Subordinated Bond Strategy?

The idea of subordinated bond holders in AIB and\or Bank of Ireland potentially taking haircuts has been discussed on various occasions since the IMF-EU deal was announced on Sunday. This post examines this issue and tries to figure out what the government’s strategy is.

The Minister for Finance’s statement on this matter was as follows:

As I said in my statement on the 30th of September last, there will be significant burden sharing by junior debt holders in Irish Nationwide and Anglo Irish Bank. These two institutions had received very substantial amounts of State assistance and it was only right that this should be done.

My Department has been working with the Office of the Attorney General to draft appropriate legislation to achieve this and this is near finalisation. Parallel to this Anglo Irish Bank has run a buyback operation which will offer these bondholders an exchange of new debt for old but at a discount of at least 80%. This process is still underway and will be concluded shortly.

Obviously this approach will also have to be considered in other situations where an institution receives substantial and significant State assistance in terms of capital provided to maintain their solvency ratios. I hope to be in a position soon to announce this legislation.

The policy conditionality document goes into more detail:

Consistent with EU State Aid rules, burden sharing will be achieved with holders of subordinated debt in relevant credit institutions over the period of the programme. This will be based on the quantum of capital and other financial assistance the State commits to support specific credit institutions and the financial viability of those institutions in the absence of such support. Resolution and restructuring legislation will address the issue of burden sharing by subordinated bondholders will be submitted to the Oireachtas by end-2010. Where it is appropriate, the process of implementing liability management exercises similar to that which is currently being undertaken in relation to holders of subordinated debt in Anglo Irish Bank will be commenced by end-Q1 2011.

Now let’s bring into the mix the Central Bank’s statement from Sunday:

The Central Bank has set a new minimum capital requirement for Allied Irish Bank, Bank of Ireland, ILP and EBS of 10.5% Core Tier 1. In addition, the Central Bank is requiring these banks to raise sufficient capital to achieve a capital ratio of at least 12% core tier 1 by 28 February, 2011 in the case of AIB, BOI and EBS and by 31 May 2011 in the case of ILP.

And after this, we get

Bank of Ireland, Allied Irish Banks, ILP and EBS will be subject, as previously announced, to a stress test in March 2011 under the Central Bank’s PCAR methodology. If, as a result of the PCAR, banks are assessed to be at risk of falling below the 10.5% core tier 1 target then further capital injections will occur.

So, the following appears to be the sequence of events:

December: Resolution legislation is introduced outlining a mechanism whereby subdebt holders lose out if the State has to provide a large amount of capital to maintain solvency.

February: AIB and BoI are recapitalised, presumably mainly or totally with state money, to 12 percent core tier one ratios.

March: PCAR is completed. This will involve writing down of asset values and this will trigger the need for more capital injections if the core tier one ratio fall below 10.5%.

So how exactly might burden sharing with subordinated bondholders happen? Frankly, it’s as clear as mud.

One interpretation is the following: AIB and Bank of Ireland are capitalised to 14% and 12.5% core equity ratios by the end of February. After this occurs, there are stress tests and only if these stress tests uncover losses that wipe out the end-February levels of capital will the subdebt holders be start to lose out.

If that’s the scenario, then it would seem pretty unlikely that subdebt holders will lose out. Stress tests rarely uncover that a bank has lost 14% of its risk weighted assets.

So perhaps all the talk of subdebt holders losing is just waffle. However, the tone of the public comments on this has been to suggest burden sharing is likely.

If that’s the case, the process might have to be something like as follows: AIB and Bank of Ireland are capitalised to 14% and 12.5% core equity ratios by the end of February. Then more money is put in after the PCAR. At this point, if the combined amount of state funding that has been put in during these two stages (the “quantum of capital”) is the difference between solvency and insolvency, then the legislation triggers a mechanism through which subdebt holders lose out.

I’m no lawyer but this latter mechanism seems legally dubious. It seems to propose that the state can put €9.8 billion in equity into AIB in February and then turn around in March after some additional losses have been diagnosed and somehow ask bondholders, who are senior to equity in the liability pecking order, to take a hit even though the bank is not insolvent at that point.

There seems to be a cake-and-eating-it problem here. On the one hand, the government wants to reassure everyone owed money by the Irish banks that their money is safe. Thus, it wants to keep the banks adequately capitalised and avoid ever having to declare a bank temporarily insolvent. On the other hand, since there are strong suspicions that the banks really are insolvent, it wants a mechanism to allow it to apply ex post haircuts to subordinated bondholders after a stress test shows that the banks have been insolvent.

Or maybe I’ve got it all wrong. I’m happy to hear from others who perhaps have a better idea than me as to what’s going on.

61 replies on “Subordinated Bond Strategy?”

‘On the other hand, since there are strong suspicions that the banks really are insolvent, it wants a mechanism to allow it to apply ex post haircuts to subordinated bondholders after a stress test shows that the banks have been insolvent.’

I don’t get it. The banks have been stress tested and we were assured by the financial regulator and the governor of the central bank that with the new capital being injected then the banks met the solvency requirements of both institutions.

Now we have a further 10b in capital being injected with a further 25b contingency funds being available.

But you can bring the core 1 up to 20% and it does not address the central issue of liquidity. ILP say they only need 100m to meet the new ratios and they can fund it from internal resources. Yet they are reliant on ECB funding.

So what is the point in injecting all this capital (taxpayers) into the banks.
Is it so the taxpayer can absorb all losses in the hope that the biggest banks can be sold to foreign institutions. Or given away gratis.

The ECB have demonstrated that they can bring us to our knees with a few comments. This whole resolution process looks fraught with danger and is unlikely to be implemented any time soon thus ensuring continuing stagnation.

The first duty of a state is to protect its citizenry against foreign and domestic enemies. In this, it has failed miserably so why expect them to stop.

This government has failed to stop the socialisation of the 69 billion or so in senior debt at the level of 2 Billion Irish taxpayers to the benefit of the broader Eurozone. Nothing surprises me when it comes to what our “partners” in the EU, France and Germany will try (and succeed) in foisting upon our country.

There’s a higher than even probability that I, and a lot of my fellow taxpayers, will migrate to countries like the UK or US that can actually prevent the robbery of their citizenry.

and on the issue of stress test, if as has been reported, the new (European) stress tests are to include liquidity, is it not safe to assume that the Irish Banks will fail in the absence of guaranteed liquidity support from the ECB.

So what is the point of new stress tests?

Karl the net issue seems to be simple: can the subs be forced to take haircuts while the BofI and AIB retain private shareholders? How can you ‘resolve’ a bank that is not insolvent? The stress tests surely come first.

There’s a lot of people talking about bondholder burning as “bailing out gamblers”. It should surely be the case that whatever about sub debt and equity investments, a senior debt investment in an Irish bank should not have been a gamble of any kind, should it? What I mean is, as an EU, Eurozone and OECD member, there should have been an expectation that banking operations were well regulated and that banking norms were risk-neutral if not risk-averse.

My point is – can we pinpoint a point in time where investor banks could or should have known that a senior debt investment in an Irish bank was a risky bet?

@Colm McCarthy – that is what the subdebt holders have been saying, hasn’t it? It is incredible the contortions which the government have been going to to avoid a declaration of insolvency, presumably to avoid a deposit run and RTE cameramen camped out beside the queues at branches.

I guess what’s needed is some kind of super secret insolvency, you know, like the Big Four in the UK when the government said “don’t go talking about going concern letters, we’re going to bail them out you know”

@Colm McCarthy
‘How can you ‘resolve’ a bank that is not insolvent? ‘

I think I answered my own question above. If the legal mechanism is in place and the banks are again stress tested with the new criteria (liquidity) then they are clearly insolvent and can be put through the new bank resolution legal mechanism. Presumably the legislation will contain a means of’haircutting’ subs. The shareholders will be wiped as is normal and it seems legally bulletproof. Whether they deal with the parri passu issue in the legislation is doubtful but it would seem a good opportunity to distinguish depositors and bondholders going forward.


how can they be forced to take haircuts even if they are fully publicly owned?

There must be a default event to impose losses. But a default event implies no capital to hold deposits.

The anglo rearrangement was questionable and it is not clear whether it will be treated as a default for the purposes of CDS. In my view it ought to be.

Passing a law that forces a bank to default on its liabilities without experiencing a default event is changing the rules of the game mid stream.

Now, that may be morally justified, but it has to be at least questionable from a legal perspective.

Furthermore, it represents the first financial suppression we have engaged in. Surely justified, but this is a slippery slope and it would not take much more for this to effect investors views on our willingness (as opposed to our ability) to repay our debts.

@Mark Dowling

‘My point is – can we pinpoint a point in time where investor banks could or should have known that a senior debt investment in an Irish bank was a risky bet?’

Sure, at the moment in time you noticed it yielded higher than its ‘risk free’ equivalent.

There is a conflict between the classic (and legally enshrined) view that bondholders are entirely senior to equityholders and the public-interest view that banks need equityholders not close to zero value every business day. Without extremely quick resolution mechanisms in place it takes too long in real time to clean out all equity holders, then the junior debtholders, and then re-inject equity. So the government needs to find a workaround – first diluting the existing equityholders down to near zero values while injecting new equity capital, and then second burning the juniors. It amounts to the same thing except for the exact timing. It is “not in the legally correct order” but that is the only time-ordering that works without a very fast (overnight or over weekend) resolution mechanism.

‘Passing a law that forces a bank to default on its liabilities without experiencing a default event is changing the rules of the game mid stream.’

no need to pass such a law. they are insolvent on the basis of not being able to meet their liabilities as they fall due (without the ECB).

The fact the ECB is mopping up (bank infected) sovereign bonds in the secondary markets is de facto an acceptance of responsibilty for non regulation of capital flows between Germany, France ,etc to Ireland during the boom.
The ECB’s mandate for price stability should have set its alarm bells ringing when massive capital flows followed the passing of the Nice treaty despite the fact that sovereign bond funding for each country required a seperate risk assessment independent of the ‘ONE’ market which allowed such unregulated capital flows.
This grinding down of risk to one pulverised low level during the boom when demand was maintained at very different levels in different countries could not be mitigated through fiscal adjustments .
The ECB should have been asking simple questions such as why were countries such as Ireland the recipients of massive capital flows from Germany whilst its bond yields were priced the same as Germany’s.

The failure for our insolvency lies largely with the ECB which did not meet its mandate to preserve price stability.As has been stated before our sovereign debt is easily manageable ,its the bank debt thats killing us.Thats where the toxicity of high inflation in Ireland was out of control.
The ECB did NOTHING to prevent the hosing of the property inferno with German,French etc money.

The ECB is now acting as proxy for the senior and subordinate bond holders.They are not our friends or our partners.
There is no reason why we cannot default on all bank debt held by the ECB by defaulting on the equivalent amount in sovereign bonds.

Around august time the eu published a directive to standardise deposit guarantees at €100k. What are they up to? On one hand they’re saying depositors have limited protection, on the other they’re saying senior bonds have uncapped protection. It’s double-deutsche.

“[1]can the subs be forced to take haircuts while the BofI and AIB retain private shareholders? [2]How can you ‘resolve’ a bank that is not insolvent? The stress tests surely come first.”
1. Indeed. It would appear that existing shareholders have to lose all; diluting to whatever degree does not appear to be that. Note, this also means that the NPRF will have to lose its equity stakes… might look bad on the FF CV, so best to kick that one into the next government.
2. You can clearly do this if it is ‘nationalised’ or in examinership or whatever new makey-uppy name they come up with, given 1 above has happened (that shareholders have lost). As ceteris says, an illiquid bank is de facto insolvent.

But perhaps we are being too literal?

Assuming you mean that because the bank has theoretical capital and only prospective losses. As the capital requirement for banks is a subject of law, simple accounting isn’t required. Change the capital requirement for a bank and see it unable to raise the money itself and I presume you can do with it what you like. No? Banks operate almost at the whim of the state, in a condition of instability and what would, by some measures, be considered insolvency, even in the best of times.

“There’s a higher than even probability that I, and a lot of my fellow taxpayers, will migrate to countries like the UK or US that can actually prevent the robbery of their citizenry.”

You can forget about the US in that case. You’d have to pay more for health insurance there than you’d have to pay in taxes here.

@sean o’
“The ECB should have been asking simple questions such as why were countries such as Ireland the recipients of massive capital flows from Germany whilst its bond yields were priced the same as Germany’s.”

Why would they bother asking if they already knew the answer? It wasn’t a secret, as the German finance houses were sending their dodgy (lucrative) deals to their Irish subsidiaries for completion as they all apparently knew the regulator was permanently out to lunch.

And yes–“The ECB is now acting as proxy for the senior and subordinate bond holders.They are not our friends or our partners.”

@Mark Dowling

You are always taking a risk when you either deposit funds or buy a senior bond in a fractional reserve bank.

You are also taking a risk buying a sovereign bond. The least risky sov in a currency – eg bunds – is referred to as the “risk free” rate but even that doesn’t mean it is literally free of risk, it is just as near as you can get to it in practice.

You get a higher yield generally on a bank bond than a sov to reward you for agreeing to take that additional risk. It is not supposed to be a free lunch. If you underestimated that risk, by confining your research to looking up whether a country was a member of the OECD or in the Eurozone then you presumably saved quite a lot on research costs and further gambled on making duff investment decisions.

That such investment incompetence can get let off the hook by political lobbying is really really amazing.

Eh, jebus, calm down. Reckon its a simple case of structuring the law so that it kinda ignores the state injections of capital for explicitly “financial stability reasons”. I believe i said this a few months ago…


I don’t understand where you are coming from on this one. Surely the objective is to regain market access for the banks based on adequate capital buffers. How would this ever be possible if we engage in retrospective disregards of State capital in order to impose losses on bondholders? I share Karl’s puzzlement on the mechanism for imposing losses, which reflects inadequate attention to resolution issues from the start.

@John McHale

“Surely the objective is to regain market access for the banks based on adequate capital buffers.”

How plausible is this ? Have any of the research houses written papers on the Irish banks just needing a bit more capital to get over a bad patch ? I have seen some analysis indicating that the sovereign is untouchable because the banks are insolvent. If this plan were viable why are 10 year yields still over 9%? Wasn’t that the whole point of the exercise- to get the sov yiled down and then allow the banks back into the market on the back of it.

Ciarán O Hagan had a telling post a few weeks ago where he said that his crowd were putting Irish bonds into cold storage for the forseeable future. Why ?

He also says that the austerity plans don’t seem to have any effect on the deficit for 2012. It’s a debt deflation spiral and, even better, one with virtually unlimited expoure to bank losses which themselves are a function of the future path of the debt deflation spiral.

What happened to October’s plan for a NTMA roadshow in the early new year? The banks .

“Things will get a lot worse before they get worse”

There can’t be a “taking” authorised by the state without “due process”. The US has always been strong on this; the EU – and its member-states – has always been a bit cavalier in this area. Except, perhaps, Germany, which had some pesky US constitutional lawyers involved in the drafting of its Basic Law. Witness Chancellor Merkel’s determination to have the EFSF on a sound legal footing before her desired burden-sharing may be contemplated.

Still, I expect we’ll see some EU authorised fudge in the interim to ease the burden of bank debt in Ireland. I think Eoin is right about some declaration of the prior right to secure EZ financial stability over-ruling existing property right for some categories of assets.

@ John

first off – we’re only talking about enforced subordinated bondholder losses, or buybacks involving coercive mechanisms (ie what took place at Anglo), for ‘failed’ institutions or institutions that required ‘substantial amounts of state recapitalisation’ and are now effectively or de facto owned by the State. In these situations, State ownership is no longer an “investment”, its been mandatory to stop a disorderly collapse (and hence why Eurostat does not let us classify it as an investment). So its not real ‘equity’, or at least you could structure a law to not classify this as real risk taking equity. So, on this point, we are not talking about BOI or IPBS, its purely Anglo/IRNW (definitely), EBS (most probably), and AIB (quite possibly). These will eventually be sold on or wound down anyway, so i think the issue about giving them access to the markets is somewhat of a moot point. Any funding they get will almost certainly be on a guaranteed basis until then anyway. Although you have raised the issue that i have been talking about for the last year or so – enforcing losses, legislatively, could have contagion for the rest of the capital structure no matter how you do it.

After the State ‘equity’ is sold on then bondholders will be back on a ‘cleaner’ playing field. Also, i dont think it would be that difficult to structure the law to allow for AIB to be looked at retrospectively (ie at 31/12/10) when PCAR forms its opinion (ie PCAR says AIB is at X% capital, without state injections it would be Y% and Y% is either below minimum or is a negative number etc). So even if the money is in there, it could be somewhat ringfenced.

On BOI and IPBS, imo, the resolution laws will not be used to enforce losses, but simply as the big stick to get them to agree to it voluntarily.

Btw, forgive me for being cynical, but one could be forgiven for thinking that the government can never get it right in some people’s eyes. Last Friday everyone (me included, albeit waving a ‘careful now’ placard!) was agreed that burning SENIOR bondholders had now entered the world of real possibility, but now we’re complaining that the government may be unable to burn SUBORDINATED bondholders. The exact same thing happened with some people when Anglo announced its very aggressive, and which is now widely seen to be extremely effective and innovative, subdebt buyback plan. I’ll only note that i think i have been the only one to comment on just how successful that plan has been, and how the rest of the EZ market is potentially looking at it as a template for future enforced subordinated debt losses.

From Samuel Beckett’s ‘The UnNAMAble’ (1954): “In order to obtain the optimum view of what takes place in front of me, I should have to lower my eyes a little. But I lower my eyes no more. In a word, I only see what appears close beside me, what I best see I see ill.”

I agree with Christy and B.E.B. They are going to change the rules retrospectively. The correct amount of softening up has taken place. There will be limited collateral damage to credibility. Of course, we will never again be able to raise sub debt at anything like commercially acceptable terms.

In any case, a stress test does not make you insolvent; at worst it will say if such and such happens you will be insolvent so please put in more capital now just in case. How can that be used to justify burning anybody.

The process, either explicit or implicit, will simply be “look if it wasn’t for the State you would all be hopelessly toasted by now. As a concession we are allowing shareholders to retain minimal value as the private listing is useful and again as a concession we will give subbies 20c in the €. Take it or leave it.”

@ Christy

btw – the Anglo exchange offer HAS been declared a CDS credit default trigger.

It seems to be that the burden sharing will be imposed in the December legislation based on conditionality. eg if Tier 1 ratio below X%, then the banked is deemed “in need of restructuring” (they won’t use the word insolvent).
Then when the results of the PCAR assessment arrive, hey presto, burden sharing kicks in.

I would expect the Tier 1 or whatever rations to be set by regulation and be amendable by regulation.

re; but it would seem a good opportunity to distinguish depositors and bondholders going forward.

@ Eoin

“Btw, forgive me for being cynical, but one could be forgiven for thinking that the government can never get it right in some people’s eyes.”

Not cynicism, paranoia.

I would be confused by a subbie burden sharing strategy that started with shoving loads of state equity in front of bondholders in the firing line — even if it was announced by a government consisting of my favourite people in the world.


But it is AIB (and, God forbid, the BoI and IL&P down the road) that is at issue. I doubt that you have completely given up on AIB. The current plan is to “overcapitalise” — actually bringing core tier 1 to 14 percent initially. This will not work if at the same time we signal that we will retrospectively disregard any State capital injections if the capital losses turn out to be larger upon later stress testing. If loss sharing is to be imposed on AIB sub holders, I think it has to be done before any additional capital is put in, and we have to recognise that the current State stake would have be written down to zero. I also think Karl is right that given the FR’s assessments so far, it is unlikely that a stress test would reveal AIB is insolvent (but who knows with a large change in the assessment metholodology).

Bottom line: if loss sharing is to be done, it has to be done quickly (i.e. before any additional capital is put in); and we have to be careful to demonstrate that we are following the rule of law, if only for the pragmatic reason that we could easily undermine the loss-absorping credibility of any capital in the Irish banking system.

@ Eoin

“The exact same thing happened with some people when Anglo announced its very aggressive, and which is now widely seen to be extremely effective and innovative, subdebt buyback plan.”

Applaud it as effective and innovative if you want, but then you’ve applauded just about everything this government as done, while the cumulation of all these decisions have lead us to having to be bailed out.

In truth, there has still been no cogent explanation as to why subordinated bondholders in the world’s most insolvent bank are getting anything back. The answer likely involves the structure of the promissory notes, the amount of money owed to ECB and other things the government have done that have limited its set of options.

And it looks like we’re going down the same road with AIB, deliberately making the situation more complicated by putting lots of equity into the bank in February, one month before the stress test is supposed to indicate the true shape of the loan book.

@ Karl

“In truth, there has still been no cogent explanation as to why subordinated bondholders in the world’s most insolvent bank are getting anything back”

The most cognent explanation is that this has occurred because there is no SRR in place. The reason there is no SRR in place is because the EU/ECB has decided that there needs to be a pan-Euro(pe) SRR framework, both legally (see my previous comment on EU directive – basically if its enacted in one country, it may be valid in another) and practically (contagion/stigma), but which they have either been unwilling, or more likely unable, to put in place yet. Even in Germany, we are only seeing the new SRR legislation go to parliament at the moment, 3 years after the start of the crisis. As far as im aware, the UK is the only country in the EU to enact any type of major legislation to this effect, but they have actually yet to use it, and i believe that some rather large investment banks are now looking into how this legislation would actually interact with the EU directives that i mentioned above.

Btw, junior subordinated bondholders got 1 cent back. I assume you applaud this quite vociferously?

@ John

if the legislation only deals swith subordinated debt, then i don’t see it being a particular problem. Sub debt, in its current form, will soon become a relic that you’ll tell your grandkids about. As has become abundantly clear both at home and abroad, it is very difficult for this form of true loss-absorbing capital to actually absorb losses. For all the talk of retaining “credibility”, its quite clear that sub debt will be the sacrifical lamb in the bank restructuring process.

@ Karl

Btw, slightly ad hominem/man not ball etc there…

“Applaud it as effective and innovative if you want, but then you’ve applauded just about everything this government as done, while the cumulation of all these decisions have lead us to having to be bailed out.”

These banks have been staffed by failed bankers. Not just the boards, but the middle management and even many of the branch staff have demonstrated smug self-satisfaction, arrogance, and a pervasive culture of interpreting criticism as an unacceptable form of abuse for years.

They are paid more than many who have better judgement and know what they are doing. The ongoing costs to the state not just of the loan losses, but the staff redundancies and pensions are going to be collossal.

A very very determined attempt should be made to provide new, alternative legal entities in which the deposits are allowed to shift and the existing “banks” should be “resolved” without the staff and boards continuing to be some of the world’s most priviledged welfare recipients.

Every obligation that can be removed by way of being a claim on an insolvent company (ie reality) shouild be so removed, the exceptions being depositors and (to a yet to be negotiated extent) senior bondholders. That is where any NEW money to be committed to banking should be aimed

The pussy-footing around is continuing the expectation internationally, that the country is quite likely to continue rolling over infront of bankers. Line drawing time guys.

I suspect they will only recapitalize the banks after they force subordinated debt to take a loss. This will probably come through a tender offer prior to February 28. The sub debt holders don’t have much choice other than to take it, because by then the resolution authority will spell out the risks for them of refusing.

On a separate note – did anyone notice that the IMF program lists central government debt at 83.7bn end 2010, while eurostat is to place it around 98% GDP or 156bn? The IMF nets off cash (say 10bn at end year) and pension reserves (18bn) but the difference is still 44bn. I presume the remaining difference is the promissory notes granted to banks that are counted as debt by eurostat. Those are large – but could they make up the full remaining 44bn difference between the two numbers? And why would the IMF exclude them?

page 38 has the net central government debt:

“slightly ad hominem/man not ball etc there…”

Perhaps, though I think it helps to put your contributions in context.

Anyway, I’ve never said that debate can’t be robust or that we can’t point out how other people tend to pursue lines of arugment that we disagree with.

In any case, in terms of my personal policy on this

and I don’t get quite so concerned about the sensitivities of anonymous commenters. As I said at the time “personal abuse of named individuals by those who decide to use a nom de blog will be particularly frowned upon.”

@ Karl

yes, you’re so right, spot on, all my contributions have been about bigging-up the government line…

We can approach this Global Debt Crisis if the truth be told. All Banks are bust, that is worldwide, and they simply need to recoup their losses by turning on the public, ( I hate the term taxpayer, I,m a citizen with a name). The ECB are the problem doing the dirty work of the banks. By the way, the IMF and World Bank are bust too, sure no wonder they were licking their chops to get into Ireland. My point being we are on the edge of a cliff along with many other countries and all the talk is just a waste of energy. Of course we could follow Eric Cantona,s advise and everyone withdrawn their money on the one day and bring the banks down in one big bang. A true revolution and with no blood shed.

Sorry, We can approach this Global Debt crisis from a different angle if the truth be told.

@Paul Hunt.
Glad somebody has asked for clarity.

Jim O’leary on the radio talking about €200 billion debt in 2014. I saw that IMF figure of €83 billion and said to myself–well thats not so bad.
But its a long way from €83 billion at the end of 2010 to Jim o’Leary’s €200 billion in 2014.

It is any wonder that ordinary people get frustrated and switch off when the most basis and critical of numbers are open to different interpretations.
I for one could do with a simple explanation on all this.


I would be very suprised if there is a directive that has the effect you suggest.

Can you give me a link?

In general Directives must be implemented in each member state individually

There is a claer constitutional issue with respect to these enforced losses- far more so then there was/is with NAMA legislation.

Contractual rights are a type of private property. The state is rewriting the terms of the contracts to benefit itself and to the prejudice of the subbies. This is a claer interference with property rights – unlike NAMA

Now clearly this could be saved by, first, compensation and potentially/probably secondly, by the proviso to the property rights article of the constitution.

However, even asuming that it is constitutional, (which I would say it probably is) i must be seen as an albeit mild form of financial suppression.

In the case of AIB it would be a less mild form of supression as it is less clear that the bank still has unrecognized losses on its balance sheet that would effectively wipe out all existing equity and subbie debt.

For BOI I think such a procedure would constitute a still less mild form of financial suppression.

Slightly off topic, did anybody hear Minister Gormley on RTE today. Did he actually say that the Cabinet took a decsion on the Bank Guarantee up to a week prior to Sep 30 2009.

@John McHale

‘I also think Karl is right that given the FR’s assessments so far, it is unlikely that a stress test would reveal AIB is insolvent (but who knows with a large change in the assessment metholodology). ‘

It has been well flagged that the methodology of the new European bank stress tests will include a liquidity test. Perhaps the new Irish one will ignore this but the end result will be a lack of credibility. Then we move on to rescue no.?

Punishing the junior bondholders will not solve the problems.

1. It is not morally right to protect the senior bondholders and hit the juniors because big fat cats in the continent will feel sick. If there will be a burden sharing there is an established order. You should follow this if you want to do this properly and do it with a balanced manner. Alternatively if it is a bailout it should respect all the creditors rather than mingling with the legislation.

2. In every country banking is a special sector heavily regulated, supervised and monitored. This whole mechanism has failed. There is a huge waste and loss of taxpayer money there. AIB is the largest bank in the country, what kind of supervision could miss this whole mess. If regulators missed it, if rating agencies missed it, it is just ok that the bondholders-including the junior ones- also missed it. Burden sharing idea is misguided. Either you let the Banks go bust and let everyone know how straight your system is or you own the mess and deal with it.

3. Last point is on high risk high return mambo jumbo. This neo classical economic theory and its extensions which form the backbone of misbehaviour in financial markets is wrong. This whole system has been pushing ordinary people into share ownwership for years. Most of these people are also burned as mutual fund or equity owners at supposedly one of the safest category of companies-banks. Those who think that equity and junior bondholders should get the final invoice are simply ignoring the fact that there are many hard working normal taxpayers who were trying to accumulate some security for their retirement. Those who took government debt may also be on the hook. So who was prudent or irresponsible is not yet clear.

Bottom line is that Ireland was managed badly. Now a price needs to be paid to maintain its credibility. It should be paid with dignity. Not by pointing fingers and finding scapegoats. Everyone will remember this for a long time to come.

The euro is a currency backed by intergovernment transfers,citizens of respective Eurozone countries do not pay Federal tax to backstop it.
It requires only one major government to stop payments into the ESFS for its triple A rating to cease and for funding of the euro to be jeopardised.

Already Ireland and Greece are no longer required to contribute (as far as I know) to the ESFS.The euro bond launch secheduled for January will be interesting as these bonds are marketed as triple A even though two of the original backers are bankrupt and several other eurozone countries have seen their sovereign bond yields increase in primary and secondary markets.
How can euro bonds be sold as triple A if the risk assessment for their constituent members is increasing ?.

The issue of the day,whether senior and subordinate debt holders take a hit may become moot if Euro bonds squeeze out individual country bond auctions next year.
Another important issue is if prices on euro bonds drop will the ECB step in and mop up these debts from the secondary markets ensuring further competition of the damned between the ECB and the individual countries issuing their own sovereign bonds.

If there is to be no planned ,orderly write down of senior and subordinate bank debt held in proxy by the ECB then Investors would be wise to consider this will place the ECB itself as potentially insolvent.This would be the case if one or more countries act in their own interests and default on debt held by the ECB and at the same time refused to fund the ESFS.

The euro and the Dollar differ in their is no direct connection between the citizen and the euro as there is in the US with the Dollar.The euro exists purely on the backing by its respective countries.
As EU countries are diverging politically and economically who can make the case for the Euro? and consequently who would want to buy euro bonds under these circumstances?

@John McHale:
“Surely the objective is to regain market access for the banks based on adequate capital buffers.”

Is it the policy of the state, or of its saviours, to ensure that the current banks (or four of them) are saved? If so, why? Is not their future a matter of (at best) secondary importance?


It tallies with some of the documentation in the PAC pack plus some anedotal stuff from inside the banks (which I thought was BS). Allegedly the blanket guarantee had been floating around in DOF for weeks but had been killed off. We know (sort of) that Merrill were a bit sceptical of it. Maybe it refused to die (Zombie like).

No wonder the Pols and (especially) the CS do not want us to know about what went on.

It also tallies with Morgan Kelly’s piece about the DoF having a draft that excluded INBS and Anglo – see a repost here:

The objections to this forced an apology from the Irish Times, IIRC and, I suspect, limited critical discourse in the IT. It probably didn’t help that the first Chairman of IFSRA was also Chairman of the IT group… at the same time (Brian Patterson).

I suppose the IT will be looking for its apology back?

Our esteemed AG will have his hands full.
He has worked endlessly to avoid a cock-up on his watch and yet has been a central but generally overlooked figure in the decision making during this catastrophe. He really only hit the headlines for defending the McKillen vs. NAMA case personally and taking his dog to Kerry in a state car bringing papers down to him.
I look forward to him publishing his special resolution regime legislation with little optimism before the end of this month.

Given his role so far, I think that the bond holders will enjoy the festive season.


One of the Sundays reported that Anglo was to be nationalised and possibly put into resolution. But Cowen went ballistic & Lenny back down. Souces within the Banks and LH back up this version of events.

If this is true, it would explain why Gormley had gone hoem to bed on Monday and turned off the phone. The hard work was done.

It makes the debable of Anglo and the guarantee even worse. Put this way, it was a decision taken in cold blood and not on the hoof. moreover, the nasty banks in this version did not bounce the DOf into it. We will shortly bounce Cowen and Lenny out of office. But what about the permo govt. Some are still in situ and others have been promoted.


“But what about the permo govt?”

Indeed. We need to apply the power hoses to all the stables -and not just the political one.

Foreign observers should note the lack of prominence – 15 hours after the event – in our publicly owned media for a huge revelation about one of the most important decisions in independent Irish history.
Instead they are going with a comedy routine on the fact that we have lost our sovereignty.
“Après Match (comedy troupe) get together in the form of Brian Lenihan (Finance Minister) and Fintan O’Toole (Left-wing journalist) with a mysterious third member from the Fianna Fáil party to talk to Ryan Tubridy about the EU/IMF bailout.”
And I used to think the Pravda nickname was harsh…

Lot of FF posters on declaring that FG are going to back the budget. FG haven’t told the public yet but FF spinners know. And I used to think the FF Lite nickname was harsh.

“To be fair maybe Biffo (Brian Cowen) was so locked that he only thought it happened that way. I’m sure that his head wasn’t the best on the Tuesday Morning…. memory kinda foggy… Ah come on it could happen to a bishop.. “

N.B. In case of Iceland!: “Gormley was very clear, he said the night time meeting was just a “courtesy call”.

@Oliver Vandt

You hardly need to be told not to believe anything written by FF posters on or for that matter on

FG will oppose the budget.

If it is defeated, there may need to be talks between FF, FG and LP to pass a continuing resolution so people can be paid on January 1st, but FG will not agree to anything that the LP will not agree to and v.v.

You guys in Ireland are playing with Fire. You cannot default on subordinated bondholders and carry on. It can’t happen and won’t happen. Default is an insolvency event which will trigger a multitude of unforeseen consequences for banks such as AIB and others. If the bank is not insolvent, the debt will have to be repaid… in full and on time. No legislation can fix that, and if you try, AIB and others will be immersed in protracted litigation for years if not decades. Ireland will be a pariah in international markets for the foreseeable future. You won’t be able to raise any money at all or at very inflated uneconomic rates. Just ask the Argentines. Ten years after their massive default, and a decade after imposing a massive haircut on bondholders, they cannot raise money, their assets are impounded by overseas courts, and litigation is still going on and on… Ireland should bite the bullet, raise the funds, but save their financial credibility. All this talk about punishing subordinated bondholders without the banks themselves going into liquidation is simply fodder to appease the masses by the politicians. It is, however, reckless and irresponsible as far as the financial future of Ireland is concerned. Let’s not forget that sub debt of AIB was trading at par in August and September 2010 so all the talk about wild speculations is sadly misplaced. Ireland: my advice to you is this: Pay up in full, or face a ruinous financial future. And I agree with the analysis published by Mr Whelan (the best one I’ve read on the topic by a long shot) that the legality and practicality of the Government of Ireland’s plans on subordinated bondholders are murky to say the least. In fact, I always thought that it was a political ploy to drive bond prices very low so that they could now repurchase those bonds at bargain prices and clean up most of the debt. But a true default won’t happen because it can’t, legally and politically.

The bill has been published below with Minister’s statement.

I don’t understand how this bill will allow as the Minister states; “for the injection of capital into AIB before the end of the year to make sure that the bank is compliant with the Central Bank’s regulatory capital requirements.”

How will it allow for the injection of capital into AIB who have been given until the 28th of February to raise that capital independently and without state aid? They have also been given until the 28th of February to meet the new capital core ratio requirements. Does this mean the state are going to inject from the NPRF the 9 billion before the end of the year? What is it in this bill which facilitates AIB in raising their capital before Feb 28th that does not exist currently prior to its enactment?

This is what I was talking about in my comment above (no. 58). It would be madness, suicidal financially for the Govt of Ireland to default on AIB Sub Debt. This is an article published by the conservative Daily Telegraph of London last week. It confirms that what I had been writing earlier. If the Irish want to go the way of the Kirchners of Argentina, the Irish people will end up as poor as the Argentines. Not a pretty sight for Dublin.

Bondholders in Allied Irish Bank are preparing to sue the Irish state over losses they expect to be forced to take, in a move that may imperil attempts by the government to raise fresh funds next year.
The investors, who include some of the world’s largest fixed-income pension and insurance funds, held talks on Friday about taking the Irish government to court if it forces a second round of “haircuts” on the value of subordinated debt issued by Allied Irish.
Anglo Irish Bank and Irish Nationwide have already been the subject of legal action from subordinated debt investors, but so far without success.
What makes the latest bondholder group’s action particularly significant is that it is dominated by “long-only” investors and not so-called “speculators” like hedge funds. Investors’ anger may prompt fears of a “buyers’ strike” when Ireland, and other indebted euro area countries, come to the market next year to refinance hundreds of billions of euros of maturing sovereign debt.
“These are the pension funds, insurers and main fixed-income funds that are the backbone of the bond market,” said one source. “Many of these funds are not going to want to touch Irish paper for a long-time. I hope governments realise they are angering precisely the people they are going to need to convince to buy new bonds.”
Law firm Bingham McCutchen is understood to be organising the group and hosted a conference call on Friday for Allied Irish investors that wish to take legal action. Bingham also advised Irish Nationwide subordinated bondholders.

In June 2009, holders of Tier 1 and Tier 2 bonds in Allied Irish accepted a new issue of lower Tier 2 debt as part of an exchange offer that saw investors lose 33pc to 50pc of the face value of their investment. The latest threat of “haircuts” has enraged holders, given the repeated assurances from Irish and European authorities over the financial strength of Allied Irish.
Unlike Anglo Irish and Irish Nationwide, Allied Irish was subject to the European bank stress tests. Allied Irish passed, but after last month’s €85bn (£72bn) bailout, it is expected to be almost completely nationalised, with creditors set to take more of the pain.
“These investors are not bad guys, they are people that have already accepted substantial reductions in their investments. The simple fact is the risk return equation for many investors has now turned in favour of legal action,” said the source.
Like previous investor action groups, one major point of law at stake will be the legality of forcing haircuts on lower Tier 2 debt while still paying coupons on senior debt. Under the terms of the subordinated debt, interest payments on senior debt must have ceased before the subordinated debt can be restructured.

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