Coalition strategy may give us safety net we need Post author By Philip Lane Post date May 12, 2011 I give my views on the Kelly-Honohan debate here. Categories In Uncategorized 61 Comments on Coalition strategy may give us safety net we need ← Regaining Creditworthiness → IMF Regional Economic Outlook: Europe 61 replies on “Coalition strategy may give us safety net we need” Measured. Balanced. In other words, by 2013 we are projected to be a fully fledged financial ward of the ‘Official’ EZ System; and effectively, ECB already own the banks. Don’t think that present ECB policy will survive to 2013 … can’t remember anyone voting for ‘ slim-down quarantine’ as an aspect of European ‘solidarity’. Are you sure we will be debating in several years time ? If the ECB will not monetize , we will have to cannibalise I can see the future primary economic metric – Bone marrow inflation. http://www.youtube.com/watch?v=RhBQaWjDGvs @Philip “While the government may not have faced an immediate funding gap, there was no sign that the high sovereign spread would have gone into reverse by summer 2011 when its cash reserves would have been depleted.” But this is not addressing the point that Morgan Kelly is making as I understood his piece. Essentially he (MK) was saying that Ireland had the possibility of funding until this summer which would have shifted the focus onto Spain and Portugal and moved us down the field so to speak. He very specifically understands that Ireland was being used as an example to frighten Spain into good fiscal behaviour and if we were allowed to fund ourselves until now this “stick” would be removed. Thus the accusation of PH cutting the feet from under BLs main trump card by his solo run broadcast which forced the immediate “bailout”. What’re the chances of another 600+ comments on this one? The gist of the article is that, as provider of ELA, the ECB is someone we should prefer to do business with. That is true on a practical front, though we need to state our moral case more forcefully. The ECB appears to have stopped us burning the seniors, as sacrifice to overall financial stability. The question is: would it have been moral for us to do so ? If so, the ECB should share some burden. If not, we need to emphasise and sell the fact in Europe that we are ‘paying for our party’ , with the State, paying private debt. Also if it would be wrong to burn the seniors, we need the ECB to admit that they failed to monitor us. Even a token gesture of say 5%, would aid the overall moral case. http://market-ticker.org/akcs-www?post=185817 A critique of the WSJ reporting on the True Finn viewpoint. @ Philip Lane “IN TERMS OF future sustainability, this strategy holds that it will be easier to design more flexible repayment terms with a set of official creditors that have a big stake in the recovery of the Irish economy and in preserving European financial stability rather than with a diffuse set of private bondholders.” It is also true that it would be easier to design more flexible payment terms with a set of creditors that have a clear and rational set of goals with which we can negotiate. Unfortunately it appears that our creditors in Europe have to date been arguably more focused on European financial stability and the punishing of errant children than the recovery of the Irish economy. So in my view the question is more nuanced – do we want to try and negotiate with: (a) bond holders, whose motives can be clearly understood and have a stake in Ireland’s recovery due to a desire for maximum repayment; or (b) our European partners who are quite likely to put the European stability and also the views of French and German voters ahead of helping the Irish economy and maximum return on their investment. Excellent article, many thanks for posting. Amidst anger and search for scapegoats, a calm assessment of the choices is welcome. The IMF says in a report on Europe this morning: ‘Dealing decisively with the financial tensions in the euro area requires comprehensive and bold policy action. The stakes are high. Unrelenting reform efforts at the national level of the crisis afflicted countries need to be the first line of defense. Restoring fiscal health, squarely addressing weak banks, and implementing structural reforms to restore competitiveness are key.’ Maybe we should try some structural reform ourselves. It could improve the optics in Europe. As for the auld victims’ cross, the OECD reports that only Irish high income singles exceed the average wages’ tax wedge of 34 mainly developed countries. Add in ‘free’ water and no property tax, Ireland is not yet Siberia! It is certainly true that the financial health of the Irish banks and the Irish State could have been substantially improved if the unguaranteed senior bank bonds could have been written down without too many negative side effects. Moreover, the potential financial gain could have been far bigger again if the bank bond guarantee could have been unpicked in a way that successfully avoided a destabilising outcome. It is on this set of issues that there is the greatest divergence of views across policymakers, academics and financial-sector economists. Capitalism versus Corporate Socialism. Is there really a great debate to be had? “It is certainly plausible that the ECB might continue funding the Irish banking system even if the Government were to impose unilaterally losses on senior bondholders. However, the terms of liquidity provision could be considerably more expensive than the current generous terms, which take into account the Government’s limited fiscal capacity and its co-operation in preserving European financial stability. In turn, tighter liquidity conditions would considerably diminish the net financial gain from unilaterally imposing losses on senior bondholders.” With €21bn of senior guaranteed bonds, €20bn of senior unguaranteed secured bonds and €16bn of senior unguaranteed unsecured bonds, the “considerably more expensive” terms of ECB liquidity provision would presumably need be at 20% per annum for three years on the €80bn of ECB liquidity funding to make our current “leave no senior bondholder behind” policy preferable. 20% per annum ECB funding? Surely not. @ Jagdip you appear to apply a zero value to all three classes of bonds mentioned above? Not a particularly fair suggestion is it? I haven’t checked Jagdip Singh’s arithmetic, but he does hit the nail on the head I think. The ECB’s support is anything but cheap. Like many commentators, Philip Lane glosses over this. As for fairness, that went out the window once it was decided that the banks must not fail. @ Kevin Donoghue On fairness, if the geniuses in Merrion Street on Sept 29/30 2008, believed that all banks’ debts had to be protected – – the only eurozone country to offer such sovereign protection – – wouldn’t you think that someone would call Europe to get cover for such a big decision?; even more so, when there was no written policy on the matter. It was like a small unit of a multinational company making a hugely consequential decision based on heresay and never checking in at hq. It would of course be convenient if we put most of the blame on the ECB. It would also be convenient to ignore that the impression from officials on Sept 30 was : “Aren’t we great!” Let Europe follow. @ Japdip There might be €57 billion but the total could only be a proportion of that. The distinction between the bonds has been well aired at this stage and different ‘haircuts’ would probably apply. Getting savings on the guaranteed stuff would be very very difficult. The secured bonds have assets of some unknown value backing them. The unsecured bonds have little going for them. A second issue is that €24 billion of the debt is in BOI. All told we will be putting less than €6 billion into BOI to keep it afloat. It is unlikely that losses on bondholders above this level (and some of that is a capital buffer) could be imposed. These bondholders did not invest in AIB into which we will be putting €20 billion. Can we ask BOI bondholders to pay for the losses in a bank they didn’t invest in? The same holds for PTSB but a lower scale. €10 billion of the bonds are in PTSB which requires €4 billion of capital with about €3 billion coming from the State. The case of PTSB is a bit of a mess. This is some low-cost tracker issues but has not needed a penny from the State so far. IL&P is being broken up and PTSB nationalised because of forced losses on deleveraging and huge forecast losses on mortgages. It is still not clear that all of this is necessary but the bank is being nationalised. Anyway PTSB has €10 billion of bonds and our contribution will be much less. Can we ask these investors to pay for losses elsewhere? I estimate that a 50% on all unguaranteed senior debt would generate savings of €13 billion. If the haircuts on secured bonds is only 25% haircut then the savings would be €12 billion. If it’s just a 50% haircut on the unsecureds then it is €8 billion. Different percentages would change the totals but the point remains. A zero cut for the guaranteed stuff is also assumed but again half of that is in PTSB and BOI where the above cuts would max out the savings. All pretty significant but it would only take a 4% premium on the ECB funding to all but eliminate the savings in three years. Philip, Thanks for providing a calm, balanced overview of this issue. One thing that struck me about MK’s contribution was the absence of the political dimension. While it is true that the fiancial crisis has not exactly been one of the EU’s most glorifying episodes, we ought not let this single crisis form our sole judgement on our history in the Union nor on the necessity of it being part of our future. Plainly the crisis has exposed terrible flaws in the architecture of the union. It has also given us the unseemly spectacle of Germany and France taking very narrow, short-term views which greatly damage the potential for better Eu-wide political harmony. If we were expecting European level statesmanship from Merkel or Sarkozy we were sadly disappointed. Nevertheless, there would be a huge political cost to us in not working with the Union in attempting to manage our massive financial and fiscal crisis. I think that is pretty obvious. Of course we ought to put our case in Europe as forcefully as we can, but also skilfully and diplomatically. Another point that is interesting from an Eu perspective is that this episode has shown us that matters not properly provided for in the Treaties (such as large bail-outs!) cannot easily be dealt with using the ordinary EU framework; one consequence of which is that the big players, France and Germany, are all the more inclinged to deal with such matters using plain old power politics and narrow national interest. In this way weaker members of the Union have even less recourse to the more consensual, community based mechanisms of the Union. @Seamus and Eoin, You’re completely right of course. I was trying to tease out Philip’s statement and compare the “savings” from burning bondholders with an increased interest rate from the ECB. Proposing the maximum with a headline grabbing 20% hopefully provokes a better analysis, and step forward Seamus. Seamus’ analysis might be closer to the correct comparison (by which I mean the correct assessment of the haircuts that might be applied) but someone should be doing the sums and establishing the risks and probabilities. “it will be easier to design more flexible repayment terms with a set of official creditors that have a big stake in the recovery of the Irish economy and in preserving European financial stability rather than with a diffuse set of private bondholders.” I’m busy for the rest of the day (so I’m not being rude not responding to any subsequent comments) but I’d make one small comment on this point. While in theory you might imagine that it’s easier to deal with official creditors, it will be hard to change the IMF’s view of itself as a super-senior creditor and the EU is moving towards (rather than away from) the view that it should also be a preferred creditor (ESM is to be senior to private debt.) And as far as I know, regular Irish sovereign bonds can be restructured via a bill in the Dail rather than bia via complex negotiations with many creditors. So one could argue plausibly for the alternative scenario in which the flexible repayment terms involve larger and larger haircuts for private bondholders as time goes on. @ MH +1 We can only imagine what happened on 29 Sept 2008 but I think future generations will see it as the moment where the “Arrah sure it’ll be grand” philosophy met its Aughrim. BLTD went into the meeting with a bill to nationalise Anglo and came out having guaranteed the banks. He didn’t know anything about their risk exposures. There was no stress testing done. He probably took the assurances of Eugene Sheehy and Brian Goggin in good faith. 2 comments seen here at some stage stand out : “It’s extraordinary after 3yrs, stress tests, NAMA, that a full audit of our banks has not yet been able to give us a complete picture of our account.” I am guessing that BLTD did not have a full audit of the banks on 29 September 2008. “Labour also promises to introduce cost-benefit analyses for “major capital projects ” I imagine that BLTD did not carry out a cost benefit analysis of this major capital project. The ineptitude was soul destroying. @ Jagdip between ELA and ECB-repo, we have ~155bn provided to us in ultra-low-cost funding (ie sub 1.75% average rate right now). Assuming a market spread of 300bps (which we’d probably snap their arm off for right now), that’s a 4.65bn subsidy per annum. 3 years, €14bn…. QUOTE The Government’s strategy is to lobby for a more robust European safety net, in case negative shocks make it infeasible to deliver on projected targets. This approach is predicated on the commitment among our European partners to ensure that Ireland will successfully emerge from the current dire situation. This commitment is reinforced by the fact that the euro zone crisis is fundamentally different to previous sovereign and banking crises by virtue of the enhanced joint interest between creditors and debtors in preserving area-wide financial stability and in the capacity of the ECB to provide additional resolution mechanisms. UNQUOTE This extract from the article sums up the confusion at the very heart of the debate, both among economists and in the wider public. It stems from a lack of knowledge of the EU institutional context and a failure to recognise its importance. On the first point, it is not possible to regain creditworthiness while implying that the steps being taken may not, in fact, succeed. It is contradictory and the markets know it. (However, it was remarkable to hear the head of the S & P ratings committee refer to the bank stress tests in Ireland as “robust” against such a confused Irish government position. Maybe, they are simply ignoring what it is saying and seeing the Irish economy righting itself more or less spontaneously despite everything a failed political establishment can do to prevent it). On the second point, the formulations used are too vague. The ECB is not in the business of providing “additional resolution mechanisms” nor, for that matter, resolution mechanisms of any kind. This is the job of governments and it is the failure of the latter to do so which appears to have pushed the ECB into a series of non-conventional measures, steps which it may now be regretting. I will call on another blogger, Anonymous, who is evidently expert, to explain (the details of the exchanges can be found on the thread “Greek restructuring: divergence in views among policymakers”). QUOTE The fact remains that the ECB does not have a LOLR role – the National Central Banks do. To put it simply: – The ECB does monetary policy operations, against safe collateral (listed in the ECB’s General Documentation), and at the ECB’s policy rate. These are intended to fulfill the banking system’s aggregate liquidity need, not to prop up fragile banks. – In crisis times, for example when euro area money markets are malfunctioning, the ECB may intervene to keep the system functioning. The bond purchase program was justified by this argument. – And finally, each National Central Banks provide emergency liquidity (last resort lending) for its domestic banks. It may accept whatever collateral it does and charge whatever interest rate it chooses. Unlike with monetary liquidity, where the whole Eurosystem shares the risk, here the National Central Bank itself carries the risk. The CBI has done plenty of this, as is readily visible in its balance sheet. Blaming the ECB for not doing something it was never mandated to do is just silly. In short, what happened last fall was that little by little Irish banks, cut off from market liquidity, were starting to hoard an increasingly large share of the ECB’s liquidity provision (this is again readily visible on CBI’s published balance sheet), and providing collateral that was rapidly losing value (Irish government & NAMA bonds etc.). So little by little what was supposed to be risk-less monetary liquidity provision to sound banks started to look more and more like emergency liquidity to a banking sector that was in imminent risk of implosion – ie. the kind of risky liquidity that belongs to the National Central Bank. Is it a wonder that the ECB started to get nervous? UNQUOTE This is what the head of the Finnish Central Bank said in an interview with the FT recently (note the sparing use of words!). QUOTE “FT The ECB is providing crucial support for the banking systems of Portugal, Greece and Ireland. What will happen to the ECB’s liquidity support beyond July? EL As regards monetary policy – the standard measures – we [the ECB] will act on behalf of the euro area. The countries you mention have structural problems and monetary policy is not the appropriate tool to tackle them. As for the non-standard measures, as Mr Trichet said on Thursday, when we have something new to say, we will say it.” UNQUOTE How soon will the ECB have something new to say? In my opinion, when its view as to how the ESM should operate, if it ever comes into operation at all, is fully accepted by a gaggle of totally inept European politicians. In the meantime, the sooner Ireland gets its fiscal house in order, as advocated by John McHale and now the ESRI, the better. There is no other way of resolving the contradiction in the government’s position. It is talking the talk while singularly failing to walk the walk. @Jagdip Singh “Seamus’ analysis might be closer to the correct comparison (by which I mean the correct assessment of the haircuts that might be applied) but someone should be doing the sums and establishing the risks and probabilities.” Indeed. And it remains still that most money can be saved by liquidating the most bust banks – Anglo and INBS. 34.5 bn of the bailout, untold reputational damage and 27 bn of promissory notes still waiting to be paid on. Liquidation is required, though. Not some half-assed attempt to ‘spoof for victory’. Why is has not happened is one of the great mysteries of our time… Too measured. Too balanced. Sorry, Philip, I agree with your position but it comes across as “…on the other hand, Morgan Kelly might be right”. Whatever about his historical or current analysis, Kelly’s proposals would be economic and political suicide for this country. I would have hoped for a more robust denunciation from mainstream economic thought. As it is popular commentators such as Pat Kenny think Kelly is correct. From the article: It is certainly arguable that the projected pace of fiscal consolidation is too slow. However, an immediate closing of the fiscal deficit would send Ireland into a new and deeper recession, while also having a dramatic impact on the banking system, in view of the high debt levels among households and small businesses. Are you recommending the scrapping of Croke Park? In terms of a ‘dramatic impact on the banking system’, that will intensify anyway as mortgage defaults and debt defaults in general rise. I have said many times here that default begins at home, and managing domestic defaults is crucial to putting things back together – good to see that the Taxing Master recommends debt forgiveness in some form. I no longer understand the government’s strategy, if continuing the strategy of the last government is all it is so be it. But it reminds me of someone who insists on pouring more and more water into a bucket which continues springing more and more holes. It is tolerably fine, until the water pipe runs dry. In the absence of growth and employment, other ways of tidying up personal debt must be sought. Adopting a short position on Greek debt, and waiting for another crisis cash chest to open out to bail it and inter alia Ireland out, isn’t unreasonable but it may not work out that way. @ Seamus Coffey Quick Question. You say: “All pretty significant but it would only take a 4% premium on the ECB funding to all but eliminate the savings in three years.” Is it clear that tha ECB would be allowed under its own rules to alter the interest on its support? Or put it another way, is that interest the result of a non-negotiable calculation, like the IMF loan that even they can’t change, or is it subject to the the ECB (board’s?) free decision making? @ All An excellent article and a great read. Thanks. Some works of real substance coming out now. It is full of nuance and context, of course, and one should be careful about only hearing what one wants to hear, but a stand out paragraph for me, was: “It is certainly arguable that the projected pace of fiscal consolidation is too slow. However, an immediate closing of the fiscal deficit would send Ireland into a new and deeper recession, while also having a dramatic impact on the banking system, in view of the high debt levels among households and small businesses. It is for these macroeconomic reasons (and not the protection of highly paid upper-level public sector workers) that the troika has agreed to a drawn-out fiscal adjustment process, in which steady expansion in the export sector offsets the negative fiscal drag on the domestic sector and private sector debt sustainability is supported by a gradual pace of adjustment.” I’ll have a quick ride of a particular hobby horse, then send it out to pasture, as too many hobby horses ride across these threads regardless of context. If we do proceed down this route, and successfully arrive at the sunny uplands of a balanced budget, a reformed (in a good way) public service, a growing economy, a managable debt, and a stable banking system: if that is all achieved, we are still left with the massive cost of repairing the private losses of the banking system which has been coerced from the citizens, tax-payers and future generations. If this money does not come back to the state in some way or other, over and above the normal operations of a healthy banking system, even over decades, then this still leaves us in a world turned upside down. How is the banking system going to fully pay back this money to the state? BTW I reckon that this is the “Brian Woods” who often comments here, getting his views out into a more public arena. http://www.irishtimes.com/letters/index.html#1224296751088 @ Gavin they don’t have to change the rate, the can simply change the collateral rules – providing 20 cents of funding against 100 cents of collateral, even at a 1% nominal rate, becomes a 5% effective rate. Or put another way, to fund a 200bn banking system you’d need a trillion euro in collateral. @ Eoin Bond Thanks again. I’ve been meaning to ask you a similar question to a while back. Where are the ECB getting the 150bn to put in as liquidity. Is this more magic beans? @Gavin: That Brian is not I! I saw it and laughed! “Oh, what will my ‘enemies do now?” “I’m OUTED! ” I lack the patience to write to IT. This place is so much better. You get your wings clipped real fast. Could someone do me (and possibly a few other folk as well) a real big favour. Bonds and nature of and levels of (snr. jnr, sub, etc. etc) – what in God’s name is it all about. Something suitable for single-neuron engagement. Again, thanks for the mention. See you around. Brian P Woods Snr. Here is some good news. Not great news. Just good news. From Bloomberg: Anglo Irish Bank Corp., whose bailout has cost the nation 29.3 billion euros ($42 billion), may need no more government capital in the country’s latest stress tests on the lender, two people with knowledge of the talks said. Initial findings by the country’s central bank and its adviser, BlackRock Inc.’s BlackRock Solutions unit, haven’t shown further capital shortfalls at the Dublin-based lender, said the people, who declined to be identified because the assessments aren’t yet complete. The government has said it will need to impose losses on senior Anglo Irish bondholders if it has to inject more capital into the bank. Prime Minister Enda Kenny said last month he didn’t expect the taxpayer to have to put more money into Anglo Irish, which was nationalized in January 2009 after bad loans soared following the collapse of a domestic real-estate bubble. “As previously advised, the central bank is carrying out a review of data and asset quality and loan loss assessments,” said Nicola Faulkner, a spokeswoman for the central bank. “This will be published at the end of the month.” She declined to comment further. Officials at Anglo Irish and the finance ministry also declined to comment. Anglo Irish and Irish Nationwide Building Society, taken over by the state last year, are being merged and wound down within 10 years. Both were stress-tested in September, when the cost of bailing out Anglo Irish was put at 29.3 billion euros on a base case, rising to 34.3 billion in a worst-case scenario. Irish Nationwide’s cost was assessed at 5.4 billion euros. The central bank said in March the loss assumptions used in the September stress tests were “higher than the most severe” ones BlackRock used to gauge the capital needs of the country’s so-called viable banks. @ Gavin correct – magic beans. They can literally create it in their own account to lend out. However, it is different to QE because of the collateralised (allegedly high quality) and short term nature of their liquidity injections, as opposed to outright purchases from the Fed/BoE. @ Enda prediction – this will be treated as bad news by many on here as it implies we will not burn bondholders. For some the hope is that bondholders get burnt, regardless of just why we may need to do it (ie more capital losses). @ Eoin Bond Or maybe the hope is that bondholders get bailed in at some point when a bank has burned through its equity many, many times over. Crazy, I know. The poor bondholders. Burned at the stake by the Inquisition for their devotion to Saint Sean. @Brian Woods I think Gavin Kostick was referring to Brian Woods II, whose views are quite consistent with the letter to Madam Editor. Nothing wrong with calling John McHale a respected academic, but what’s Morgan Kelly supposed to be, a DFH? @ Brian and Kevin I was: apologies. Is that you “Brian Woods II”? @ Jon Note that i was referring to from this point on (that should have been obvious). If bailing in requires additional losses, would you be for or against that? “So far, we have just seen fairly straightforward, plain-vanilla sort of financial arrangements to deal with this problem,” Mr. Honohan said. “More imagination is needed and I expect to see that over the next months and years.” He declined to elaborate on how to improve Ireland’s package, beyond repeating his support for a lower interest rate on the loans it receives from its euro-zone partners. Mr. Honohan stressed that it’s not unusual to revamp assistance programs, and that there are few examples of a “perfect blueprint”. “The progress of the crisis in the euro area periphery in the past year confirms that it does take time for governments and decision-makers to appreciate the nature as well as the scale of the problem,” he said. Critics of Europe’s efforts to solve its debt crisis have argued that the governments and banks affected are insolvent and will never repay their debts, while the policy response has assumed that the problem is merely a temporary one of liquidity. Mr. Honohan said it wasn’t the ECB’s job to sort out the mess. Its program of buying bonds, in abeyance for over a month, is “not designed to deal with sustained levels of market skepticism,” he said. Equally, he said, the problem of banks that are unable to get money from anywhere but the ECB—”is not going to be fixed by any special devices in the operation of monetary policy.” http://online.wsj.com/article/SB10001424052748703864204576318771000398498.html @Eoin I can’t see that it would require additional losses – there are no pari passu deposits in either Anglo or INBS that would require a government digout. Perhaps an immediate liquidation would be required? @ Hogan sorry, i was referring to current govt policy (no additional losses, no senior haircuts). @ Brian Woods (the non letter writing kind) From CBI at end-Feb (and should be broadly similar today) Senior govt guaranteed debt – 20.9bn Senior unguaranteed secured – 20bn Senior unguaranteed unsecured – 16.4bn Junior/Subordinated debt- 6.9bn http://www.financialregulator.ie/press-area/press-releases/Pages/Clarification-SeniorDebtandSubordinatedDebtIssuance.aspx All the “senior” debt ranks equal to each other on the bank balance sheet capital structures, alongside deposits. So, absent some sort of additional support (assets or guarantees), they would all get paid out the same, alongside depositors, in the event of a liquidation. However, guaranteed debt comes with a govt guarantee to be made whole in that situation, while secured debt has a lien over specified assets as well as a general claim on the issuer, so it gets the proceeds of the assets first, and if this is not enough it then lines up alongside other senior creditors for the rest. In many cases (covered bonds), secured debt is heavily overcollateralised (ie 150% assets to liability), so there should easily be enough value in the assets to cover their claim. Also, to consider, increased secured lending effectively reduces the claimable assets for unsecured debtholders, in effect placing them futher down the capital pecking order (ie assets get sold off to meet claims of secured lenders, and only whats left after that is distributable to unsecured lenders). This is why imposing losses on secured creditors is seen as both (a) unlikely given overcollateralisation and (b) legally very difficult given their lien on these assets as well as general claim on the issuer. Unsecured debt is a standard senior creditor claim on the issuer, ranking parri passu with all the rest, including depositors. Depositors could be made whole via the govt, but this then limits the total savings from loss imposition, as the losses are first “shared” between depositors and bondholders. Junior and sub debt are the same things, but there is different levels of this, ie Tier 1, Tier 2, and different levels within that, ie Upper Tier 1, Lower Tier 1. Tier 2 is ranked higher than Tier 1. Sub debt is seen as true risk capital, but it is still relatively difficult to impose mandatory (as opposed to voluntary buybacks) losses on this class of creditor without some form of resolution regime to protect the ongoing operations/financial stability etc. It’s taken a draconian piece of legislation (the CIFS) to allow for loss imposition on the Irish banks, and even this is being challenged in the courts (June 2nd). Below here you would have preference shares and then common equity. The CIFS legislation noted above has in many ways attempted to place these classes of investor above subordinated debt in the capital structure, which is legally and reputationally probelmatic. @BEB: Thanks for your time and effort. Will study carefully. Brian Snr* * New signoff to avoid healthy confusions! @Mr. Bond, A fount of knowledge and information, as usual 🙂 But do we have any idea who’s holding this €57.3 bn of ‘seniors’ now? There seems to be a view abroad that the original holders bailed out and that they’re now held by vultures and hedgies. However, I still think the ECB has the biggest problem. How can it unwind this massive liquidity support without taking a hit? I don’t think it would pass last year’s ‘joke’ bank stress tests – not to mind the heavy duty ones that are being promised. @Eoin Bond Reports today suggest that the ECB are not at all happy with the legislation you refer to. I would not be at all surprised to see it struck down in the forthcoming legal challenge. I noted Bloomberg carrying the story yesterday on this AIB haircut . I asked yesterday .. When do you think they can raise money on bond markets? @CP “When do you think they can raise money on bond markets?” There is so much capital sloshing around looking for a home these days and for a little extra yield everyone can be friends. Especially if the post crisis post FF Ireland starts to make money again . @Bond. Eoin Bond Many thanks for that guide to the jargon etc. As to what constitutes good news in this general context I distinguish two issues: Good news for Ireland should be reflected in a downturn in those depressing Bloomberg bond-yield and CDS charts, if markets are even weedy-weak-form efficient. For the world as a whole, it is good news whenever creditors who have the likes of Geithner and Trichet dancing like puppets to their tune are forced to take a hit. A fundamental problem with the global financial system is that weak banks have become hostages to creditors who are exploiting their power to cause chaos, in a way they could never hope to do if they were holding the bonds of a crippled manufacturing company. “Try burning me and the depositor gets it!” In that way they are obstructing an adjustment which badly needs to happen if we are to have a robust recovery. So when they are told to shut up and take their losses like men I’m inclined to applaud. Eoin, Isn’t there a bit of a problem in that the covered issuance in the periphery particularly, and the requirement to overcollateralise is, from a credit quality point of view, undermining senior bank bonds generally. It leaves them ever more dependent on the authorities determination that banks must not go into resolution. BTW did you see this from DB a while back: “We highlight that AlB Mortgage Bank published a 6.5% OC based on a calculation in line with the legal framework but 50% based on calculation nominal calculation. One reason for this is the limit regarding the share of substitution assets being 15% in the Irish legal framework for covered bonds. Hence, while a higher share of substitution assets can of course increase investor protection and please rating agencies, it can also suggest that AIB may struggle to put in more residential mortgage loans in the cover pool and instead prefers more substitution assets. The latter is typically easier to move and hence may also disappear quickly in times of stress. While we have no clear view yet if the decision to use a higher share of substitution assets than legally allowed was driven by lack of eligible residential mortgage loans at the parent company or was due to practical reasons or due to higher credit at rating agencies, uncertainty regarding cover pool quality of Irish covered bonds remains high. Generally, in our view, as fulfilling legal requirements is not sufficient to protect full and timely payment of Irish covered bonds, investors have to rely on voluntary support (at least regarding full and timely payment)…” I’ve read Philip’s response to MK and for the record, my comments follow: In my view Philip’s is a Stockholm Syndrome reaction to our crisis that is highly damaging to our opportunity to recover from the crisis. Re: “full of fear of causing economic disruptions” A frequently made comment that identifies with the mindset of those we are negotiating with. Frankly, the idea we sacrifice ourselves to save the euro is ridiculous. If our actions cause the euro to fall, the euro is already in as place it shouldn’t be. It deserves to collapse if it means the destruction of the Irish economy to save it! Re “In relation to the sovereign bond market, the Irish-German spread on 10-year bonds actually fell in the first half of October after the end-September announcement of the extra bank provisions.” There were many causes to the increasing spreads, decline in growth both in GNP and GDP, increasing losses flagged upward on a rolling basis in the banks. Slight falls are natural, the underlying trends upward are what count. Also the fall in confidence at the government’s response to the crisis through Nama and austerity measures. The lack of faith in the true cost of bank losses because of the Nama prop; real losses as opposed to ‘estimated’ losses given to the banks by Nama. Re “have a big stake in the recovery of the Irish economy” Where is the evidence the ECB, our partners have a big stake in the recovery of the Irish economy? As Lenihan said, Trichet wants his money back. But recovery of the Irish economy to the extent it becomes a competitor attractive to further FDI that won’t go to germany, that will also involve burning German banks? Look at the evidence re bailout terms, we are ignored next week while Greece takes centre stage; the centrality of CT to the debate. When will our useless negotiators get the message:) A more cautious and realistic approach, less like dependent children of the ECB, would be to assume Germany and France cares not a whit so that FDI goes to Germany and France, we pay our money back and that’s it! Re “agreed to a drawn-out fiscal adjustment process, in which steady expansion in the export sector offsets the negative fiscal drag on the domestic sector and private sector debt sustainability is supported by a gradual pace of adjustment.” The above is a real stinker. No mention of the word ’employment’. So the plan is to have the country supported by GDP sustained by small employment numbers, while the domestic economy servicing the vast majority of the people of Ireland and their employment needs, is to be allowed to disappear. “However, there is a reluctance at the ECB, some key national governments in Europe and, it seems, the US treasury to impose losses on senior bondholders during the current crisis, for fear that it could lead to a widespread disruption in global credit markets.” Stockholm syndrome, reminded me of Honahan rather craven and delusional and psychophantic point made re the political responsibilities of adversaries we face in negotiation hindering their ability to do better for us. Pity his brother wasn’t doing the negotiating! As you can guess, I’m on the side of MK in the debate! @ Michael Hennigan This is old ground but “wouldn’t you think that someone would call Europe to get cover for such a big decision?” “It was like a small unit of a multinational company making a hugely consequential decision based on here say and never checking in at hq.” Or they did ask. We know they were told to “save your banks at all costs” Isn’t it amazing that banks have not failed in Europe regardless of size or level of insolvency. Maybe its just market forces. @ Colm Brazil “I’ve read Philip’s response to MK and for the record, my comments follow: In my view Philip’s is a Stockholm Syndrome reaction to our crisis that is highly damaging to our opportunity to recover from the crisis.” I have a simpler analysis than Stockholm syndrome although that may be part of it. Fear, denial and self preservation. Donal Kerr in todays IT letters puts it perfectly. http://www.irishtimes.com/letters/ Fair play to Tommy Broughan too. People who are arguing for action that is not in their own self interest will always get a more careful hearing in my ear. I think Stephen Kinsella’s comment in his blog in the guardian on Tuesday analysing the effects of Morgan Kelly’s proposals casts a light on the motivation of some of our academics (perfectly understandable BTW). “Assuming public sector workers and I (and it will be me on the streets folks, I’m a mid-level public sector worker with three kids) haven’t burned the country down in protest, the next question is what effects on the macroeconomy such a drop in government expenditure might have.” @ All I had written a very similar letter but in my letter I simply used the term “Kelly” whereas the letter in the IT refers to Prof Kelly. So no, that is not my letter. Having read the article, which clearly has official support, I can only conclude as follows: Ireland doesn’t have the brains to realise that the country is being routed. Neither does it have the balls to put up a fight. By the end of the year the ECB will be run by an ex Goldman Sachs executive and Jurgen Stark will be an established senior figure among several new boards members wanting to establish their Neocon credentials. Under the present structure they will be deciding Ireland’s future. Some argue that a course such as Kelly’s will leave us without ATMs. This is a lazy, intellectually dishonest view. The real issue of the Irish banks, now being propped up by ECB ‘liquidity’, is that the ECB itself will close the Irish banks at a time of its choosing. After that post-Aughrim point, Ireland will have nothing left to make a stand with. Not even Limerick! PS Historians of Aughrim will know that the Irish infantry were routed by the Williamite cavalry as they fled in disarray. According to the Governor of the Irish Central Bank in his interview with the WSJ: “Mr. Honohan said it wasn’t the ECB’s job to sort out the mess. Its program of buying bonds, in abeyance for over a month, is “not designed to deal with sustained levels of market skepticism,” he said. Equally, he said, the problem of banks that are unable to get money from anywhere but the ECB—”is not going to be fixed by any special devices in the operation of monetary policy”. Now that the Governor has expressed the same view – with some considerable assistance form Anonymous – as I have for some time past, , I wonder, with all due modesty, if the issue could be considered as decided? @Bond. Eoin Bond ‘Spose your’e also on the list for the Honourary M.A. Econ. from UCD that the blog is rumoured to be presenting at the end of financial summer days – now they just link to your tutorial! We’re still bust. Bond. Eoin Bond Says: May 12th, 2011 at 1:17 pm Well done – what this site should be all about. I’ll buy you a pint if you miss out on the Honours above 🙂 @ Eamonn Moran We know they were told to “save your banks at all costs” You appear to miss my point. No other EA country guaranteed bank debt. It doesn’t matter what is claimed in respect of a prior informal phone conversation with one individual. On the night the decision was made, it appears that no contact was made with Legarde, head of Ecofin, Juncker of the Eurogroup nor Trichet. Wouldn’t it have been wise for the people in Dublin to force the EU institutions heads to take a position on the issue? At least opposition to it would have given a reason to think through the implications. Many other countries opposed giving a blanket guarantee. My guess is that there was no consultation because the Irish expected to get a wrong answer; on Sept 30, there was pride that Dublin had shown the way. The priority was to protect Anglo with 1 day to its year end. @Michael Finnegan +1 The absence (avoidance) of contact with relevant EU parties on the night of the guarantee is inexplicable to anyone trying to understand the events rationally. Courtesy of John Gormley, the public was made aware that in the week prior to the guarantee, discussions of some form of guarantee were taking place within cabinet. The original spin on events stated that a liquidity emergency had arisen requiring a immediate response. Gormley’s recollections torpedoed this fable. If a guarantee was in the ether for at least a week beforehand, and the DoF had a draft Anglo nationalization bill in its pocket for several months, the decision taken to inform the EU of a guarantee only after it had been pledged is curious and perplexing. It permits speculation that the Irish parties suspected the blanket nature of the guarantee would not have been approved, begging the question why was it introduced in the first place??? Who benefited in other words? Certainly not the taxpayers. @MH The priority was to protect Anglo with 1 day to its year end. Yes you are right on that. That night was about FF protecting its own. But you will recall the story of the Irishman who ‘was born for his country’ (O’Casey play, I think). Does that fateful night, in the case of both person and country, forever condemn the offspring to the appelation of misbegotten bastard. I do acknowledge that the motivations of the mother in the case of the ‘man born for his country’ were more honourable that those of the Irish Government on the night of Sept 28th/29th. It is time to concentrate on nurturing the offspring. “On the night the decision was made, it appears that no contact was made with Legarde, head of Ecofin, Juncker of the Eurogroup nor Trichet.” Legarde I agree. The other 2 we dont know. Or what if there were other very high level calls from Poulson or Chairmen of the large investment banks? I am sure they would have been very much in favour of “the McWilliams option” If we assume that “we must protect our banks at all costs” and “we are not F*&%ing Nationalising anglo” are the parameters how many more available options did Lenihan have? Th I don’t believe Trichet said ‘at all costs’ and I don’t believe Lenihan, a lawyer, put down the phone and assumed he had a carte blanche from Trichet. If there was an argument like this about a big business project before the Commercial Court, Mr. Justice Kelly would surely fire whatever book was to hand at the clown making it. As the Alchemist said, the guarantee was under discussion for sometime including with outfits like Merrill Lynch. One would think that Lenihan would have called Jean-Claude Juncker, the head of the Eurogroup, who was not ill-disposed to Ireland, to sound him out on covering all existing debt? Or clarified with Trichet? But he had time to consult a local aspiring Svengali! What was the view of the Central Bank governor on the blanket guarantee? The other mystery is that after the panicky duo from Anglo Irish left the BoI HQ on Baggot St., they went off -stage or so it seems. But that cannot be true. Fitzpatrick must have been on an open line to Merrion Street. There is a story that will unfold at some stage on the Cowen-Lenihan dynamic that night. I resurrect these issues as we appear to have seamlessly transmuted from property to anti-EU hysteria and in these situations, myth easily becomes received wisdom. @ Michael, Eamon, The Alchemist, etc. ‘Wouldn’t it have been wise for the people in Dublin to force the EU institutions heads to take a position on the issue?’ I agree, and I’m not sure much has been learned from this. On the bank guarantee, as well as the above, I get the impression there was a heady mix of bravado, euphoria, mutual re-enforcement and naked self-interest as the modern thrusting Irish showed those staid, stuck-in-the-mud, Europeans how it should really be done. The actual bubble went with a bubble mentality, that the boom could only get boomier, and the occasional glimpse of the void, or indeed simple reality, could only be dealt with by denial and the horror of negativity. Around 2006 I asked my friendly bank manager how it could be that property prices could simply, permanently rise in concentric circles around Dublin, and received the answer, ‘Don’t question it.’ @MH, GK, at al An Italian friend of mine said to me last year that ‘The problem with Ireland is that people still believe what their governments tell them.’ It strained my incredulity beyond breaking point when it was divulged that ‘no notes’ existed of the discussions that took place in the couple of hours preceding the guarantee. And of course it is perfectly possible to spend nine hours playing golf and having dinner and never discuss anything at all of significance. @ Michael Hennigan “On the night the decision was made, it appears that no contact was made with Legarde, head of Ecofin, Juncker of the Eurogroup nor Trichet. Wouldn’t it have been wise for the people in Dublin to force the EU institutions heads to take a position on the issue? At least opposition to it would have given a reason to think through the implications.” This is not in accordance with the version provided by Simon Carswell in his lengthy piece for the Irish Times last September: “Before 6am [morning of 30 September, 2008] , Lenihan calls the French finance minister, Christine Lagarde, then chairwoman of the EU finance ministers, and Luxembourg’s prime minister, Jean Claude Juncker, who heads the group of euro zone member states, informing them – mostly in French – about his decision to guarantee the banks. The guarantee is announced around 6.45am, making Ireland the first country in the world during the global financial crisis to introduce an industry-wide blanket guarantee.British chancellor Alistair Darling learns about the guarantee from a radio news bulletin that morning. Furious, he calls Lenihan, seeking to have it reversed, and warns that the measure would put pressure on British banks.” The reference to Lenihan conducting the conversations in French doesn’t ring true, given Lagarde’s perfect command of English, and Juncker’s proficiency in the language too. Nevertheless, it seems that there was contact prior to the decision being announced, even if it was after the decision had been made. “ Comments are closed.