How Would a Greek-Style Haircut Affect Ireland?

Someone asked me today how a Greek-style haircut for private bondholders would impact on the Irish debt situation if applied here. Without any claim that this is a prediction for what could happen to Ireland, or a policy recommendation, here are the calculations.

While the figure grabbing the headlines is the 50%-60% haircut for private holders of Greek sovereign bonds, it appears that the bonds bought by the ECB will not be written down, nor will the IMF loans. FT Alphaville discuss a UBS report that calculates that a 50% haircut for private bondholders actually implies a 22% reduction in total debt.

In Ireland’s case, the latest EU Commission report estimates (page eight) that our year-end general government debt will be €172.5 billion or about 110 percent of GDP. The report also estimates that by the end of this year, we will owe €38.2 billion to the EU and IMF.  (Table 4 on page 23).

We don’t know how much Irish sovereign debt the ECB own but it’s believed to be a large amount. I do remember a report from Barclay’s claiming they owned €18 billion by June 2010. Let’s say ECB owns €22 billion of Irish debt (that’s just a guess, I really don’t know). Combine that with €38 billion from EU-IMF and you have €60 billion in debt that wouldn’t be getting a haircut. Better guesses of ECB holdings of Irish sovereign debt are welcome.

Now apply a 50% haircut to the remaining €92.5 billion of our debt and you reduce the debt by €46.25 billion, or 29 percent of GDP, getting the debt ratio down to 81 percent. (Of course, we’d still be running large deficits, so it would start increasing again.)

So that’s the answer. Perhaps worth noting, however, is that an alternative method of writing down Ireland’s debt by close to 30 percent of GDP without haircutting private bondholders at all would be to have Anglo’s ELA debt to the Central Bank of Ireland written off.

According to its interim report Anglo owed €28.1 billion in ELA at the end of 2010 but this had risen to €38.1 billion by the end of June. This is because Anglo transferred €12.2 billion in NAMA senior bonds to AIB in February to back the deposits that were being moved out of the bank.

On July 1, Anglo was merged with Irish Nationwide Building Society (INBS) to form what is now called the Irish Bank Resolution Corporation (IBRC). As of the end of 2010, INBS had €7.3 billion in loans from the ECB. However, €3.7 billion of this was backed by NAMA bonds and other assets that were transferred to Irish Life and Permanent. INBS has been in receipt of ELA since February to replace this lost funding. While this has been admitted by a Department of Finance official (see this story) the exact figure has not been released. I assume it is about €4 billion.

So my estimate is that the IBRC now owes about €42 billion in Emergency Liquidity Assistance to the Central Bank of Ireland. If the European authorities ever decide they like the idea of haircuts for Irish debt, it would be fair to ask which of a fifty percent haircut or a write-off of ELA would be more likely to damage Ireland’s reputation or cause financial market contagion.

40 thoughts on “How Would a Greek-Style Haircut Affect Ireland?”

  1. A very timely thread. I am not so sure about the assumptions that ECB owned bonds would not suffer a haircut as all the reports I’m reading suggest that the aim is to reduce their 360b bond pile by 50%.

  2. For the ladyeeze, an investment in hair dye might be in order. For the gents, olive oyl is de rigeur.

  3. The figures in this contribution may well be right but the political implications have also to be considered. A country can either have the reputation for honouring its debts – including even those for which it may have mistakenly accepted responsibility – or defaulting on them. There is no middle way. The picture is somewhat clouded by membership of a currency union but the basic principle remains unchanged (even for California!).

    cf. http://financialedge.investopedia.com/financial-edge/0911/The-History-Of-Greek-Sovereign-Debt-Defaults.aspx#axzz1bjC7hXco

  4. I was talking to a consultant to a few greek health insurers today. The clients of the insurers who work for the banks and the government seem to have been hit with a 25% pay cut. So they don’t have the means to pay their health insurance premiums. So the insurers are in trouble. That’s before they write down the value of their bonds.

    I can’t see the Eurowallahs propping up the Irish insurance sector in the event of a debt haircut. The whole approach to the crisis seems to be far too Victorian.

  5. Karl,
    Any thoughts on the impact of re financing the pro notes into a lower coupon/ longer maturity. Thereby we don’t default but the burden is reduced.

  6. @DOCM

    “A country can either have the reputation for honouring its debts – including even those for which it may have mistakenly accepted responsibility – or defaulting on them. There is no middle way”

    Well you may view this as a black or white issue. I don’t see it as being so simple. Sovereign bondholders will likely take a far more positive view of us if we can pay them back and paying back all the ELA will make that a lot harder.

  7. @DOCM

    Well if there’s going to be a historical league table of debt transgressors, Germany is assured of a place right at or near the top.

    Back in the 1950s, the USA and other countries reduced Germany’s debt. In fact in the London Club Agreement “the repayable amount was reduced by 50% … and stretched out over 30 years” – perhaps the Germans are just cutting and pasting from their own agreement to formulate their current proposals?

    Should Germany at the time have declined the US offer on the basis that they wanted to rebuild their “reputation” or on the basis of “honour”, or were they right to accept the offer on the basis that it would contribute to rebuilding the country?

  8. @ Bryan G

    I was not aware that Ireland was in need of rebuilding after near total destruction as was the case in Germany in the 1950’s.

    My point is a very simple one. A country’s reputation for honouring its debts is an invaluable asset not alone as a statement of mature sovereignty but of capacity to continue borrowing. It simply cannot be lightly abandoned especially not on the basis of the Greek example, the most inappropriate one that can be imagined.

    This is not in any way to rule out continued persistent negotiation to improve the conditions of the Irish bailout and taking advantage of any deals can be agreed amicably between debtors and creditors; but not in terms of a “Greek style haircut”. It simply risks launching a silly debate and we have enough of those already.

  9. Karl,
    Thanks for that. I am sure the govt would want to do this. I am not sure how it sits with the leaked source of recap- private, state, EFSF.

  10. Is this 42B/60B/100B emergency liquidity a version of QE in all but name. They are not going to ask for it back. And who are you going to give it back to anyway. Basically the ECB has given the ICB a local permit.

  11. Can someone who knows about these things explain something to me:

    Greece 1yr bonds ar yielding close to 100% apparently. This obviously anticipates a haircut. However apparently the PSI will be voluntary to avoid CDS triggers.

    Therefore why can I not buy these bonds and refuse to participate and just collect my coupons and principal and return 100%?

  12. While the imposition of the banks bond debt on the Irish people is egregious, unjust and possibly unpayable, the political reality is that unless and until a German or French bank burns bondholders, Ireland will not change its current position. Even a Spanish or Italian bank burning its bondholders will not be enough for the inner circle political and PS to risk their good fortunes and break ranks.

    But if a German or French banks burns bondholders then all bondholders in all Irish banks will be fair game for every cent that has gone into the banks.

  13. @docm

    “A country can either have the reputation for honouring its debts – including even those for which it may have mistakenly accepted responsibility – or defaulting on them. There is no middle way”

    Where did that idea come from? Maybe the same place that provided “a country is defined by a network of contracts”, or “don’t resolve the banks and leave any senior unsecured creditors out of pocket or there will be no future market in unsecured bank debt”.

    Apart from a few bonkers years, it has always been the case that when you bought a bond the yield reflected in part a default risk, which varied from company to company and sovereign to sovereign, whether absolute or via inflation.

    And by the way, silence about the possibility of the other pigs defaulting will not stop investors speculating about the possibility.

  14. @Actuary

    Yes there is potentially a different value to a non-leaned on, non-bank holder, but you also have to bear in mind that Greece could leave the Euro and tell you where to go.

  15. “A country’s reputation for honouring its debts is an invaluable asset not alone as a statement of mature sovereignty but of capacity to continue borrowing. It simply cannot be lightly abandoned especially not on the basis of the Greek example, the most inappropriate one that can be imagined.”

    DOCM- do you also tend to be offended when you see ladies drinking big pints ?

  16. @ seafoid

    Let’s put it this way! When I was in Kerry in July and walking along a beach in a freezing wind a young lady came towards me in a handpainted T-shirt stating “Ireland is not Greece”. I was not offended.

  17. @DOCM

    Germany and Japan seem to have done alright in the last 65 years. The world was prepared to overlook the small matter of a homicidal rampage that killed 60 million people. I think Ireland’s reputation would recover easily enough if we didn’t pay back some Anglo bonds.

  18. @DOCM

    I am aware that Ireland didn’t initiate a war of total destruction, and lose. The point is that Allied policy after WWII was a victory of pragmatism over ideology, largely forced through by the USA, over the objections of the French, who wanted de-industrialization of Germany, for example. Even today there are echoes of that dynamic, with the USA-influenced IMF calling for a realistic policy to Greek debt, over the objections of the French.

    The Greeks are bystanders at their own debt negotiations – an EU team are negotiating with the IIF. The same will be true for Ireland if it looks like the amount official support needed looks like getting out of hand. It is an illusion to think that Ireland has any real say in the matter. Ireland will be forced not to default, right up until the day when it is forced to default, should that ever happen.

  19. @BryanG
    The Americans have a more realistic attitude to unsustainable debt be it company, personal or sovereign. Just look at how many times Trump enterprises have being bankrupt and he continues to operate and start new ventures. GM is also a success story for realistic assessment of sustainability.

  20. This site is like a virtual pub with no drink – 3 years of this default talk would be wildly amusing really – if one were in a constant state of intoxication.
    I guess when all the credit deposits have been drained to pay external sovs yee will finally admit we should have nationalised our credit deposits in Sep 2008 when a whopping 80%+ of our sovergin debt was externally funded.
    I can’t for the life of me think what the use of a credit bank is if it cannot give out credit.
    Even the most conservative voices in a normal state of situational awareness would have folded up AIB and done a deal deal with BoI / BoE

  21. @DOCM

    Blind Biddy has awarded you the Lorenzo of the Month Award.

    Should sit well with your Vichy_Bankers’ Top Spinner Award. Well done Sir/Madam.

    Pity that you do not have the balls to ditch the Anonymous – little wonder that lady in Kerry walked on …

    The Conflationist Fallacy dear boy/girl : Vichy_Banking Debt is NOT Irish Sovereign Debt. Countries do not make decisions – people in power do – one of the Ontological Fallacies.

    That said, keep up the lorenzian good works …

  22. @all

    I wish we had waited until the end of the week until we started this debate.

    @Karl

    I have a question on your Iceland thread (regarding your observations on the current cost, and standard, of living in that country) which you might be kind enough to take look at.

    Best….L

  23. Ireland and Greece have come to their difficulties by different pahts. Ireland by having collusion in its real estate and banking market causing a massive crash and huge banking losses to developers. Then the decison to make these and other European banks debts Irish government debts which it clearly could not afford.
    Greece by large debts due to misguided public spending.
    If a haircut is applied to Ireland it should be made very clear to international investors that Irelands economy is fundamentally sound and it is the European banking industry which has failed us.
    The best way to do that as Dr. Whelan suggests is to haircut the banking debt to make it very clear.

  24. In terms of the CBI being able to write off ELA debts at the end of the post, what would happen if the ECB bought then wrote of a fixed percentage of GDP of each eurozone member’s debt through QE?

    This isn’t a suggestion, I have no understanding of the mechanics of this beyond it being inflationary.

  25. A straw poll of other PR Guys in the financial services sector yesterday tells me everything they’ve seen cross their desks in the past week says there is a line drawn in the sand at 40% for ‘voluntary’ PSI. Anything above that and the sword of Damaclese drops.

    Perhaps we are going to get one of those sudden and massive – but largely unexplained and very short lived – market moves as a warning so that politicians get the message about who really wears the pants around here (what was the last one? 1000 points on the Dow that lasted for about 5 minutes?). Or perhaps just a quick spike in Italian bond yields to really set the pulses racing. Could be a good day for GS.

    Meanwhile, PR Guys earning the EU Euro are busy writing bank bashing stuff. Mostly because they have been unable to obtain work with the banks but in some cases, directed to by EU officials.

    Of course, German MP’s with a vote beforehand could yet sink the whole thing.

    It’s going to be an interesting 48 hours or so.

  26. @ Karl/CP

    the suggestion at the moment is that the ECB essentially gets out flat on their Greek holdings, ie where they bought them, which effectively comes to about a 30% haircut give or take. The downside of this is that this will increase the amount of officials loans by another 30-35bn or so and will reduce the usage of the ECB’s balance sheet in terms of helping to alleviate the crisis. At some stage the ECB’s balance sheet needs to be used in a far more effective manner to create a sustainable solution.

  27. @ Tullmcadoo
    “Any thoughts on the impact of re financing the pro notes into a lower coupon/ longer maturity. Thereby we don’t default but the burden is reduced.”

    People over 40 who have increased their standards of living and personal wealth massively need to stop sending future dated invoices to those under 40. Haven’t we done enough already. Just add up all our negative equity.
    We will either not pay them soon or not pay them in a couple of decades but make no mistake. We will not pay. We would prefer if you pay up yourselves or default.

  28. @ Actuary

    “Therefore why can I not buy these bonds and refuse to participate and just collect my coupons and principal and return 100%?”

    Depends what your name is.
    If it’s Peter Sutherland or one of his minions or Roman Abramovitch then the answer is yes.
    If you are an ordinary citizen I would like to see you try.
    As a joke you could try to call up Davy or Goodbody’s and see what they say.

  29. @ Actuary

    “Therefore why can I not buy these bonds and refuse to participate and just collect my coupons and principal and return 100%?”

    contrary to Eamonn Moran’s unresearched suggestion, you’re actually probably correct in terms of what will happen. They key will be whether enough agree/sign up to the eventually agreed terms of the Greek debt discount – if not enough sign up (banks will, insurance companies/pension funds may not) then they will go down the mandatory route. I suspect they may try to identify any large holders of these bonds, even if non-institutional, to make sure no rich Greek person is trying to benefit from the confusion, but anyone below a certain threshold will probably get out whole. Obviously there is a risk that they somehow force everyone to take part, but that risks creating a “credit event” which the ECB is dead set against.

  30. @Bond. Eoin Bond

    How many is ‘enough’ do you think? 75-85% ?

    On balance, what do you think the chances are of them going down the mandatory route? 50/50 or better (better meaning not going mandatory)?

    In a case like this, with figures like 60% being bandied around, I would have thought there’s a fine line between not triggering a credit event and letting the genie out of the bottle. Sometimes (only when I’ve had a pint or ten) I think I would like this credit event triggered just to see what would actually happen – get the popcorn out and watch the show etc. – but then I sober up.

    You are absolutely right in that the ECB are dead set against that happening but their negotiator (I forget his name, the Italian guy?) had better have been practicing not blinking in front of his mirror before he set out from home this morning. I’m sure there are people on the other side of the table who would remove their eyelids if they thought it would help them win (whatever ‘win’ means in this situation). On second thoughts, it would probably be Granny’s eyelids.

  31. … but being Italian, he might be prepared to remove their eyelids for them…. or at least make them an offer they can’t refuse.

  32. @ PR

    it seems like the banks are now quite willing to accept 40% hc’s, so something closer to 50% probably gets done. As long as they get 75% acceptance of private holders, i assume it’s a “success”. Question is how they deal with ECB holdings without opening the way for legal action or something.

  33. @ Eamonn

    From PK: “If you believed that, you’d think that Latvia was booming ”

    Latvia CDS today= 280bps, ie the same as Iceland
    High in 2009, before it enacted hyper-sterity, 1200bps.

    Krugman selectively using stats once again, who knew?

  34. @all
    New York Times – Update on the Ostriches in the ECB & The ScapeGoating of poor Silvio & Distressed Bankers etc

    There is also a question of what happens with the European Central Bank’s substantial holdings of Greek bonds, which have an estimated face value of about 45 billion euros. Jean-Claude Trichet, president of the E.C.B., has said that the central bank would not participate in any voluntary debt relief for Greece, known as “private sector involvement,” because it is not part of the private sector.

    Still, any insistence by the E.C.B. that it should be exempt from the pain of a debt devaluation could be controversial.

    The central bank might insist that its holdings be transferred to the European bailout fund, Mr. Pascual wrote.

    http://www.nytimes.com/2011/10/26/business/global/european-finance-ministers-call-off-pre-summit-meeting.html?_r=1&nl=afternoonupdate&emc=aua2

    IMHO – handcuffing of the ECB is a Gigantic Error of Judgment …

  35. @ALL in Government

    ‘Speaking to the Dáil today, Mr Kenny said Greek-style haircuts on the country’s sovereign debts are “not a panacea” for Ireland, as such a move would lead to accelerated austerity, damage overseas trade and hurt Ireland’s attraction for investment.

    http://www.irishtimes.com/newspaper/breaking/2011/1026/breaking7.html?cmpid=lunchtime-digest&utm_source=lunchtime-digest&utm_medium=email

    Would someone PLEASE explain the CONFLATIONIST FALLACY to An Taoiseach – [hint: distinction between genuine sovereign debt and vichy_banking system debt …

  36. The Greek-style haircut has several imperfections that may come to the surface later. There are several important questions that need to be answered. For example how many banks will voluntarily execute an exchange of Greece’s obligations? And what will happen if one of the bigger countries like Italy or Portugal defaults? The economic situation in those countries is not positive at all and the possible default would surely destroy all hopes placed in the EFSF and other rescue packages recently approved by the EU. This only shows that the countries which were in favor of looking for other solutions and refused to make their contributions were right. Now it’s too late and there clearly are no more good options that would put a halt to this crisis.

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