Thanks to grumpy for drawing our attention to a fascinating segment with Patrick Honohan on last night’s Tonight with Vincent Browne show. (The segment runs from minute 17:40 to minute 36:12; you can read grumpy’s comment here.) Governor Honohan made an unfortunate reference to “the people” in relation to the blocking of attempts to impose losses on senior bondholders, giving fodder for conspiracy theories. But I don’t think there is much of a mystery about the people in question. The ECB clearly worried — and continues to worry — about balance-sheet contagion across the European banking system, and (I would suppose even more importantly) the implications of the precedent of withdrawing the implicit guarantee for senior debt for the funding of a system that continues to be fragile.
On the Irish side, given the existence of the ELG guarantee on post-December 2009 bank funding, the equal ranking of depositors and senior bondholders, and the systemic importance of AIB and Bank of Ireland to Ireland’s credit and payment systems, a pragmatic decision was made that the fiscal savings from feasible loss imposition (most likely the remaining unguaranteed senior debt in Anglo and INBS) would not be worth risking the reliability of large-scale funding from the eurosystem.
(It is worth noting that a special resolution regime was not in place, and even if it was the U.K. example shows U.S.-style depositor preference is considered incompatible with European law. In principle it would have been possible for losses to be shared between depositors and senior bondholders, with the State making depositors whole. But at that stage the State had lost its creditworthiness, making it hard to see how such depositor protection could have been implemented without significant outside support. Lastly, both Anglo and INBS still had depositors back in November. The Credit Institutions (Stabilisation) Act later facilitated the movement of depositors out of those banks, but that piece of legislation – which made it possible to impose proper losses on subordinated bond holders – is unlikely to be costless in terms of the longer-term reputation of the stability of Ireland’s investment environment.)
I think reasonable people can disagree about whether more should have been done to force the issue back in November with senior bondholders. But I find it hard to understand the certitude with which the policy course is criticised given the very real constraints that were faced. At this stage, I feel the obsession with the “socialisation of bank losses” is becoming a substitute for hard thinking about what we need to do now to get through a crisis that still poses massive downside risk.
Update: Namawinelake provides a transcript of the key segment with Governor Honohan: see here.