Lex — Ireland: sharing the debt burden

The FT’s Lex renews its call for bondholder burden sharing in today’s column (see here).   I know many readers are fans of the FT’s stance on dealing with the Irish banks.   A consistent feature of this stance, however, has been to throw out strong recommendations for burden sharing, but with little discussion of the practical challenges involved.   Today, the suggestion is to put losses partly on unguaranteed but secured senior bondholders; and, true to form, there is no discussion of the practicalities of imposing losses on the subset of banks that will be well-capitalised after the stress tests.   I know space is tight, but I think we have reason to expect better from the FT.   The closing couple of paragraphs:

Some €21bn of that total consists of senior bonds issued and guaranteed since January 2010, and, therefore, probably untouchable. Another €7bn is subordinated debt on which holders are already taking a haircut. The rest is senior bonds, of which €16.4bn are unguaranteed and unsecured, and €19bn are unguaranteed but are secured on bank assets.

It is here that burden sharing should be concentrated, and the government needs to start the bidding as high as possible. Only if both classes of unguaranteed bonds, amounting to 23 per cent of GDP, are included can the resulting savings make a real difference to Ireland’s otherwise ballooning debt/GDP ratio, which could hit 120 per cent without burden sharing. Thursday’s stress test results on Irish banks will indicate how much extra capital they need. The taxpayer’s contribution must be as little as possible. Irish senior bank bonds trade at prices that discount some burden sharing. The case for it is compelling.

50 thoughts on “Lex — Ireland: sharing the debt burden”

  1. Another solid ft piece that will be ignored and “tut tutted” at by the permanent gift and the green jersey no bondholder left unsaved brigade

  2. There must be a soliloquy waiting to burst forth somewhere: to burden share or not to burden share, etc.

    Burden sharing and growth. Hmm… Not sure I have got my thick head around around that union yet.

    Could someone please explain to me how burden sharing with bondholders will improve the lot of the domestic economy? Presumably, the recent rounds of tax increases will still be required and probably enhanced to deal with the public deficit. Suppose Ireland ‘burden shares’ away – not a transitive relation I know – €7 billion, will that make a significant difference to employers?

    Or is this burden sharing talk just the usual nonsense that goes on in Ireland where the real work task is replaced by one that lends the delusion of doing something?

  3. What do you think the practical challenges are that the FT is overlooking?

    From reading the article I don’t think that the FT is ignoring the difficulties in bailing in creditors, however I think they are correct in saying that it is the correct course of action.

    “Ireland ruled out burden sharing with its panicky and ill-conceived blanket guarantee to bank creditors in September 2008. That fusion of sovereign and bank debt is at the root of the country’s financial woes. In principle, Ireland is right to try to “bail-in” bank creditors. Such an exercise, however, is not simple.”

  4. @ John

    not entirely sure how you burden share on secured stuff. Most of it is heavily (ridiculously so in some cases) overcollateralised, and/or owned by the ECB (they had a bond support program). Covered bonds are also probably the only fully functioning (and only just at that) funding market in the Eurozone right now, so contagion is gonna be the big risk there. Again, fine for the government to use as a negotiating stick, but not sure about the wisdom, practicalities (legal and operational) or savings that it would actually involve.

    Unsecured stuff is a well worn path at this stage. Everyone knows the pro’s and con’s, and people on both sides of the argument tend to leave out the inconveniencies involved…

  5. @Eoin
    “Unsecured stuff is a well worn path at this stage. Everyone knows the pro’s and con’s, and people on both sides of the argument tend to leave out the inconveniencies involved”

    Not leaving the inconveniencies out and understand what they are. I just think some of the consequences are part of the long term solution rather than something to be avoided.

    A large part of the current crisis was caused by the mis-pricing of risk. I just cannot see how the medium/long term solution, involves enforcing more of the same.

  6. @ DE

    i don’t necessarily disagree with you, the system needs a circuit breaker at this stage. Maybe putting losses on senior debt will, after some momentary volatility, be the solution, but it could as easily herald a new Lehman’s style risk collapse. But at least we can say the argument has been out there a while and investors can’t claim they were ultra-shocked if it arose. However, the issue of secured holders taking losses has, as far as i’m aware, been only very, very rarely considered, and would have the potential to close off the only still fully functioning funding route that currently exists. Some covered bond markets have, for instance, NEVER taken an enforced capital loss in over 150 years of issuing. Suddenly enforcing losses via a legislative ‘direction order’ style haircut (rather than liquidation), would potentially freak that market out completely.

  7. Two quotes from Nouriel Roubini tweeting today…

    “Ireland should follow Iceland & not put all bank losses on the gov’s back. Restructure those senior debts. Otherwise the gov. will go bust.”

    “Ireland should recap it’s banks by reducing & converting senior bond claims into equity as putting losses on gov’s back will bankrupt it.”

    How long will people like this, people who saw the crisis coming, be ignored by Irish/EU govs.?

  8. The problem I have with the sort of stuff the FT is spouting is that it gives false solace to the ‘one bound and we’re free to return to Business-as-Usual’ brigade. And it allows all the vested interests to dig in and reinforce their resistance to the major structural economic reforms that are required to grow the domestic economy. Until people get it into their heads that there is no going back and that until some serious reforms of political governance and of the domestic economy are implemented there will be no effective recovery. EU solidarity is in the short supply – and is shrinking fast – but if any is to be forthcoming it will be motivated only by evidence of serious reform of political and economic governance.

    ‘And we had fun, fun, fun ’till Daddy took the t-bird away’. It’ll take a good bit of shaping up before a new one will be provided.

  9. I would certainly be interested in reading about the practical challenges involved in burden-sharing. But it would be helpful if these were compared with the consequences of sovereign default, since that is what I expect to happen as a result of the refusal to face up to those challenges. It’s not helpful to stress that surgery is complicated and risky while ignoring the probable consequences of letting nature take its course.

  10. I have personnally no philosophical problems with the concept of burden-sharing for bondholders of failed banks.

    But as you point out, practicalities are left out.
    1. Haircuts on secured bonds (guaranteed or not) => legal challenges likely to be successful
    2. Haircuts on senior bonds before haircuts on junior bonds => legal challenges likely to be successful
    3. Haircuts on bonds of banks that are not clearly insolvent => legal challenges to be expected
    4. Haircuts on senior bonds without haircuts on deposits => legal challenges to be expected

    Regarding point 3, it is pretty clear to everyone that Anglo Irish is insolvent. But it is not so clear (to my ignorant self anyway) whether Allied Irish or Bank of Ireland for example are insolvent. If not, burning bondholders of these banks becomes problematic.

  11. @alll

    Most of those who should have been well and truly burned (Anglo_Irish, INBS, good bit of AIB .. are gone home scorch free … whistling gypsy …. ;pink champagne on ice all round … to be paid for by Irish fools

    [btw – no one, no one has yet been held accountable for all, or any, of this … great little country … where’s the next NO_NAMES report Minister – tmro might be good timing to release it]

    ergo …. if this was for an EZ reason(save the Euro; contagion; angie/nicky dictates; lorenzo’s 5th vision of secrets of fatima; no one resposible for monitoring EZ dodgy-dodgy capital flows; whatever) … time for ECB/EZ to make up a ‘fair share’ of the difference ….. with real capital into Irish banking system – not simply liquidity, not more state guaranteed loans, not further socialization -but real dosh … real capital

    … Big Gals and Small Lad in EZ CORE are still hiding their own stuff ,,, while we get stuffed … & I see no change on this one ….

  12. How do the legal challenges work? If we’re broke we’re broke.
    What can the judges do – issue a judgement order on the entire country? Order that Cork be auctioned off on EBay!
    I’m sure that the bondholders are fairly practical people. Even with a judgement in their favour they stand a small chance of recouping their losses. I’m sure that they’ll weigh up the probabilities of this against whatever haircut is on offer.
    Or I could be wrong. I dunno….

  13. On the working assumption that some level of burden sharing is agreed at EU level i.e. in plain mans speak – the banks cannot repay their ceditors in full, as to what level is anyones guess and to what type of security which is expected to take the hit is even more problematic – nevertheless is it not unreasanable to assume that when the Govt/Banks/EU eventually make this determination then the flood gates will/should open on the domestic side.

    As I’ve indicated here before the argument will go along the lines – ‘if the Bank cannot afford to repay its own debts well I’ve determined that neither can I afford to repay mine to the bank’.

    The definition of ‘afford’ is again open to question. In the case of mortgage debts does this mean families sit in the dark with no heat on in the winter and continue to finance a house worth 20% of its original purchase price as the negative equity makes it impossible to move?

    The IBA indicated yesterday that with the prospect of 100,000 people losing their homes and debt write downs the only workable long term solution surely any burden sharing by the banks will be seen as open season for domestic mortgage holders? Who could blame them as the banks mispriced the asset class in the first instance.

    As was said here before debt write downs need to begin at home first and I’ve seen no scheme or plan form Govt or elsewhere (including here) which seems capable of getting to the bottom of this impending disaster.

    Last year on ‘The Frontline’ programme CMcC dismissed out of hand Matt Coopers NAMA for the people suggestion. Perhaps time for a rethink?

    Thoughts on a postcard to Messrs Honahan and Elderfield.

  14. @ DOD
    still and all they only lent out 986 million dollars…if only our boys had been as restrained. I suppose its an example that lends some support to your vichy bank thing….we had cowboy bankers, afghanistan had cowboy bankers….only difference is our lads had the european banks to gorge on.

  15. IL&P ….. mortgages …

    the never ending, never ending bank saga …. still_in_situ Spectacless under some stress … “It’s a question of whether the Government will take over or under 50 per cent [majority control],” said a source familiar with the company’s situation.

    here we go again ….

    http://www.irishtimes.com/newspaper/breaking/2011/0329/breaking17.html

    Does anyone remember that €7billion? Think I need a vacation in Kabul – I’m one stressed_out citizen serf from this stuff ….

  16. @Jarlath

    But the Afghanis not as dumb as PD/FF/gp in guaranteeing all the debts – IMF demanding liquidation – spose the’ll simply call in the Talli_banks to do the job; our lot liquidated the Irish citizen-serfs themselves!

  17. @Incognito
    I agree with you and there are other considerations:
    1. Haircutting anyone while private equity holders still have a stake. That the banks have been left with equity market listings and the previous government’s strategy was to maintain private equity holdings was surely a serious mistake that has “complicated” resolution.
    2. As @Eoin points out, secured debt is overcollateralised. If it was not in 2008, it certainly is now and my understanding of secured repo, for example, is that it is not long durations (a year or less), that the collateral requirements are reassessed at renewal (so more collateral has been posted since 2008).

    It may be that it would have been a good idea to leave secured lenders with their overpriced collateral in 2008/early 2009 (it almost certainly was over-priced then) as a result of busting the banks, but that is past history and revisiting it is pointless beyond an academic exercise of “what was done wrong”. Some of us called for it at the time…

    I don’t actually see how you can haircut secured debt – either you buy back the assets at the end of the repo, or you do not. You can make an offer to pay less than the agreed price, maybe, but the lender is free to tell you where to go. In which case you have no assets. If they are overcollateralised to above market value, you’ve just lost a packet. Not only have you lost ownership of the assets, you’ve lost the income from them (which you were getting during the repo period). The assets are then likely to be sold on to buyers who might not be willing to partake in further resolution measures.

    The result would be that, for example, NAMA debt, residential mortgages, corporate loans, car loans whatever other loans, as well as ‘secure’ assets (cash, bunds, corporate debt) would be sold on the open market at whatever value could be obtained for them. If the goal is to avoid firesales (which I think is mostly mistaken, a measured level of sales would be good, I think) then you have failed. If the goal is to allow borrowers to deleverage with some measure of forbearance, you have also failed as buyers would be looking to maximise their returns.

    And that is even before you get to the whole contagion of secured lending markets. Unsecured lending dried up in 2008. If secured lending were to dry up (or even just become more expensive), we’d be into a second financial crisis in Europe and, I believe, a far more damaging one.

  18. I rather take a bank default over a soverign default and deal with the consequences as they come. If we wait until the end of 2012 when our safety net is cut off we are screwed and its defo a soverign default which is one of the requirements to entry the ECB permanent rescue fund.
    Look, this is pure politics at this stage.

  19. The tremendeous value of these exchanges, notably the contributions by Paul Hunt and Hogan Mayhew, is that they confirm – even for bloggers such as myself who would not know a covered bond from a hole in the wall – a gut political instinct that there is no “one bound and our hero was free” solution to debt either for the State or the private individual.

    The FT is like an onlooker safely on the ground inviting Hibernia to jump from the ledge. Thre is enough horse sense in the country to prevent this happening.

  20. @ david burke

    It has always been ‘pure politics ‘surely. The banks captured the regulator. When the bubble burst they captured the DoF and the MoF. The steps taken were designed to preseve the fiction that the Irish banking sector was somehow viable, and to allow the existing stakeholders (inclduing CEOs and bank bondholders) to get out with the loot.

    All this was done in the ‘national interest’. Now we are seeing the consequences of government ‘error’. The incoming adminstration has a big majority, but they are totally uncharted waters now.

  21. So what is involved: €20bn gain and we then hope the ECB would take the role of private debt buyers plus the liquidity provider to the banks.

    We would still struggle to bring the day to day deficit under control and presumably alienate other members of the Eurogroup.

    The new mandate of the IMF in 2013 would likely see them implement draconian cuts in return for more help if we in the interval delude ourselves into believing that bond burning is all that’s required ie business as usual for the vested interests.

  22. Why not just have a straight forward bank and sovereign default?
    We are already shut out of credit markets so that deterrant doesn’t apply.
    We need to stop borrowing anyway now because we can’t pay anything back so that deterrant doesn’t apply either.
    No, seriously, I know all about no money in ATMs etc – but we are heading there anyway. We are going to have to default at some stage – why not forget our misplaced pride and do it now?

  23. Here is just one thing that may be worth considering. From IL&P

    “As at 30 June 2010, debt securities includes €886m (30 June 2009: €328m, 31 December 2009: €701m) of securities issued by Anglo Irish Bank”

    This is just one of the 15 possible interrelationships between the covered banks. The benefits of burden sharing will be reduced if the covered six turn out to substantial holders of these bonds. Maybe the Irish banks were the only ones willing “to pull on the green jersey”.

    This is not an argument pro or anti burden sharing but it is important not to overstate the benefits. We don’t know what has happened this holding since June 2010, nor do we know what type of bonds these were. Like others here I too feel that the mechanics of applying a haircut to secured debt is not straightforward.

  24. @Michael Hennigan
    “The new mandate of the IMF in 2013 would likely see them implement draconian cuts in return for more help if we in the interval delude ourselves into believing that bond burning is all that’s required ie business as usual for the vested interests.”

    I have yet to see anyone suggest that burning bondholders will solve all our problems, or that will allow us to avoid doing all the many many reforms/cuts/taxes that are needed.

    In my mind the two things are completely separate and both need to be done asap

  25. I assume we’re all aware of IL&P being down 50% on the day now, and we’ve just become numb to the issue of banking collapses in our midst?

  26. @DOCM,

    I’ll gracefully accept your kind words, but it is Hoganmahew who has provided what, for me, is one of the clinchers in this seemingly interminable series of exchanges: i.e., “[i]f secured lending were to dry up (or even just become more expensive), we’d be into a second financial crisis in Europe and, I believe, a far more damaging one.”

    Yes, other EZ banks have ‘warehoused’ toxic assets, but they, and their governments, are determined to manage these down in a way that will retain the confidence of, and maintain access at reasonable cost to, the international capital markets. We are truly and brutally exposed. In my view, our EU partners, contrary to much opinion here, are not determined to ‘do us down’. Indeed, I believe there is a willingness to assist. But any willingness to assist is constrained both by this determination not to impair in any way access to the international capital markets and by the perception of many voters in these countries that, while they see themselves as well-governed, Ireland is in this mess entirely due to misgovernance.

    Those exercising power and influence in these countries are not unaware that they contributed in the ’70s to help lift us out of the legacy of misgovernance since the foundation of the state and later to ameliorate the impact of misgovernance during the GUBU decade from ’77-’87 and that we had the gall to crow about our bubble economy of the 2000s, to fail to make net contributions to the EU proportionate to our apparent economic success and to reject the Lisbon Treaty not on any perfectly legitimate democratic grounds, but on the basis of uniformed opinions, prejudice and hubris.

    Generosity to the apparently irredeemably prodigal is, not surpisingly, in short supply.

  27. @Eoin Bond
    I see RTE reporting it as a certainty. Will it make any difference in the overall scheme of things?
    Must be unique – the entire native banking sector nationalized.

  28. Imposing losses on unguaranteed bondholders is not burden sharing – it is an EXTENSION of burden sharing which up to now have been almost exclusively been borne by taxpayers who are sharing burden with shareholders and some junior bondholders.

  29. What’s happening to Anglo/INBS?

    Not part of this Thursday’s stress test. Women and clildren have been evacuated. Does this mean that a line has been drawn under these and that, in effect, unguaranteed stuff will be burnt if there is any further deterioration in the position of those fine institutions?

  30. Feel the fear and do it anyway! IMHO Ireland is going to trigger a European bank collapse in the next few months unless the Irish Gov and ECB Cops on fast. Their protection of the bondholders over and above the citizens at every turn is going to do them in. Their willingness to go to any lengths (giving Irish banks 150 billion and rising) to prevent the necessary losses being taken cannot go on much longer. There will be a tipping point.

  31. Guarantees were only acceptable when the fear, one year ago plus, that contagion would hit and our banks would have trouble borrowing and that could even spread to our sovereign.

    I don’t know – its like taking your medicine and getting the sickness anyway at this stage.

  32. I assume we’re all aware of IL&P being down 50% on the day now ….

    So the state is “forced” to buy another dog, eh? It would be nice if, just for a change, the Minister said “I’ll think about it.”

  33. From Bloomberg

    “S&P cut Portugal for the second time in a week to the lowest investment-grade rating of BBB-, three steps below Ireland. Greece’s rating fell two grades to BB-, three levels below investment grade. S&P cited concerns that both countries will be forced to restructure debt after seeking European aid. ”

    Looks like we are only in third place-for now.

  34. @ Seamus and all

    “We don’t know what has happened this holding since June 2010, nor do we know what type of bonds these were.”

    As a point of information, who does actually really does know who the unguaranteed bondholders really are? I don’t mean, does anyone here know, or does Guido Fawkes know, I mean what is the list of institutions, if any, that have this information.

    For what it’s worth my tuppunce, from the government’s POV, is:

    Wait for the stress tests (steady, boys, steady).

    Compare and contrast the amount of cash needed with the amount provided under the MoU.

    In the event that the amount needed is larger (likely, but one could be pleasantly surprised), announce that the key aim of government is to stay within the terms of the MoU. This is to facilitate a healthy banking sector and re-entry to bond market, as agreed. As a result of the tests, this is sadly now no longer possible.

    To make the ongoing finances possible, the state will look to restructure unguaranteed bank debt as this is not covered by the MoU and no other option (get ready to argue) is now avaialble to cover the costs. This conversation goes to ESRF/ECB/IMF. A time limit is set.

    The purpose of this is to get a clear, public statement of whether this is acceptable to our various partners. If the ECB say it is not, which I believe is beyond their remit, then open negotiations as to what is a better solution.

    These negotiations are held in the light that, Ireland, in spite of its considerable difficulties, is willing to play its part in sustaining the European banking system by not undermining the confidence of the bond market, but such support cannot come without a reassessment of the now sadly out-of-date MoU.

  35. @ hoganmahew:

    Useful and informative. Thanks. Question (not looking for answer, just musing): the ‘securities’ that are being pledged. These have an ‘asset’ value. How is this determined? On basis of an implied income or perhaps its a hard asset that could be sold? Or what?

    Now if the utility value (what I believe its worth) of that assest exceeds its expected value (the current market price) – that surely poses some future risk and lenders may become ever more cautious – perhaps to the point of saying, “Get lost!”

    Debt is actually a current, real proxy for virtual, future income. This latter is in a very iffy condition at the moment. So maybe we have a perfect financial storm brewing: two depressions circulating around each other!

    BpW

  36. @BpW
    Oh absolutely, depressions are being staved off by happy pills and the jar’s nearly empty.

    Many of the asset values are calculated on a magical abacus…

  37. @ceteris paribus

    Panic is in ‘virtual reality’ – in Reality Irish sovereign is NOT IN the market … in fact, is no longer sovereign – but in the hands of unkind and not so alien strangers …. we’re in a kind of Matrix continuously reloading below our levels of consciousness …. hence, out complete lack of contact with any phenomenon that could be termed ‘Reality’ as lives and thought are assimilated into the dynamic equations of the financial system …

    … red pills and head for the hills …. bring a bazooka, a slean, an axe, a shovel … and a box of matches (-;

  38. @BWII

    An essential if you desire an invite to The Turf-Cutters Ball, hosted this year by your favourite TD, Ming The Merciless Flanagan, on a raised bog somewhere in Roscommon. Enjoy!

  39. @Paul Hunt

    And it allows all the vested interests to dig in and reinforce their resistance to the major structural economic reforms that are required to grow the domestic economy

    Terrific but just at the moment lets focus on the vested interests in Europe conspiring to prop up the current configuration of European financial system with Ireland’s emaciated corpse in the hope (and it is just a hope) that Europe’s economy can be reconfigured to support its’ financial sector in such a way as the Euro (and the current flavour of capitalism) can be protected against its own inherent flaws.

    In my view, our EU partners, contrary to much opinion here, are not determined to ‘do us down’. Indeed, I believe there is a willingness to assist.

    Brian Lenihan also had a strong belief in our current EU “partners” willingness to assist if we did our bit for the European financial sector and price stability. How did that work out again, I forget?

    It might be wiser to focus on what Merkel, Sarkozy and the ECB have said and done so far rather than what we imagine might secretly lie in their big Christian Democrat hearts waiting to be revealed if we wooed them with a bouquet of mixed privatizations, austerity measures and soi-disant market reforms.

    and to reject the Lisbon Treaty not on any perfectly legitimate democratic grounds, but on the basis of uniformed opinions, prejudice and hubris.

    Fortunately I have a boiler plate for this one:

    We did enact the Lisbon treaty (sadly) and we are currently enjoying the fruits thereof.

    Lisbon was a treaty enacted without real democratic consent across Europe and which did nothing (and I went through the agonizing tedium of reading the consolidated text) to increase the power of popular democracy in the EU in any way, in fact it did quite the reverse.

    What the Lisbon treaty did do was to change the balance of power in the EU’s governing institutions to vastly increase the influence of the ruling Governments in the larger EU countries and make it much easier for them to use EC negotiations for domestic political gain.

    And – Oh my God! – that is exactly what happened.

    Those on the left who opposed the Lisbon treaty are not terribly surprised by the turn of events it enabled while those who did support it cling to the belief that if Christmas had come earlier the Turkeys might have been better treated.

  40. @Shay,

    I have to applaud your tenacity 🙂

    We seem to be quite close on the diagnosis; but frequently differ on the implications.

    My comment (in response to John McHale’s latest post):
    http://www.irisheconomy.ie/index.php/2011/03/29/the-grand-bargain/#comments
    may be relevant here. I am not denying that Ireland (and Greece and Portugal) is being punished disproportionately; but, equally, just because they are being mandated by the Troika, doesn’t mean that certain structural reforms are not worth pursuing.

  41. @all

    Lessons on Governance & Financial System Corporate Governance from ..

    ‘Afghanistan: Ex-minister held on corruption charge

    A former cabinet minister has been arrested on corruption charges and a senior adviser to the President, who is also a former central bank chairman, has been questioned amid a growing banking scandal.
    Enayatullah Qasimi, the former minister for aviation and transport, was arrested on two charges of alleged corruption involving up to $9m (£5.6m), a spokesman for the attorney general’s office said.
    Noorullah Delawari, who advises President Hamid Karzai on banking and the private sector, was also questioned but later released.

    http://www.independent.co.uk/news/world/asia/afghanistan-exminister-held-on-corruption-charge-2256636.html

    Must book that vacation in Kabul. Think I’ll bring Blind Biddy just in case ..

  42. @ Gavin Kostick
    “As a point of information, who does actually really does know who the unguaranteed bondholders really are? I don’t mean, does anyone here know, or does Guido Fawkes know, I mean what is the list of institutions, if any, that have this information.”
    Well i can tell you who claims he didnt know. Micheal Martin (Who was a minister when he made a statement) claimed in the last leaders debate that “no body knows who the bond holders actually are”

  43. @Paul Hunt

    I have to applaud your tenacity

    Tenacity? I am in the early stages of paranoid psychosis, obsessive compulsive blogging and economic policy induced insomnia.

    It is partially because Axel Weber can invade your dreams and make you want to cut things unless you read a TASC posting every third irisheconomy post.

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