Anglo’s January 31st Bond
This post was written by Karl Whelan
There have been some comments on this blog this morning on the popular subject of bank bonds.
Let me point out some facts and then some questions for debate.
The facts: On Monday, January 31st, Anglo Irish Bank are going to pay out on a maturing bond worth €750 million. (For reference, the total cut in this year’s welfare budget will be €873 million.) The investors who purchased this bond invested their money with Anglo on the 17th of January 2006. The bond is senior unsecured debt and is not covered by a state guarantee.
The questions: Should the government have passed legislation this month to allow the Minister for Finance to intervene so that the bank did not pay this bond back? And if so, should the next government pass such a bill in relation to the remaining €4 billion or so in outstanding unguaranteed bonds owed by Anglo and INBS?
In answering the question, it’s worth noting that the logic of the section of the recent Credit Institutions (Stabilisation) Bill relating to subordinated debt suggests that a government can change the terms and conditions of bonds to apply haircuts if the bank owes its continued existence to significant amounts of public money being injected.
It is unclear whether this power can simply be extended to senior bonds but it seems to me that it can. Another issue is whether such changes in terms and conditions can legally work to allow a bank to distinguish between different types of unsecured creditors that start out with equal claims, by haircutting bond holders but not deposits. Mechanically, of course, one could achieve the same outcome by haircutting both senior bonds and depositors and then compensating depositors via a separate piece of legislation, but this would be more complicated.
The other issue is the implications of a default on a senior bond for the Irish and European banking sectors. My belief is that how this plays depends on what investors believe is the precedent being set. If the precedent is that investors can lose out if they place their money with banks with flawed business models, who engaged in shady business practices and then become grossly insolvent—then surely this is a precedent that must form part of new proposals for dealing with failed institutions?
On the other hand, one could argue that at such a sensitive time for the Irish banking sector, defaults of this type would send the wrong message and worsen an already extremely serious liquidity problem. This is the argument put forward by our new best friend, Mr. Bini-Smaghi.
I’m open to considering all sides of this argument. On balance, however, I’m inclined to the position that it is in the interests of both Irish citizens and those in the wider EU to set a precedent with the Anglo and INBS bonds that there need to be limits on how much support European taxpayers will provide to insolvent banks.
Tags: Anglo Irish Bank
January 28th, 2011 at 4:15 pm
I think you are right - send the message we are negotiating and serious about it too.
Colm Mc Carthy set the stage for this (if I understand him correctly) by asking the question earlier today regarding last nights Primetime: Who is the elected politician and who is the un-elected official?
There is no point playing softball if the other side are playing hardball. If the situation were reversed would they pay up? Would they sell their assets, raid their piggy banks to pay? Doubt it. They would be onto the lawyers to negotiate the whole bloody thing away.
Unguaranteed is the phrase to note here, that is why it gets the rate it does.
They are big boys and know the game and this time the governments need to make the rules on behalf of their masters the taxpayers.
As I mentioned on a previous mail if we want to be capitalists we must invest, bank, govern and consume RESPONSIBILY.
The government that governed irresponsibly is going.
The consumers who consumed irresponsibly are suffering (along with others who didn’t)
The Banks who banked irresponsibly are ours.
It’s the bondholders turn.
When everyone has had a taste of the gruel, we should all discuss lunch.
January 28th, 2011 at 4:19 pm
No problem with your conclusion. In fact, if one stands back from the situation, it seems almost ridiculous that it has to be asserted - and in such cautious and tentative terms - in a functioning democracy with a mixed economy. The problem as I see it is that Ireland cannot take this stand unilaterally; there has be to EU-wide consent. And there’s the rub.
January 28th, 2011 at 4:23 pm
@ Paul
So do we hope for things to get worse internationally?
January 28th, 2011 at 4:31 pm
“… should the next government pass such a bill in relation to the remaining €4 billion or so in outstanding unguaranteed bonds owed by Anglo and INBS?”
Yes. If other EU governments disagree, let them pay off these bondholders with their own taxpayers’ money. Really, it’s infuriating that such a question even needs to be asked. What party do I have to vote for to ensure we take a stand on this?
January 28th, 2011 at 4:33 pm
Were the government to direct the Board of Anglo to close the company immediately, what would the net position of the Exchequer be?
January 28th, 2011 at 4:44 pm
The re-negotiation will only start when they see what they want to happen is not going to happen.
We have to start somewhere.
Their strategy is to say never as many times as it takes for us to keep believing it - I don’t believe it.
Lets start now
January 28th, 2011 at 4:45 pm
http://ftalphaville.ft.com/blog/2011/01/28/473201/what-a-strong-euro-hides/
74% of American investors surveyed by UBS thought there would be a debt restructuring event in Ireland within the next 3 years.
January 28th, 2011 at 4:48 pm
@Jarlath,
No. We should not wish for that. This is purely political. Chancellor Merkel has committed to drawing the line in the sand - but only for after 2013. She needs to draw it next month - and line all her troops up behind it. All the sovereign bond market wants is some certainty. Jean-Claude Juncker is reported to have said: “We all know what to do, but we don’t how we’ll get re-elected if we do it.” It’s time to fish or cut bait.
January 28th, 2011 at 5:04 pm
“Another issue is whether such changes in terms and conditions can legally work to allow a bank to distinguish between different types of unsecured creditors that start out with equal claims, by haircutting bond holders but not deposits.”
Assuming there is some serious legal impediment, which means that depositors must share the losses, is that any reason why the government should hold back? Surely anyone placing a large deposit with Anglo knew there was a significant risk involved?
January 28th, 2011 at 5:06 pm
@karl
In the case of the subbies at Anglo and INBS it was clear that all the private sector equity in the bank was lost and that the only equity that remained was the equity that the government injected in order to allow the banks to continue to hold deposits.
Furthermore, it was clear that if the bank had not been supported and had been run through liquidation than the subbies would have received nothing. Therefore in the case of the subbies they were essentially denied due process - losses were imposed on them in a manner which was not supposed to be possible when they bought the bonds - the rules of the game were changed.
Importantly, and on the other hand, they received more than they would have if the rules of the game had been adhered to (ie zero). In this sense it could be argued that both sides (the state and the subbies) did better than they would have if the bank was liquidated and the subbies did not suffer a material prejudice.
In the case of un-guaranteed seniors, I would argue that, if losses are to be imposed, at very least the same logic should apply. The losses at the bank ought to be calculated - original equity must absorb the first losses - then all of the value of the subbies (despite the fact that they didn’t in fact absorb their full share) then the remaining losses should be spread across deposits and seniors, with guaranteed seniors and deposits reimbursed.
Moreover, when measuring losses, assumptions that favour bond holders ought to be employed so as to ensure that they do not suffer materially (as in in comparison) as a result of not been run through an examinership /liquidation/ resolution regime.
If this process is followed I would guess that the most that could be saved is somewhere between 5% and 30% of the outstanding value of un guaranteed bonds. That would work out at somewhere between 200 million and 1.2 billion.
Whether it would be worth the controversy it would cause would depend on whether it had full EU support and whether it was closer to 1.2 billion than 200 million
January 28th, 2011 at 5:19 pm
“Another issue is whether such changes in terms and conditions can legally work to allow a bank to distinguish between different types of unsecured creditors that start out with equal claims, by haircutting bond holders but not deposits.”
That is for me the crux of the matter. If the unsecured bondholders had the same seniority as the depositors at the time of their initial investment, then both should share equally in any haircut. If not, then the bondholders would probably require formal bankrupcy proceedings, making just an even bigger mess of what is already a big one.
January 28th, 2011 at 5:42 pm
Karl,
“Another issue is whether such changes in terms and conditions can legally work to allow a bank to distinguish between different types of unsecured creditors that start out with equal claims, by haircutting bond holders but not deposits.”
ANY DOUBT and no rational deposit manager or holder would leave a cent there. Then the precedent for the other banks…..
KevinD,
“Assuming there is some serious legal impediment, which means that depositors must share the losses, is that any reason why the government should hold back? Surely anyone placing a large deposit with Anglo knew there was a significant risk involved?”
There is - the bond documentation and the governing law. Even if there weren’t then how can you possibly equate a term bond bought in 2006 with a deposit now?!
If you can track down a list of depositors and amounts for the day the guarantee was announced, you could tell them they are not morally entitled to have withdrawn that deposit and ask them to put it back so you can confiscate some of it.
The current deposits are ONLY there because they have been given a guarantee by the state.
If you want to do this, set up new banks to put compensated depositor’s funds into, liquidate the existing banks (including all employment, bonus and pension contracts) in a wind up. Then advertise new jobs in new banks with as few of the pillocks that were in the old ones as possible.
January 28th, 2011 at 6:20 pm
A clarification, for grumpy: I take it that Karl Whelan does not have guaranteed deposits in mind when he refers to unsecured creditors. Maybe an Irish Government guarantee ain’t what it used to be, but it’s security of a sort.
January 28th, 2011 at 6:28 pm
Kevin,
Deposits are “unsecured creditors” as are “unsecured senior bonds”. Basically, the former are guaranteed, some of latterare not.
Unsecured just means a kind of floating charge.
January 28th, 2011 at 6:37 pm
grumpy,
It wouldn’t surprise me if there are actually no unguaranteed deposits at all. (If there are the depositors concerned must be nutcases.) But if there are none, then the problem, which Karl Whelan refers to, simply doesn’t arise. If any such depositors do exist then it’s their tough luck, say I. That’s all I meant by my comment; I wasn’t proposing that guaranteed deposits should be shorn. It may come to that eventually of course, if we continue to let the situation deteriorate.
January 28th, 2011 at 7:14 pm
“On the other hand, one could argue that at such a sensitive time for the Irish banking sector, defaults of this type would send the wrong message and worsen an already extremely serious liquidity problem.”
I have a problem with this statement. The time for Irish banks has remained sensitive for well over two years and the way things are going, there is not reason to believe that it will remain sensitive some 2013 or 2014.
There is never a wrong time to do the right thing.
January 28th, 2011 at 7:16 pm
That last line should be:
“…there is no reason to believe that it will not remain sensitive…”
I feel like Irish banks are stuck in a Beckett play!
January 28th, 2011 at 8:14 pm
I’m beyond limits ….
Mr. Dukes - get your act in order please.
January 28th, 2011 at 9:59 pm
Hi Karl,
….’ because it is really so blatantly unjust that the people should absorb all the losses and the bondholders get away free’…. - G. Soros on Ireland here:
http://video.ft.com/v/764176285001/Soros-Ireland-must-restructure-now
January 28th, 2011 at 10:12 pm
Thank you for posting this Karl. You can guess what side of the debate I am on.
It is also surely the case that the bank run which has been in progress for a while now has been brought about by fears about the solvency of the State, and that those fears were heightened by the original bank guarantee, which means that Bini-Smaghi has things precisely backwards.
January 28th, 2011 at 10:34 pm
I just watched Hosni Mubarak on al Jazeera and he really came across as an octogenarian Biffo.
Law and order, plámás, free and democratic society. Taking side of poor people.
*Economy too important to be left to economists*.
Secure stable homeland of civilized people . Troublemakers. Stand up for country. Exhausted my life for this country. Hard times, war, one people one nation the right direction and course so long as we set goals right. The rule of law. More democracy, more freedom. New steps. The same shite. Reduce unemployment, raise standard of living. Embrace consciousness and struggle. Fearing for Egypt and future. Further chaos mayhem destruction so trust me . Requested govt to step down today. New govt tomorrow. Shoulder new priorities. Safety and security of all Egyptians. God save Egypt.
January 29th, 2011 at 12:12 am
“Another issue is whether such changes in terms and conditions can legally work to allow a bank to distinguish between different types of unsecured creditors that start out with equal claims, by haircutting bond holders but not deposits.”
I understand that the first €100 000 is covered under the original deposit insurance - so the never did start out with equal claims - after that it’s just too bad
January 29th, 2011 at 12:17 am
The bondholders who are about to be repaid are very likely not the same bondholders who bought the issue. I don’t know if these are registered bonds, likely not, so as to trace sales and purchases. As mentioned the depositors, OTOH, were given assurances and should be offered a “stay bonus” for leaving such a valuable source of liquidity.
Discount the bondholders, they already did. The holders today really will make a killing on their purchases at discount with repayment at par. Plus interest.
Default. Default now.
January 29th, 2011 at 12:27 am
@AMcGrath
““Another issue is whether such changes in terms and conditions can legally work to allow a bank to distinguish between different types of unsecured creditors that start out with equal claims, by haircutting bond holders but not deposits.”
I understand that the first €100 000 is covered under the original deposit insurance - so the never did start out with equal claims - after that it’s just too bad”
The equal claims referred to is in the context of a winding up. The depositors and senior unsecureds are usually pari passu (in a winding up, but also apparently in Lenihan’s imagination, in all ways possible including favourite rap artist)
They have equal claims on the assets of the bank. As an investor, I would regard the 100k deposit guarantee and the ELG unlimited guarantee as both state guarantees. You will be regarded as defaulting if you stitch up these depositors - so get plan B for the structural deficit out of the cupboard and stop keeping it sectret - or people like me will know it doesn’t exist.
January 29th, 2011 at 12:43 am
@grumpy
What eventuality was the deposit insurance scheme envisaged to cover - if not a winding up? It was not intened to cover bondholders.
January 29th, 2011 at 12:44 am
so this event can be triggered - then wind up later..
January 29th, 2011 at 7:36 am
Returning to our ‘imaginary’ liquidation scenario. This is what has been used to enforce equity and sub-debt wipeout.
What needs to be presented for senior debt is the furtherance of this imaginary liquidation. The calculations need to be made public - what assets of value does Anglo have net of debtor-in-possession financing, what liabilities does it have, what order do those liabilities need to be satisfied in.
Then share the assets out between them.
Where the state has guaranteed liabilities, as debtor in possession, it can use its previously committed resources to make those debtors whole.
Unsecured debtors would then get a haircut on their payout commensurate with the bustness of Anglo, plus a bit for going with good grace.
This is basic Chapter 11 stuff.
The problem, it seems to me is two-fold:
1. It would require a level of disclosure that so far has been shrouded in the spoof of ‘commercial confidence’. It would require that assets are named and quoted at market price, not some imaginary NAMA price. It would, in effect, require price discovery in the market for bank assets. It would also require an admission of the scale of Anglo’s debts (other than senior and deposit).
2. For the ‘imaginary’ liquidation to be effective and reasonable, the chain of liabilities has to be fairly worked through. This has not happened in the other banks… so far. AIB retains a rump of private shareholders so the government is an investor, not a debtor in possession. It is not free to attempt to bitchslap anyone given its unwillingness to start at the beginning.
I believe 1 is an unsurmountable obstacle to the current consensus. 2 appears likewise in relation to banks other than Anglo and INBS.
January 29th, 2011 at 12:30 pm
Speaking of INBS, anyone see the other four “doing an INBS” and issuing €16.5bn in self held ELG this week, for the sole purpose of repo-ing with the ECB. Funding options for the Irish banks clearly getting more and more difficult.
January 29th, 2011 at 1:44 pm
@Eoin
Is it 16.5 bn at INBS now?
Or do you mean that they will issue a new 16.5bn?
I don’t believe the INBS debt would be eligible for the ECB since it is not a marketable instrument, as such it would be used for ELA underpinned by, yes, that would be us, the taxpayers…
January 29th, 2011 at 3:52 pm
A question:
What are the requirements for having a banking license in Ireland? (Is being solvent a non-negotiable requirement?)
January 29th, 2011 at 4:05 pm
@ Hoggie
Oops, i was a bit vague there alright! No, INBS is 4bn, but the others have more or less done the same thing this wek for a total of 16.5bn. I think there may be some fudging going on with the “marketable instrument” definition for the INBS (and this) stuff because of the ELG backing it up, but given that its a sovereign packed secuity, whats the real difference between ECB and ELA, we’re on the hook either way? Anyways, i think the final days of that particular blackhole of an institution are soon approaching, so don’t think its that much of an issue.
January 29th, 2011 at 4:34 pm
Eoin Bond : is there a link to that 16.5b? What your saying seems extraordinary? how can they “create” 16.5b? Or is it something the govt did?
January 29th, 2011 at 7:36 pm
@ Dr Bob
http://www.ntma.ie/ELGScheme/GuaranteedLiabilitiesbyInstitution.php
It’s a loophole in the system which the ECB seems to allow for the moment. I believe it is being used in this situation to replace Sterling/UK loan books which are no longer eligible at the ECB from the start of this year, as only Euro-denominated collateral is now accepted. It is a defacto creation of quasi-quantitative easing, albeit they won’t admit to it.
January 29th, 2011 at 7:56 pm
@Bond Eoin Bond
Michael Lewis made a guest appearance on Marian Finucane today ….. wonder was anybody listening?
January 30th, 2011 at 12:08 am
@Dr Bob
Link to the Irish Times with the 16.5 billion
http://www.irishtimes.com/newspaper/finance/2011/0129/1224288526774.html
January 30th, 2011 at 4:06 am
@Jesper
The letters of comfort and the guarantees make the banks solvent (so long as the tax-payer is solvent).
January 30th, 2011 at 10:44 am
Daniel Gross commented that he SF policy on debt was basically the correct one to pursue. Any thoughts on that.
I know in this state its difficult to comment on SFs policies but any thoughts?
January 30th, 2011 at 11:32 am
Default. These high rollers knew the score. Let them eat cheese.
January 30th, 2011 at 5:07 pm
@ Wow
Given that the rest of the political establishment supports the bailout in the name of realpolitik, when Ireland defaults the whole political model will be broken and not just FF. SF are the only ones talking sense.
Fintan O’Toole was in the Irish Times yesterday saying that there wasn’t enough time to come up with an alternative political offer but in reality I think they are waiting for the next government to collapse .
January 31st, 2011 at 4:20 pm
I’m with you Karl - its not black and white - but the balance to me tips in one direction.
The whole problem with haircuts for seniors in the absence of a rulebook is a Lehmans type freeze-up as banks wonder who is next among them.
Fair enough to an extent.
But Anglo and INBS are basket cases that don’t exist as banks in any real shape or form - they dont relate to any other bank seeking funding.
Its much harder to say they set a precedent for a functioning bank.
January 31st, 2011 at 4:21 pm
Just to clarify - I’m not suggesting you are sitting on the fence - I’m with you that they should be haircutted
January 31st, 2011 at 11:08 pm
@seafid
Well, I strongly disagree with O’Toole and his sorry article in the IT. Political change and offering of an alternative is a ongoing process, otherwise it is a coup d’etat.
Paul Sommerville is running for Dublin South East!
http://paulsommerville.com/policies.html
+1 on that!
February 4th, 2011 at 11:20 pm
“Another issue is whether such changes in terms and conditions can legally work to allow a bank to distinguish between different types of unsecured creditors that start out with equal claims, by haircutting bond holders but not deposits.”
The answer is YES.
Check out the NYLJ for an article on that - its about pari passu.
You can rank payments.
February 10th, 2011 at 9:59 am
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