Anglo Bonds: Not Coming From the Taxpayer

Via NAMA Wine Lake, I came across this very important statement from An Taoiseach on September 28 about repayment of Anglo bonds

If the Anglo bondholders are paid, they will be paid from their own resources. This will not come from the taxpayer. The Minister for Finance has been dealing with this situation at the ECOFIN meetings.

This is really good news. I had been under the impression for some time that all of the funds used to pay Anglo bondholders came from the taxpayer. But apparently that’s not the case. Phew, that’s a relief. Hats off to the Minister for his excellent work at those ECOFIN meetings.

Update: In case anyone thinks Enda’s on his own here with this idea of Anglo bondholder payouts not coming from the taxpayer, listen to Leo Varadkar on RTE’s This Week today (32 minutes and 25 seconds in). When asked about the looming payout to bondholders, Leo says

Well that’s not quite the case. What’s happening in relation to the Anglo bondholders is they’ll be paid from Anglo’s own resources, from the sale of its own property assets, for example. The only money that is being put into Anglo Irish by this government is the promissory notes, the €3 billion a year that we are required to give to Anglo, or what is now the IBRC, as a result of the deal made by Fianna Fail and the Greens, and we are trying to have that changed. That is our major objective at the moment.

I recommend strongly that the government retire this particular piece of spin immediately. Every cent that is given to bondholders is an additional cent that will have to be poured into Anglo by the Irish tax payer, whether as promissory note payments or some rejiggered version of these notes.

25 thoughts on “Anglo Bonds: Not Coming From the Taxpayer”

  1. It is a sad testament to the poor, I might even say unpatriotic, journalism at our national broadcaster and newspaper of record that Enda Kenny’s announcement of such extraordinarily good news has not been given the coverage it deserves….

  2. Hang on now…what “own resources” would that be..? If the state pumps in money and then it’s paid out to the bondholders then Enda is right but only in a technical way..

  3. Unfortunately Enda Kenny is actually stupid enough to believe the above nonsense.

    Also I’ve made clear before that I believe senior bondholders should be repaid…but some of these bonds had extraordinary coupon (13%), and at the very least, we should withold that bit when repaying the principal. There is neither a moral,nor practical argument for paying that premium.

  4. If something that’s apparently great news isn’t pushed for all it’s worth by politicians then there’s usually some ‘more to it than meets the eye’ going on.

    Or is Prof. Whelan being a bit tongue-in-cheek when he says, “Hats off to the Minister for his excellent work”??

  5. Maybe they’ll fund this through a dilution of shares? or a pub quiz, or even a raffle for the Anglo sign that seemed to spark such nostalgia

    Why would Enda say this?

  6. @PR Guy

    Or is Prof. Whelan being a bit tongue-in-cheek when he says, “Hats off to the Minister for his excellent work”??

    I think it is more “Pants down” than “Hats off”, the implication being, at its most charitable, that Enda has no idea what he is talking about, and at its most critical that he and Moriarty Noonan are disingenuously describing unconditional surrender as tactical victory.

  7. It’s worth reading the full exchange in the Dail which is here

    http://www.kildarestreet.com/debates/?id=2011-09-28.2.0

    but the immediately preceding sentence mouthed by Taoiseach Kenny in response to a question from Sinn Fein is

    “I expect the Deputy, as the leader of his party, to spell out credible alternatives and an economic policy that is not based on fantasy but on reality” !

    Last Friday, in the David Norris tape that was released and played on radio, Helen Lucy Burke asked David Norris about a venereal disease affecting gays called “Black Hole”. Sounds like bluetongue, yellow fever or red death. Anyway David Norris didn’t have a clue what she was on about, and as far as I can tell there is no such venereal condition, either in medical or slang terms.

    But if you were to give Taoiseach Kenny a kick up the behind and give him a black hole, might you argue that it wasn’t in fact you that created the black hole but your size 11 brogues (or 6 pumps). Because that is what Enda is saying in respect of the repayment of these Anglo bonds, which of course is “fantasy”.

  8. The belief that Anglo has its own resources is surely the stuff of Alice In Wonderland – words mean what I want them to mean etc. I suppose this logic applies mutatis mutandis to AIB also; paying its way out of its own resources.

  9. @ ceter
    This is the best quote from the article.
    Walker F. Todd, a research fellow at the American Institute for Economic Research and a former official at the Federal Reserve Bank of Cleveland, said governments were setting a troubling precedent when they bailed out a company and paid its trading partners in full, as occurred with A.I.G. and as might occur with Dexia.

    “In the short run, it would help if the authorities would say they refuse to provide publicly funded money for the payoffs of derivatives,” he said. “This is like using public funds to support your local casino. It is difficult to see how this is good for society in the long run.”

    The thing that is most puzzling for me is that the majority of bondholders of Anglo were already sold insurance in case of default. Derivatives – Credit Default Swaps. Who exactly sold them the insurance we dont know because that market is mysterious.
    The confusing thing is that Anglo went bankrupt and instead of calling in their insurance the Irish taxpayers pay up. So why did the Anglo bondholders pay for insurance in the first place?

  10. Enda Kenny is in Brussels today. Any idea what advisers travelled with him? Afterall he’s only part of the (likely) most important to date governmental decision that will affect the world’s economy.

    Did he take the advisers who dreamt up the above nonsense ? Or does he have a Ferrari in the garage we don’t know about ?

  11. @Desmond
    Great photo of Enda with his buddy Silvio on the home page of Reuters. Nicky looks peed off and Angela is missing. I think Enda is consoling Silvio after the drubbing he got last night from Nicky and Angela.

  12. @Chris
    The casino reference is apt but I was intrigued by the Dexia guys take on EU rules. It seems he believes that burning bondholders “is incompatible with EU Rules”. I would like to know which rules he refers to. Is it contained in any Treaty or is the guy just talking through his a**e.

  13. @Chris
    The problem is not the CDS on Anglo bondholdings, it is the Interest Rate Swaps that Anglo itself holds that are in the red. As first Anglo and then the Irish sovereign rating declined, Anglo had to put up more and more cash collateral on these derivatives. What Mr. Todd doesn’t appear to realise is that derivative payments (i.e. cash collateral) is super-senior – it outranks everyone in a liquidation. It is treated as “somebody else’s cash” held in escrow.

    Changing this would be seismic for derivatives and would probably involve physical (i.e. electronic) movement of cash daily. This is not to say that it would be a bad thing, but in the current environment, it would result in large-scale insolvencies. At the moment, the prayer is that some pink elephant in a tutu will wave its wand and make everything okay so some fo the vastly losing swaps come back into the money.

  14. @hoganmahew

    You are correct. It all leads back to the Interest Rate Swaps Anglo wrote. So far Anglo (or rather the Irish tax payer) has had to put up around 8 billion in collateral / cash payments for these and other derivatives on their books. It was the tens of billions of cash calls on IRS’s that just killed Dexia.

    Before 2008 most IRS contracts were not exchange traded. Now it 60% and soon it will be almost all of them. What that means that all these contracts which were previous thinly collateralized now have to be fully collateralized. And instead of being valued on the trading book mark to model they will all have to be valued marked to market. Which means no more room to finesse all the contracts that have gone very badly wrong.

    So we should finally start finding out in the next year or two the full cost of Anglos huge trading book circa 2008 and just how much money they lost on it. So far it looks like it wont be less than 10 billion when you add in the FX losses.

    To put that 10B number in perspective. That’s about the same order as the annual income tax take for the country.

    I have a sneaking suspicion the final number may be a lot lot more. If Dexia can lose 40b/50b on a 100b bond / IRS book just how much money could Anglo lose on a 160b nominal IRS book. They have already lost far more than the usual 1%/2% real valuation and we are only part way into the loss crystallization process which could go on for at least another five years or more as the contracts run out.

  15. @JMC

    “You are correct. It all leads back to the Interest Rate Swaps Anglo wrote. So far Anglo (or rather the Irish tax payer) has had to put up around 8 billion in collateral / cash payments for these and other derivatives on their books. ”

    Surely one of the first things that should have been done after the State took over Anglo was to close out the ‘casino’ book. How one would would do this I am not clear, except by setting up offsetting trades or saying: The trade is cancelled, here is the current loss / profit in cash, the casino is now closed.

    You appear to be suggesting that there could be a further 10B in derivative losses in Anglo that have not already been accounted for on its balance sheet. Or that there are derivative contracts still in place that if they turn sour could result in a further 10B losses.

    To a layman like myself this sounds incredulous that this could be the case?

  16. @ Chris

    ‘The confusing thing is that Anglo went bankrupt and instead of calling in their insurance the Irish taxpayers pay up. So why did the Anglo bondholders pay for insurance in the first place?’

    Exactly.

    Who hold the biggest market in the insurance of these products?

    Cue Mr. Guitner (sic)?

  17. More attempts at accountamancy from an unrepentant Government. A pity they didn’t notice that the banks could sell their own assets before all that free money was given to Bank of Ireland who has €10 billion squirrelled away before they were bought out for ~€250 million.

  18. @Joseph Ryan

    Not to worry – what was it An Taoiseach said before he became An Taoiseach? … must be getting a touch of that short term amnesia that the citizenry is suffering from at the mo where we are all back in Bowel Bertie’s Paradise ….. & the FF National Executive is the real power in the land ……

    “Not another red cent to the banks” ….

  19. They know the people will never understand.

    So they use that.

    Begining to think there’s no hope.

  20. @ David O’D

    “Not another red cent to the banks” ….

    I think it was actually Leo the Loudmouth who said that.

    From the Examiner 10th Feb 2011:-

    Frontbench spokesperson Leo Varadkar said banks should not be given any more capital without renegotiating with bondholders.

    “Any bank coming to us looking for more money is going to have to show how they are going to impose losses on their junior bondholders, on their senior bondholders, and on other creditors before they come looking to us for any more money. Not another cent.” ”

    Read more: http://www.irishexaminer.com/ireland/kfeyeyidcwgb/rss2/

  21. @bolshevik

    Ta for that. I must have inhaled a touch of that amnesiac contagion afflicting the supine gullible citizenry at the mo ….

    @Karl Whelan [On Update – reality vs irony

    “I recommend strongly that the government retire this particular piece of spin immediately. Every cent that is given to bondholders is an additional cent that will have to be poured into Anglo by the Irish tax payer, whether as promissory note payments or some rejiggered version of these notes.”

    100% Agree

    @Minister Leo Varadkar

    Clean bowled & OUT.

    Get a grip – we had more than sufficient bullsh1t from the last lot to last a couple of generations …

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