The dominant view on this site seems to be that the new government should play hardball with regard to senior bondholders. While I sympathise with the fury over the inequity of bailing out private creditors, I have reluctantly come to a different conclusion. In the interests of debate, I give below a stripped-down overview of my reasoning. I’m sure people will tell me where I’m wrong.
Cutting to the essentials, the State is now effectively on the hook for: (i) bank losses beyond their capital; (ii) any losses on capital the State itself has injected; and (iii) and the eventual losses on NAMA. The ECB/CBI will provide the necessary liquidity/funding to meet all ongoing obligations to creditors. In return, they require a shrinking of bank liabilities (to reduce their exposure) and an eschewal of loss imposition on senior bondholders given concerns over balance sheet contagion and eurozone precedents. (Arthur Beesley reports on eye-opening estimates by Seamus Coffey on the ownership of the Irish bank bonds.)
There is a growing chorus that Ireland should insist on imposing losses on (at least) unguaranteed seniors. This comes down to gambling the ECB won’t significantly pull the liquidity/funding support, and indeed that we should take the further risk that the fiscal components of the bailout deal will not be withdrawn.
I think most of us agree that the original blanket guarantee was a shocking mistake, and also that in ordinary circumstances losses should be imposed – Danish style – on unguaranteed bank creditors.
I think the difference in views comes down to how we see the obligations of the ECB. If we think the ECB is simply doing its job with its liquidity/funding support, then demands to protect bondholders do seem indefensible. (By the way, the dictatorial language used by Commissioner Rehn earlier in the week barring such loss imposition was both undiplomatic and, I thought, extremely unhelpful.) But if we see the ECB as going beyond its ordinary lender of last resort obligations to small set of banks within the eurozone, then proportional additional conditions do not seem unwarranted. I think people should take a close look at what the ECB/CBI are giving, as well as what they are demanding. From where I sit, the ECB’s willingness to act as long-term lender of last resort does qualify as extraordinary support.