The ELG expressly provides an irrevocable guarantee. It occurs to me that this guarantee would be enforceable before the Irish courts irrespective of whether the bond itself is subject to foreign law and/or the jurisdiction of foreign courts. The guarantee is given by the State, not the individual bank, and thus can be enforced against the State directly. No question of sovereign immunity arises: the State can be sued directly before the Irish courts. The more you look at the liability side of our banks balance sheet the more ominous the problems seem. What in god’s name is going to replace deposits AND central bank funding on th balance sheet? Long term debt at 6% from the EU? What effect is that going to have on the cost of funding for our banks? What effect is that going to have on the interest rate facing the Irish private sector? What effect is that going to have on bank losses on tracker mortgages? “If that is the case maybe we can use the UK resolution legislation” I don’t think thats how it rolls Any attempt to amend the ELG legislation so as to allow the guarantee to be revoked would prima facie seem to unconstitutional. The State would have to invoke the fiscal emergency exception provided for under the Nursing Homes case: it is hard to see how this would work given the relatively small sums involved. The courts would take some persuasion to accept that the State’s financial future turns on the ability to repudiate a relatively small quantity of bonds. Moreover, as Eoin points out, the ELG is only one of a number of legal obstacles. There is no bank resolution scheme in place, and even if there were, the State would have to demonstrate the earlier lines of equity / subordinated debt have been exhausted before losses can be imposed on senior bonds. It may be possible to make this argument re: Anglo, but the rosy picture presented of the capital reserves of the other main banks suggests the argument will not hold for them. @ zhou enlai I think we can take it that any default would be a default by the banks on unguaranteed debt. I don’t think any one in the political classes (or amongst economists?) is suggesting a sovereign default on the ELGS is desirable. Not sure that Brian Lucey would agree… Full downgrade of entire Irish banking system from S&P. Interesting that the foreign subs have also been put on creditwatch negative, first time i’ve seen this happen on such a broadbased view. *S&P LOWERS IRISH BANK RATINGS FOLLOWING SOVEREIGN DOWNGRADE *BARCLAYS BANK IRELAND COUNTERPARTY CUT TO A+ FROM AA-: S&P *BANK OF IRELAND L-T COUNTERPARTY CREDIT CUT TO BBB+ FROM A-:S&P *ANGLO IRISH BANK COUNTERPARTY CREDIT CUT TO B FROM BBB BY S&P *ALLIED IRISH BANK L-T COUNTERPARTY CUT TO BBB FROM BBB+ BY S&P *IRISH LIFE & PERMANENT LT COUNTERPARTY CUT TO BBB FROM BBB+:S&P *IRISH LIFE ASSURANCE LT COUNTERPARTY, ISSUER RTG FROM BBB+: S&P *IRISH LIFE ASSURANCE LT COUNTERPARTY, ISSUER RTG CUT TO BBB:S&P *ANGLO IRISH BANK, ALLIED IRISH BANK ON CREDITWATCH NEG: S&P *BANK OF IRELAND, IRISH LIFE & PERMANENT ON CREDITWATCH NEG: S&P *IRISH LIFE ASSURANCE, BARCLAYS IRELAND ON CREDITWATCH NEG: S&P *ULSTER BANK, KBC BANK IRELAND ON CREDITWATCH NEGATIVE BY S&P @ Mr Bond: I think where your POV diverges from many others here is your contention that we’re now standing on the edge of a precipice, as you put it to Brian Lucey. My contention is that we tumbled down a slippery slope around the turn of the century, and plunged off a precipice a few years later. Only discussion now is are we going to land on something hard or something soft(er)? Perhaps a few bank seniors could form a neat pile and help us cushion the blow, which promises to be extremely hard in any event, but perhaps not fatal. If a bondholder sues the state and wins, he presumably becomes owed the money by the state. Currently he is owed the money by the state. How would he enforce his claim? As per christy: “What in god’s name is going to replace deposits AND central bank funding on the balance sheet? Long term debt at 6% from the EU?” Anybody? What’s the point in burning bondholders if it involves undertaking EU debt to honour ECB and Central Bank repos? We would effectively be borrowing from the EU to pay back the ECB. @ Eoin Where should I put my deposit now?? @grumpy The bondholder would sue the State to have the bank liquidated, not to have the full value of their debt repaid. Avoiding a legally enforced liquidation is the key to the whole puzzle. @ grumpy NIB or Rabodirect – both full branches of HQ. @ Luca In the unlikely event that the State did decide to renege on the ELG, the first step would be amending legislation. The bondholders could then seek to challenge the constitutionality of the amending legislation. They might also seek damages? Not sure how an action against the State could result in a court order to wind up the bank. Of course, if an event could be identified as a default on the terms of the bond, then an action might be brought against the bank and such an action might seek an order winding up the bank. @ eoin think that was meant for me, thanks @Bond. Eoin Bond ‘Full downgrade of entire Irish banking system from S&P’ Stay in the now! We need all facts … Sunday/Mon morning is a long ways away …… and we are a moving target …. The European Banking System is the Real Issue – Yet the EZ Centre does not appear to have a PLAN …. so we are expendable/disposable ……… and FF are prisoners at the negotiating table …. This loan(bail-out), even at 2%interest + some haircuts to subbies [and I’ll believe seniors by next monday if I see it ……….. still leaves too much debt – beyond our capacity …………… IMHO, only logical is to DEFAULT now on ALL Banking System Dept and force the issue – not when we are in worse shape in a yr or two, or when the Iberian,Roman,Greek forces it next month or next year. Cheap credit came from the centre, and if the centre does not act soon, it will not hold. Realist pragmatists in the IMF can only go so far – the BALLS are needed on our side – and as usual I’m speaking from a serf perspective. @ gadge yes, sorry! All getting very messy out there, imagine some cobweb covered documentation is being dragged out of storage. @ Greg (if you’re out there) some CDS events may be upcoming. If you could run the death star around the block to make sure it’s good to go that’d be helpful. My copy-paste function is getting tired… *BORD GAIS EIREANN CUT TO BBB+ FROM A- BY S&P, ON WATCH NEGATIVE *S&P DOWNGRADES DUBLIN AIRPORT AUTHORITY TO ‘BBB’; ON WATCH NEG @gadge/Brian Lucey “Not sure that Brian Lucey would agree…” I double-dare ya Lucey! (don’t be using your iPhone in the Church though) @Brian J Goggin re: Citizens’ Assemblies. The point is that everything has been discussed and debated a thousand times over. An assembly of citizens that is a truly representative sample of the Irish people would have NOTHING of interest to add by way of recommendations. It would basically be just another government-funded committee — as though we hadn’t enough already. At best it would produce the kind of love-in bromides associated with political party manifestos. At worst it would produce some kind of collective stream-of-consciousness, blarney and blather. Go thru the PowerPoint presentation on their website — it reads like something out a Monty Python sketch, oozing political correctness about ‘gender balance’ and ‘inclusiveness’ to boot. It’s sad to see a leading university pouring resources into the promotion of junk science of this kind. [Thanks for the Latin prayer, BTW – much appreciated!] I think this is more Bully boy tactics. I think the most objective way of looking at the legal issues are to look at past instances of defaults in other places and see what happened there. We know that default is not uncommon. Were there successful court rulings and payments made to creditors after the Kazak default recently or the Russian one in the early nineties or the Argentinian one? @Bond. Eoin Bond – stats just out show that sales of derivatives death stars have risen by 241% y-o-y in Ireland thanks to the bank scrappage scheme accidentally introduced in 2008. Two out of three residences in the country now have one. I think you will find that Greg’s is the now out of fashion Mk I. Can I interest you in the new, hybrid Mk II version that runs on dark matter? A snip at 150% of GDP though I may be able to arrange a haircut on that of, say, 70% ? @Eamonn Again, you are missing the point. We don’t want the banks to default. Why would you want to wind down the Irish banking system? How would that help? What people are trying to work out is how you get one part of the capital structure to shoulder some of the costs without running into legal difficulties. You might think it is easy but finer minds than yours and mine are still struggling to find a way. Sorry, meant to say liquidate the Irish banking system. A wind down sounds too nice and orderly @Eoin, Sorry to impose, but do we have any reasons for the DAA and BGE downgrade? The Indo reported this, but, as usual, lacked journalistic input, like trying to answer who, where, when, why, how? @gadge Again, politics requires the standard deposits (non elg) guarantee to be observed. Foreigners neither vote for politicians nor string them up. You top up any liquidation fron assets outside the bank. @ luca Presumably you set out the reasoning behind an offer to seniors in such a way that it is clear that the liquidation they may seek will not assist them. How about offering depositors a transfer into a new bank. Where would that leave the bondholders liquidation estimates. Not my role to work all this out. There should be people beavering away at all this. @enda f are these finer minds in the MoF? @ Paul Hunt 2 reasons – semi states dont go bust when their sovereign backer can stand behind them. Thats obviously questionable now. Also, lets say a semi state becomes a private ltd company….so obviously the odds of a sell off have increased. But haven’t seen the ‘note’ attached to the downgrade, only headline so far. A friend recently told me that you don’t call in the economists or the financial mandarins when things get really serious, you call in the lawyers. CG on true economics “l of this comes before we even consider the real economy-side of the matters. With private investment on its knees, and companies, starved of trade and operational credits, operating outside the realm of normal corporate finance, can anyone really claim that we have a private sector capacity to escape a restructuring of the private or public or both debts? Irish families are now so deep in debt and negative equity that consumption and household investment stalled, while deposits are vanishing to pay rising state and semi-state bills. Squeezed on both ends of their incomes – by falling earning and rising taxes and charges – these very households cannot be expected to provide more funding for our fiscal policy pyramid scheme. But the final straw that broke the proverbial camel’s back is the belated realisation that the EU has no plan B for dealing with this crisis. In fact, it doesn’t even have a plan A. This was made absolutely clear by the vacuous nature of statements issued by the EU Commissioner Olli Rehn during and after his visit to Dublin this week. The fundamental EU problem is that the much-lauded EFSF (European Financial Stabilization Facility) – the fund used to put Greece into a bond markets deep-freezer earlier this year – is not designed to address the problems we face. EFSF is designed to help cash strapped governments for a period of 3 years at ‘near market’ rates. Ireland is not cash-strapped. Nor are ‘near-market rates’ a sustainable lending option for us. We are plain insolvent when one takes three to five years forward view. Our sovereign debt to GNP ratio is likely to exceed 140% by the end of 2015 and this is before we factor in the highly probable wave of mortgages defaults. Our household and corporate debts are more than double those of Greece. And we are staring at the abyss of rising interest rates and strong euro into the next 3-5 years. EFSF is simply not fit for the purpose of rescuing Ireland. At current yields, Ireland will need to grow its economy at some 6.5-7% on average annually for the next decade to counterbalance the mountain of debt we are carrying. At the ESFS rates – at ca 4.5%. Anyone expecting this to happen without radical and extremely painful structural reforms of the economy (not just budget cuts) should really go back to the basics of economics. With exception of exporting sectors our economy has slipped into a coma. Jolting it out of this state will require complete rethinking of our fiscal and economic policies. As an optimist, I can tell you that this can be done. As a pragmatic observer of the current policy and economic environment, I have little hope that it can be done without restructuring our debts – either public or private or both – and issuing a new policies mandate for the political leadership.” comments? @Eoin, Many thanks. BGE and DAA seem to be suffering for the perceived sins of the owner, unless the ratings agencies are questioning the ability of their respective regulators to keep gouging consumers to keep them in the style to which they have become accustomed. Terminal 2 (DAA) and for BGE its use of solid network revenues to finance artificial competiton and Minister Ryan’s Green fantasies may be relevant. “If a bondholder sues the state and wins, he presumably becomes owed the money by the state. Currently he is owed the money by the state. How would he enforce his claim?” Exactly! @eoin S and P ratings measure the chances of a default. We are going to default. So why is the fact that we have Irish Banks moving from Axx to Bxx news requiring capital letters? BTW How do you get this info so hot off the shelf? Where are you copy and pasting from? It seems like one of those breaking headline things they have in stock exchanges. @christy Thanks for the unedited version of Constantin Gurdgiev’s article in The Irish Examiner. Link: http://trueeconomics.blogspot.com/2010/11/economics-221110-november-12-on-record.html Published on November 12. Seems like a century ago. “We don’t want the banks to default. Why would you want to wind down the Irish banking system?” If that “We” is supposed to be the Irish people don’t include me in it. Set up a new state bank move all deposits and branch outlets to it. Let the Bondholders fight over whats left. @zhou_enlai ‘Lawyers!’ No shortage of them – order all tribunals wound up within the week – and put all lawyers on outcomes only payment on any legal issues re ‘avoidance of the wasteland’ agenda. This would also plug the lacuna re this upper-echelon elite in the so-called 4-year(week) plan … With Fianna Fail outpolling Fine Gael in the Donegal by-election – it might also be wise to conduct a stress test on the condition of the Irish Army. I believe the guarantee will be found to be unconstitutional and will be declared null and void. Probably NAMA too. Gut feeling and all that… @zhou – “A friend recently told me that you don’t call in the economists or the financial mandarins when things get really serious, you call in the lawyers.” Personally, I would cut out the middle man (men) and arrive with lawyers. Wow. Fianna Fáil are really going out in style. Presumably there is going to be lots of thinking outside the box between now and Christmas. @hoganmahew Void ab initio or voidable? 😉 @all “Several proposals are on the table, said a source. At present attention centres on two similar schemes. In the first, bank debt would be converted into equity shares. In the second, bond investors would be given the choice of injecting fresh capital into banks or face a cut in their investment. The source said there was a “common understanding” between delegations from the EU Commission, the European Central Bank and the IMF that senior and junior bondholders should each pay a share of the rescue costs. The first step would be to seek to “persuade” senior bondholders to participate in the bailout, said the source. “If that doesn’t succeed, the question is how can you force them in a legally-sound way.” http://www.irishtimes.com/newspaper/breaking/2010/1126/breaking6.html The FT reported on Thursday that the Bundesrat, the German parliament’s upper house, was expected today to pass radical bank restructuring laws that will include one of the first examples of a so-called “bail-in”, a scheme to ensure that creditors take losses when a bank is failing. Senior bondholders, the largest group, would see only up to 15% of their holdings converted to equity. I used be an accountant – a role to dampen over-exhuberence? @ Brian Lucey Im gutted that the whole sorry, stinking mess has proven to be worse than my imaginings. I suspect Morgan, Constantin, Karl, Peter etc are similarly. Following your IT article in Sept, did you not change your position on forcing losses on bondholders? I’m afraid I cannot share your pain; isn’t it appropriate to state that in 2006, the crazy peak year of the boom, you did not see that a 30% annual growth in credit was risking disaster? There is no need to put a Latin gloss on my reaction as I challenged the then conventional wisdom myself even though banks were among my advertising customers. @Carolus: Not to drag this discussion too far off topic, I’ll conclude by saying that reliance on think-ins in the Galway Tent (or the Ardilaun Hotel) hasn’t been that useful: I can’t see that a Citizens’ Assembly could be worse. And just as, I think, this blog benefits from having a diversity of views and background understandings, so too might the national dicussion benefit. bjg @Hogan ‘I believe the guarantee will be found to be unconstitutional and will be declared null and void. Probably NAMA too. Gut feeling and all that…’ It would be very difficult to rebut the presumption of constitutionality of both Acts. Didn’t the McKillen case establish that NAMA Act was constitutional. @hoganmahew That would be personally humiliating for Lenihan. Which doesn’t necessarily mean it won’t happen of course. @Michael Hennigan It seems the Germans are more than nervous according to a report in the Telegraph- “Germany cannot keep paying for bail-outs without going bankrupt itself,” said Professor Wilhelm Hankel, of Frankfurt University. “This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings.” The refrain was picked up this week by German finance minister Wolfgang Schäuble. “We’re not swimming in money, we’re drowning in debts,” he told the Bundestag. @ceteris “It would be very difficult to rebut the presumption of constitutionality of both Acts. Didn’t the McKillen case establish that NAMA Act was constitutional.” I believe McKillen was given leave to appeal the constitutionality of NAMA to the Supreme Court, but the case hasn’t been heard. As I understand it, he lost his case on the items that related to the NAMA Act, but the constitutionality of the act hasn’t yet been tested. No testing of the guarantee has yet been made. At the time, I was astonished that the President didn’t refer it to the Supreme Court to make it challenge proof. Intentionally foolish? Or unintentionally wise? @zhou Dunno! Void ab initio, I’d have thought? Might mean payback for the banks as a result? (The guarantee fees they’d paid?). On the other hand, voidable would be the more sensible outcome and the courts recently seem to have used that? @gadge “The ELG expressly provides an irrevocable guarantee. ” The bottom line is that the bank bondster’s – senior and junior – guaranteed and unguaranteed debt, is theirs not mine or ours. The constitutionality of transferring someone elses debt onto citizens shoulders is what needs to be looked at. My legal knowledge is around zero but my gut tells me that black is black and white is white, my debt is my problem, bondholders debt is their problem. Even if basic natural justice was not on our side in this matter which it clearly is, I have faith in the legal system to find whatever it chooses to find. As the great J swift said regarding lawyers that they were: ” .. a society of men among us, bred up from their youth in the art of proving, by words multiplied for the purpose, that white is black, and black is white, according as they are paid.” So item 1 should be a constitutional challenge to the guarantee. As I said earlier a declaration that something is irrevocable is meaningless – like Jimmy Jones declaration that he is God – it doesn’t make it so. Surely all laws and guarantees are by their very nature revocable. As Brian Lucey said laws can be repealed @Hogan ‘I believe McKillen was given leave to appeal the constitutionality of NAMA to the Supreme Court, but the case hasn’t been heard. As I understand it, he lost his case on the items that related to the NAMA Act, but the constitutionality of the act hasn’t yet been tested.’ I don’t get it. If the constitutionality of the Act has not been tested in the High Court then there is no basis for appeal on that issue to the Supreme Court. As it was a three judge court I cannot see the SC reversing them in any event. All this may be academic – ‘Europe’s fate may be decided soon by the German constitutional court as it rules on a clutch of cases challenging the legality of the Greek bail-out, the EFSF machinery, and ECB bond purchases. “There has been a clear violation of the law and no judge can ignore that,” said Prof Hankel, a co-author of one of the complaints. “I am convinced the court will forbid future payments.” If he is right – we may learn in February – the EU debt crisis will take a dramatic new turn. ‘ @hogan +1 sorry – I was busy making your point in a more convoluted less elegant manner – so I missed your post @ceteris What part of the German constitution are Hankel et al relying on? I thought the recent balanced-budget debt-brake amendment doesn’t come into effect until 2016? @ Eamonn thats off my Bloomberg terminal. They make it look nice and dramatic with the stars and capital letters. If Karl and Philip would upgrade to a fancier blog softwarei could even throw in some funky colours on here… @ All market has gone quiet. Morning sell off has stabilised. Expectation of Sunday evening “big bang” has subsided, but still very nervous and unsure out there. I fear for the ratings of the X-Factor results show on Sunday evening if the IMF purposely announce in the same timeslot… @Tom Delaney ‘What part of the German constitution are Hankel et al relying on? Not sure but I presume the argument would be that the German Government are acting in breach of the Treaty in providing bailouts (Article 125, I think) and therefore breaching the German Constitution in acting unlawfully. Just re expectation management – market clearly believes the chances of seniors taking a hit have increased, that much is clear. But Anglo 2012 unguaranteed seniors still trade at 70 cents today. Clearly the “evisceration” expected in this thread is somewhat out of step with the market pricing. @Eoin, I reckon you’re on the money. There really is no legal scope for ‘evisceration’. The Troika will labour and push – and produce a mouse. But it could be a politically symbolic mouse. depressing reading. Come back JtO, all is forgiven. @ceteris “I don’t get it. If the constitutionality of the Act has not been tested in the High Court then there is no basis for appeal on that issue to the Supreme Court. As it was a three judge court I cannot see the SC reversing them in any event.” You’re right, the Commercial Court ruled it as constitutional. http://coldwellbanker.ie/blog/?p=686 “It also ruled that Mr McKillen had not raised a substantial argument about the constitutionality of the Nama Act.” This was a fallback position if the other arguments failed. As they have, perhaps a more robust attack on the constitutionality will be made? @ AMcGrath Any challenge to the constitutionality of the guarantee would almost certainly fail. The courts cannot second-guess the legislature, the most that the courts do is to consider whether a particular legislative measure is disproportionate or irrational. The judgment in the McKillen / Dellaway case goes to some length to emphasie the narrow function of the courts. @ ceteris paribus I don’t get it. If the constitutionality of the Act has not been tested in the High Court then there is no basis for appeal on that issue to the Supreme Court. As it was a three judge court I cannot see the SC reversing them in any event A litigant does not require leave/permission to appeal in respect of a constitutional issue. However, the principle of judicial self-restraint indicates that a court should attempt to resolve a case on non-constitutional grounds if possible, and to avoid determining a constitutional challenge unless it is necessary to do so. As I understand McKillen’s argument is that he is entitled to a “fair hearing” in advance of a decision to transfer his loans. The High Court ruled that no hearing was required in circumstances where under the terms of his loan agreements, the loans were assignable at will, i.e. even without NAMA, the bank could have sold on his loan. Therefore he had no constitutional right which was adversely affected. Welcome to the age of force majeure. @ Hogan Mahew The President is a Fianna Fáil chocolate teapot style president. You get what they vote for and FF weren’t going to have another Robinson. Kind of ironic that Robinson beat the previous generation of useless Lenihan and that her successor is around to see the fruit of the work of the son. @gadge thanks – “disproportionate and irrational” sounds good to me Cov CovECB ELG Senior Ung’t LTII UTII TI EBS 1,000 1,350 1,025 1,161 212 84 AIB 2,700 9,400 4,395 8,400 3,984 163 569 BOI 7,064 5,892 4,910 5,882 2,997 144 639 Anglo 8,855 2,410 4,447 1,612 45 334 IPBS 4,721 2,056 873 200 IRNWID 631 168 Total 10,764 25,497 17,461 22,577 9,845 552 1,626 Ok, MASSIVE apologies for the formatting, but this is as good as you get from me! Breakdown of all the outstanding publically held debt liabilities, so this is what you can have a crack at with figuring out total potential capital to be gained. I reckon 12-13bn is doable off these figures, albeit with some aggressive manoueuvring. Ah crap… IRNWID figures are for Senior ung’t (631m) and LTII (168m) (ie has nothing else) IPBS figures start at ELG (ie no Cov or CovECB) Anglo has no Cov so starts at CovECB EBS has no UTII Sorry, any questions, ask away, hope its readable (all amounts in millions obviously) @Hogan Thanks. That clarifies matters. I think the key is The Nama Act, it held, was “a proportionate response to the very grave financial situation in which the State finds itself and which had particular relevance to financial institutions within the State”. This finding would, I venture to opine, be impossible to overturn. @Gadge My point was that if it was not tested in the HC no grounds existed for appeal to SC. Hogan has clarified this. The HC is obliged to protect the constitutional rights of all citizens/litigants. ….. what is that sound? Sounds like smacking of lips (-; @Eoin Ta Anyone got any ideas on how it is done if they go down this road? How do you ringfence deposits? Like I said previosly on another thread, I now think there should be a restructuring of bank debt. I just don’t know how it can be done without another banking crisis across Europe. Right now, Ireland is nothing more than a lab rat. @ Enda good bank/bad bank per JPM, for AIB and BOI (just their suggestion). But agreed, this is seriously grey and fragile ground for a number of reasons. Could either be the circuit breaker which solves everything, or the straw that breaks the camels back again. @gadge “The courts cannot second-guess the legislature, the most that the courts do is to consider whether a particular legislative measure is disproportionate or irrational.” Would a change in circumstances change the constitutionality of a particular piece of legislation? While it may not have been clear (to most, anyway) that the guarantee would bankrupt the state, it seems to be clear now that it can. Does this make it a disproportionate or irrational response to a private sector problem? What about the penury of future generations? @Eoin Could the current prices of bank seniors be indicative of an interest holiday? That no more interest will be paid to maturity, but that capital will be repaid? Does anyone have an idea what the ELG says about paying coupon? “Zapatero says investors betting against Madrid are wrong” Id love to see a clip of 1 the greek finance minister saying that 2 Lenihan saying that 3 Portuguese finance guy saying that then we could see these statements in th proper context 6one news Fitch downgrades BOI subordinate bonds Portugal denies it is being pressured into asking for a bailout – second domino about to go: @Paul Hunt I think you are labouring under a misapprehension that Ireland retains any unilateral sovereignty to address these issues. Any new arrangements for bank resolution and financial regulation will be established in primary EU legislation and transposed into Irish legislation. I agree that at this point any new resolution legislation could not be done independently. There was plenty of time over the last two years to put something in place that could have been useful now, though. All that was needed was something credible enough to convince %51 of the bondholders that it was better to take an offered discount than fight it through the courts and possibly lose more (I think most bonds have clauses allowing a majority of the bondholders to change the terms of the note for all the bondholders). The government has never done anything except at the last minute and under duress. They are like a chess player that never thinks more than one move ahead and doesn’t really know how to play chess. There also needs to be a new Glass-Steagall like law that ensures that there are some banks that are limited to strictly controlled personal/commercial banking activities and separated from banks that engage in more speculative lending/investment bank activities. That way Boring Bank can continue to operate and provide normal banking services even if Casino Bank fails. @grumpy If a bondholder sues the state and wins, he presumably becomes owed the money by the state. Currently he is owed the money by the state. How would he enforce his claim? Creditors can go after any assets held abroad, as this article shows. In Ireland’s case there probably isn’t much to go after though. The article does include this gem In 2002, German creditors even tried seizing an Argentine naval training vessel that was due to dock at the port of Bremerhaven. So no more trips to Berlin in the government jet then. @ hoggie doubt it – that was a 2012 issue. Only a couple of coupons left in it. Definitely suggests capital write down of some sort, but not massively aggressive. Could this be an out from the ELG “Credit institutions will be eligible to join the ELG Scheme if they are systemically important and solvent and have been specified or are already specified by the Minister under section 6(1) of the Credit Institutions (Financial Support) Act 2008.” @Eoin Are you quoting prices for ELG backed securities or all un-guaranteed stuff? Can anything be done on the covered bonds, if they are un-guaranteed? Another trip down memory lane: Stgilitz at Project Syndicate, May 2010: One proposed solution is for these countries [he means the PIGS – CG] to engineer the equivalent of a devaluation – a uniform decrease in wages. This, I believe, is unachievable, and its distributive consequences are unacceptable. The social tensions would be enormous. It is a fantasy. There is a second solution: the exit of Germany from the eurozone or the division of the eurozone into two sub-regions. The euro was an interesting experiment, but, like the almost-forgotten exchange-rate mechanism (ERM) that preceded it and fell apart when speculators attacked the British pound in 1992, it lacks the institutional support required to make it work. There is a third solution, which Europe may come to realize is the most promising for all: implement the institutional reforms, including the necessary fiscal framework, that should have been made when the euro was launched. Stizlitz’s solution 3 (the EU super-state) is and was and will have been the most phantasmagorical of all. Listen to the Germans. Listen to your own, innere Schweinehund. So it looks like it’s going to be solution 2. Followed by massive devaluation on the part of the PIGS, or PIIGS. Hence: Solution 2 = Solution 1. RTE says the interest rate is 6.7%. http://www.rte.ie/news/2010/1126/economy_bailout.html @Frank Holy God….. Fasten your seat belts… @Frank Galton 6.7% p/a on 85 billion euro to be funded by approx. 1.5 million tax-paying Irish households Quick, back-of-the-envelope calculations: this can’t be much more per Irish family than the cost of a 20-year mortgage on a small holiday home. Peanuts, in the great scheme of things. @ CG We could call the debt ‘house extensions” Everyone gets one… If 6.7 pct is true, it illustrates that the Eurocrats have the upper hand on the guys from DC. If so, it probably means the senior bond story is a ball of smoke as we know the ECB does not do burden sharing. I doubt that the country has the capacity to service the debt. Monday should be interesting. 4 year plan assumption for average interest 2011-2014 3.4 3.9 4.4 4.7 Cowen cant sign of on something so big. Election first please… Maybe the nailers did not appreciate the Irish govt taking the p..s with the assumptions in the 4 year plan. Back to the drawing board lads? @Eoin Sigh. What happened to that solo run? DSK did Sarkozy’s bidding? Good news all, the 4 year plan did a sensitivity analysis to the interest rate assumptions In the pessimistic case the average interest rate on the debt is raised by 1 percentage point and the annual GDP growth rate is lowered by 1 percentage point for each year of the 2011-2014 period. In this scenario, the conditions for stabilising the debt ratio are not met by 2014: the primary surplus achieved in that year is too small to offset the effect of the interest rate being significantly above the GDP growth rate. Interest rates in the pessimistic scenario, 2011-2014 4.4 4.9 5.4 5.7 @Frank Galton – 6.7% might be a tad worrisome then? The debt/GDP ratio will never stabilize with an interest rate of 6.7%, real-world growth and running a primary balance that results from a socially acceptable tax/cuts package. Time for some delaying tactics whlle the markets turn the heat up on Spain and Portugal. Missing the expected Sunday announcement would be a good start. Is a Dail vote needed before formally applying? @Frank Galton Where are RTE getting this rate from? Nine year money looks to be very long term given usual IMF short sharp shock tactics. 6.7% is car cash stuff. I really thought that to save the euro the rate would be 1-2%. To be clear, I will not allow every cent of my income tax to be paid as interest to foreign banks plus ECB which helped fuel the bubble. If you want reparation, go after the banks and their “Las Vegas” borrowers but count me out Are we being massaged? Prepared for the final figure? @Frank Sorry I’m confused – does that mean its not 6.7%? Also Bloomberg story from earlier – open talk of Germany pulling out and letting the rest of us default http://www.bloomberg.com/news/2010-11-26/ireland-s-relief-proves-fleeting-as-day-of-reckoning-nears-euro-credit.html oops – sorry – I get that now – that was the Plan – which as we know is history – the day it was published.. Irish Times got a “move along folks” source on the phone http://www.irishtimes.com/newspaper/breaking/2010/1126/breaking6.html @Sarah Carey From the article you quote: “Germany may pull out of the euro to allow the currency to devalue, wrote Graham Turner, chief economist at GFC Economics, a London-based consulting firm. ” The London consensus has been that the euro is a dead letter since the ERM and before. They are desperate to be proved right. It makes no sense for German, in a world of purposely undervalued currencies, to have a Reichsmark that is as uncompetitive as the Swiss Franc. The Swiss central bank has been intervening all year to try and revalue the franc in the face of huge inflows to a safe haven. It is rumoured to have spent and lost a fortune. The Bundesbank would be in a similar position to try and protect German exporters. See the CHF vs EUR over the last two years. The spikes are believed to be SNB intervention: http://uk.finance.yahoo.com/q/bc?s=EURCHF=X&t=2y @AL “Are we being massaged? Prepared for the final figure?” Possibilities: 1. Being massaged 2. Establishment incompetence/corruption 3. Being driven out of euro 4. Something else Other considerations: The government have always sounded unequivocal about protecting bondholders. Maybe the EU are angry at the government for resisting the EU’s efforts to torch them. The government have done a lot to protect BOI shareholders and keep Anglo/Nationwide going. The bank investigations are now clearly just a token effort. Maybe the EU threatens the cover up, is being resisted and has hit back. The government may consider sovereign default preferable as a result. Or maybe the government has to be seen to have a massive gun to its head so it can torch bond/shareholders/pensioners (unlikely). Or maybe the government has made another verbal agreement to get EU help in the future. Or maybe there is no verbal agreement, just a hope. If Ireland was a properly functioning democracy with a media, civil society opposition and population who refused to be kept in the dark perhaps we would know. You know those 2nd and third world foreign governments you read about who systematically deceive their populations and who are run as oligarchies and whom you feel smugly sorry for? Well, that’s twenty first century Ireland. I would GUESS we are being massaged so the government can declare victory in the negotiations. Their self-interested media manipulation has been relentless. Why stop now just because the country is on the brink? 6.7%, are they for real? what planet are they on? how can any government agree to this, its pure lunacy. At that rate it seems a no brainer to default on senior bank bond holders. @Frank Galton “The source accepted that the average interest rate was likely to be higher than the 5.2 per cent charged to Greece when it was bailed out earlier this year.” FF are leaving the next government to impose massive IMF austerity to avoid a default, if it is even avoidable. FG and Lab pulled their punches to avoid office during a deep crisis, and perhaps also out of fear of starting a deposit run. They therefore deserve to a large degree what they are going to get. It’s not a seal of office FF will be handing them over – it’s a hand grenade. I’ve had a few drinks, and thought i’d write a few lines on Ye Olde Irish Economy dot ie – first here’s a video I made back in the summer of 2009 before I voted at the Green Party convention on NAMA and the new Programme for Government (I voted yes by the way – was I right?, I don’t know) Secondly, my whole take on this whole rollercoaster we have been could be summed up by saying “politics vs economics” – the politics of keeping the euro alive versus the enormous economic calamities that are engulfing Ireland and other European Union members. I’m with the euro side, I believe in the euro project, I find it hard to believe it can crumble. I think we all need to hang together in the new multipolar 21st century. You can throw around all the numbers you like but it will come down to whether there is the political will to keep the euro project going. Will economics trump politics, or will politics trump economics. Anyway, that’s my two, half drunken, cents. Apart from that Carolus Galviensis’s post mashing James Joyce and IMF speak is so funny. I appreciate JtO’s efforts and Bond, Eoin Bond’s realistic, detailed viewpoint, Seafoid, hoganmahew, gadge, BWII, and all you other commenters that don’t come to mind now but who are worthy too have kept me informed. The academics who have kept this blog going are to be commended. There is lots of suffering in this calamity that has befallen us, but we have to rebuild our country for the next hundred years. @ All im stunned at the suggested 6.7%. I will spend today getting ridiculously drunk and may comment on this tomorrow. Maybe. Massive amounts of confusion and anger swilling through me right now… Comments are closed.