By John McHaleSunday, July 31st, 2011
In his Sunday Independent column today, Colm McCarthy again makes the argument the Government is protecting – or being forced to protect – senior bondholders in order to protect European banks.
It is entirely fair for our European partners to observe that we have brought this on ourselves but it is equally fair to note that in picking up the tab, the Irish are ‘taking one for the team’, in the phrase of Sharon Bowles, the British MEP who chairs the Economic and Monetary Affairs Committee. The team, in the form of the EU Commission, the European Central Bank and the Franco-German political leadership, persist in the pretence that the protection of creditors of the bust Irish banks, at the expense of the Irish Exchequer, represents some form of generosity to Irish citizens and taxpayers.
Fortunately, the existing deal with our European partners is impractical as well as unfair. It has not worked, it will not work and there will be further rounds of modifications as Europe gropes towards a resolution of the banking and sovereign debt crises. It will not be enough, in regaining solvency, for the Irish Government to avoid further pay-offs to bondholders in Anglo and Irish Nationwide. The Irish Exchequer’s contributions to bank rescue have already destroyed the sovereign’s capacity to borrow. There is still an opportunity to avoid default on the sovereign debt of the state, but the ability to avoid this outcome is being undermined by the obligations undertaken to investors in bonds issued by insolvent banks.
The restoration of that ability requires, in addition to vigorous reductions in the budget deficit, that the remaining costs of rescuing the Irish banks be shared with their creditors and with the European institutions whose defence of bank bondholders has helped to create the current untenable situation.
Putting aside the relative costs to Ireland’s creditworthiness of defaulting on sovereign bonds compared to sovereign guarantees, oversimplified claims that senior bondholders are being protected to protect foreign banks are undermining support for necessary fiscal adjustments.
The concerns of the ECB about balance sheet/precedent-related contagion does explain the absence of loss sharing for the roughly €3.5 billion of unguarnateed seniors in the defunct and depositor-less Anglo and INBS. The constraints on loss sharing in the pillar banks are quite different.
There is an effective instrument to impose losses on pillar-bank bondholders – bankruptcy. Although we know the credit system is already impaired, making the pillar banks bankrupt would impair the credit (and payments) system to a significantly greater degree. Also, it is conveniently ignored that depositors rank equally with senior bondholders under current law. It might have been possible for the State to make depositors whole when the State was creditworthy. That ship has sailed.
Now I do think more should have been done early on to put in place a resolution regime to increase loss-sharing options. However, the legal avenues appear to be quite proscribed. While I am not saying this is the end of the argument, given the damage done to public support for tough fiscal measures, anyone who pushes the line that losses should be imposed on broader bondholders has an obligation to explain how the legal obstacles could be overcome while protecting the credit system and protecting depositors. It is emotionally satisfying to heap blame on a requirement to protect foreign banks. The reality is more complex.