The sad news is reported here.
While there may be a intense debate about the policy choices he made as Minister of Finance, he showed a high personal commitment to finding the best solution for Ireland and a high degree of personal bravery in fulfilling his duties while also battling his illness.
Simon Carswell reports on legal challenges by subordinated bondholders of AIB and Bank of Ireland. The main contention seems to be the up-ending of usual ranking of equity and junior debt.
At the core of the case taken by Aurelius is whether a subordinated bondholder – the lowest-ranking creditor in the capital structure of a company – should be wiped out when the bank is only in existence because of €13.3 billion that must be injected by the State on top of a €7.2 billion bailout.
Aurelius claims the Government has subverted the rules of the capital markets where shareholders should be wiped out first and then junior bondholders.
It says that the stakes held by shareholders, including the Government’s preference and ordinary shares, should bear losses first.
. . .
Another subordinated bondholder challenge is also looming. On Wednesday the London law firm White and Case said it had been hired by bondholders in Bank of Ireland holding about €700 million of the €2.6 billion.
They claim that the bank’s proposal to inflict losses on lenders through a debt-for-cash-or-equity deal is “fatally flawed” because it fails to respect the fundamental principle that creditors must be repaid ahead of shareholders.
Although I am open to correction by the experts out there, my understanding is that for junior bondholders in place before the State’s capital injections, solvency is being judged based on pre-State capital injection capital levels. On this basis, the reversal of the usual ranking should not affect the ability to raise bond financing in the future. Moreover, Eoin Bond, our expert commenter on these issues, has argued on a few occasions that the subordinated bond is dead as a financing instrument for Irish banks, so we shouldn’t be overly concerned about its treatment.
Even so, I worry that uncertainty about the future creditor regime – and not just for subordinated bondholders – is making the restoration of the creditworthiness of the new pillar banks more challenging. There is not much point in pumping large amounts of supposedly loss-absorbing capital into a bank if there are fears that the capital will later be disregarded. Regime uncertainty is being much debated in regards to sovereign debt, but it applies in the case of bank debt as well. The temporary and rather draconian nature of the Credit Institutions (Stabilisation) Act has not helped in this regard; and the proposed permanent special resolution regime is not set to be enacted until the end of 2012.
I would be delighted to hear from commenters that these concerns are misplaced, and that potential creditors draw a sharp line between the treatment of legacy junior debt and any new debt issued by the banks. But I do think it would help for the government to provide as much clarity as possible as to the nature of the future creditor regime.
Paul Krugman points to the gap between Icelandic and Irish CDS spreads here.
Dublin Economics Workshop Symposium
Energy Policy Priorities
Date: June 16th. at 11 am.
Venue: Room M21, Museum Building, Trinity College.
Programme
11.00 Kieran O’Brien (Irish Academy of Engineering): Energy Policy and Economic Recovery 2011-2015
11.30 Rory Broderick (Trinity College Dublin): Wind Energy Economics: the Influence of Gas and Carbon Prices
12.00 Dieter Helm (University of Oxford): Energy Policy in Europe, the UK and Ireland
12.30 Panel Discussion.
Admission is free but places are limited. Book a place by emailing colm.mccarthy@ucd.ie.
The ECB’s position of “no default” has come in for much derision here, and indeed the Schauble letter makes clear that such an uncompromising stance is not credible. I believe, however, that Ireland gains from a distinct leaning towards a “default-as-last-resort” position, which is why any Greek precedent is so important.
A useful approach is to view the possibility of default as a valuable option, with an orderly, officially supported “restructuring” at the more valuable end of the spectrum. However, the very existence of such an option makes it harder to regain market access. Potential investors will be repelled by the likelihood of getting caught up in a later restructuring.
We thus have a trade-off in the design of the bail-out/bail-in regime, with the optimal point along the trade-off being quite different for Greece and Ireland. A good regime for Ireland, in my view, is still one that offers additional funding on reasonable terms to countries meeting their ex ante conditions without a requirement of restructuring; in other words, a reliable, though certainly not unconditional, lender of last resort (LOLR). Potential investors need to know that funding will be there even in a bad state of the world. Under such arrangements, belief in the country’s capacity to meet pre-specified conditions should be sufficient for renewed market access (assuming of course the LOLR is seen as having the financial capacity to meet its commitment). For all its communication faults, the ECB does push policy in this direction, and I think is more of a friend in the European policy debate than we realise.
The Irish Times’ Cantillon reports the government is increasingly shifting its focus to the design of the ESM. This is the right focus. While I hope that an interest-rate cut is not completely off the table, the reliability of the LOLR function is the most critical factor in resolving the Irish creditworthiness crisis.