Year: 2010

The Guarantee Extension Decision

Much of the reporting of yesterday’s guarantee decision (DoF press release here, explanatory notes here) seems to be a bit confused.

Most of the coverage has focused on something called “the guarantee”. However, there are in fact two separate state guarantee schemes. The original is the Credit Institutions (Financial Support) Act 2008 or CIFS, which was conceived on September 29, 2008. This covered essentially all liabilities of the covered banks apart from undated subordinated debt. However, the cover only extended to the end of September 2010, so that if a bank defaulted on any of these liabilities on October 1, 2010, the government would not have any responsibility. Because of this limitation, most of the bonds issued after CIFS was put in place matured in September 2010.

To allow banks to issue debt that matured later than September 2010, the government then put in place the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 which is known as the ELG scheme. This allowed bonds to be issued with maturities of up to 5 years, with the bonds having the full backing of the Irish government out to their maturity. This scheme also guaranteed deposits and other short-term liabilities.

The ELG scheme was originally supposed to run out at the same time as the CIFS guarantee, so there was only a relatively short window in which bonds could be issued and still carry the ELG cover to maturity. Actually, there was some confusion in these parts about whether the ELG scheme was supposed to run out in June 2010 or September 2010. Whatever the original date, in June, the Commission allowed for elements of the scheme to be extended to December. As the DoF’s explanatory note states

On 28 June, the Commission approved the extension of the issuance window under the ELG Scheme from 29 September to 31 December 2010 for liabilities of between three months and five years duration (except interbank deposits) and retail deposits regardless of maturity (up to a fixed term of five years).

Yesterday’s announcement relates to the ELG scheme, not the CIFS scheme. What was announced was as follows:

This announcement adds the remaining liabilities under the ELG Scheme to the extension being short term liabilities (0-3 months) including corporate deposits and interbank deposits so that now all liabilities under the Scheme benefit from the full extension of the issuance window to 31 December 2010.

I have seen reporting today claiming that yesterday’s announcement is an extension of the CIFS guarantee with the exception of the removal of subordinated debt. That does not appear to be the case. It is not an extension of the original CIFS guarantee, though it does lead to deposits that had been covered under the CIFS scheme retaining their coverage, now from the ELG scheme.

Also, unless I’m misunderstanding something, it seems as though more than just subordinated debt is losing coverage. As the DoF note explains, in relation to bonds, the ELG only covers “specific issuances of eligible debt securities and deposits (of up to five years) placed during the relevant issuance period.” Based on this, my interpretation is that senior debt that is currently covered by the CIFS scheme but which has not been issued under ELG scheme will no longer have a state guarantee as of 1 October.

With all the acronyms and complications, I may be misunderstanding this. If so, please let me know and I’ll post a clarification.

New university rankings

The latest QS university rankings are out. The rules have changed, so comparisons to last year are nonsense.

Ireland has three universities in the Top 200: TCD (52), UCD (114) and UCC (184). The others require a bit of searching: UCG (232), DCU (330), DIT (395), Maynooth (401-450), UL (451-500).

It this good or bad? I counted the number of universities in the top 200. Ireland (4.4 mln people) does better than Austria (8.3 mln), Finland (5.4 mln), Greece (11.3 mln), Portugal (11.3 mln),  Norway (4.9 mln), Singapore (5.0 mln) and Spain (46.0 mln); about as good as Denmark (5.5 mln) and New Zealand (4.4 mln); but worse than Belgium (10.8 mln), Hong Kong (7.0 mln) and Sweden (9.3 mln).

Ten Year Bond Spread at New High

A bad day in the sovereign bond market. Irish ten-year bond yields are up about 25 basis points, hovering at about six percent. Spreads over German equivalents are at about  370 basis points, well above the levels that prevailed in May prior to the announcement of the EU-IMF bailout fund.

Just reporting it, so don’t shoot the messanger. It seems worthy of discussion. Is this a temporary overreaction to relatively minimal news (WSJ story on the stress test deficiencies and some other stuff) or is this the markets catching up with the grim reality of the fiscal situation? The beginning of the end or a great buying opportunity for Irish sovereign debt?

Hot air over Poolbeg

As I expected, nothing happened yesterday. Times, Indo, and Examiner have the same story: Neither party walked away from the contract to build an incinerator in Poolbeg; and Minister Gormley continues in his role as leader of the opposition.

Meanwhile, of course, construction has halted — depriving a bunch of people from a job — and fines for breaching the landfill target accumulate.

The deeper issue was mentioned in the Times: ‘[Mr Tierney] said the managers of the four Dublin local authorities had been put in an “impossible position”. They had been given the responsibility by Government to ensure waste policy was implemented but “at the 11th hour complete and utter uncertainty has been created”.’

Long-term investment requires regulatory certainty.

Anglo’s Plan to Save Subordinated Debt Holders

It is now widely expected that the EU Commission will not approve Anglo’s Good Bank Bad Bank split and so there won’t be a good bank.

The media’s constant focus on whether the bank is being fully wound down or not has always been somewhat misplaced (I’ve been making this point for quite a while). Yes, the government would have to put extra money in to recapitalise the new bank but it wouldn’t be much (perhaps a billion or so) and, in theory, this investment could be earned back if the new bank was eventually sold off. In addition, the new bank would allow for the highest level of continuity for depositors and this could help restrict depositors leaving the bank which would complicate any adjustment to a new structure for Anglo.

In practice, there probably isn’t the basis there for a profitable new bank and there are other ways to deal with deposits, so I haven’t been a big fan of the split idea. However, this debate has been a distraction from the main issue affecting the cost of the bank to the Irish taxpayer, which is what the policy will be on the treatment of bondholders.

Now, however, a new reason has emerged to be against the new bank proposal. I had questioned here whether Anglo would have considered transferring subordinated debt liabilities to the New Bank. Now, Sunday Tribune journalist, Neil Callanan, informs us that Anglo’s management have informed him that their plan is to transfer some of the bank’s subordinated debt “to round out capital structure” (Thanks Neil.)

This is a bad idea on so many different levels. The idea about “rounding out the capital structure” sounds plausible but is, in fact, nonsense. International regulators have generally encouraged the issuance of subordinated debt because small numbers of professional bond investors may be better positioned to provide “market discipline” for the bank’s management than the shareholders, who tend to be poorly organized and easily deceived. The idea here is that the subdebt holders will lose all their money if the bank becomes insolvent, so they’ll pay close attention.

Now we have a bank which is insolvent and whose subdebt holders should get nothing. And the bank’s management wants to hive these bonds off into a new institution, fully capitalised at the expense of the Irish taxpayer, which would see the debt paid back in full.

One can only assume that Anglo’s management are aware that New Bank could “round out its capital structure” by issuing new subordinated debt, in return for which the state-owned bank would actually receive some money. But, for some reason, they would prefer to see the bank take on a legacy liability of Sean Fitzpatrick and co and pile it onto a new state-owned institution. The question is why they would want to do this.

The EU’s impending decision to prevent the new bank should stop all this. However, the planned subdebt transfer raises very serious questions about how exactly Mr. Aynsley and Mr. Dukes believe they are serving the Irish public with their plans for New Bank.