IMF on Senior Bank Bonds and Restructuring Post author By Philip Lane Post date April 25, 2012 The IMF lays out how bailing in of creditors might operate for systemically-important banks in this SDN. Categories In Uncategorized 32 Comments on IMF on Senior Bank Bonds and Restructuring ← Labour Costs → Central Bank to Survey Households with Mortgage Debt 32 replies on “IMF on Senior Bank Bonds and Restructuring” How would it work for non systematically important banks such as Anglo Irish? Interesting doc feeds in nicely as elaboration of what Ajai Chopra had to say re IMF supporting ESM participating in debt for equity bail-in for TBTF’s Re “Moreover, bail-in could break the observed negative feedback loops between sovereign risks and bank funding costs.” Here’s the flaw 🙂 Negative feedback loops between sovereign risks and bank funding costs will be replaced by putting EMU taxpayers on the hook for bank funding costs or peripheral deficit costs beyond the banking sector as in Greece. So one loop will be replaced by another, ‘negative feedback loops between sovereign risks and EMS funding’. So, any gain by the above programme for banks with the risks attached will be offset by the negative feedback loop created for sovereigns by the ESM. Taxpayers across Europe will be made to foot the bill for ESM. But, Chopra has argued that ESM somehow be involved in footing the bill for TBTF bail ins? There is a hidden cost to this in the flawed design of the EMS/EFSF. Taxpayers across Europe will be put on the hook for the costs of the ESM. IF TBTF bailin costs are too great, taxpayers across europe will have to foot the bill. Irelands ‘guarantee’ and its failure will be replicated into a EMU ‘guarantee’ enshrined in the ‘compact’ treaty. Taxpayers will be forced to pay up, their public services will foot the bill. Austerity is the only means to pay for this. The problem is one of putting out fires in banks when the real problem that causes banks to go on fire is not addressed. This is the real problem of the euro. Asset driven bubbles fed by the core at the expense of the periphery. The euro has not been designed to address or tackle its real problems; fiscal deficits, core/periphery asset/liability distortions. IMF would be better off pursuing another form of bail in. that is, bail in for the ESM itself. This would involve write down of debt for sovereigns. This will happen in the coming breakup of the euro. No use putting out fires in TBTF kitchen, when TBTF house of euro, is on fire! In pursing the concept of bail in, IMF is not involved in total reality distortion. Its work above following the breakup of the euro, will have greater credibility and importance. Unless the fundamental problems of the euro are dealt with in a healthy breakup of its distorted reality, then bail in is merely prolonging the fire, instead of putting it out! … bit late around here … Meanwhile, back at The Ranch ‘Berlin Is Running Out of Allies in Euro Crisis’ The collapse of the Dutch government, the prospect of Socialist François Hollande as next French president and the surging popularity of far-right parties shows that budget discipline is out of fashion in Europe. Chancellor Angela Merkel is looking increasingly lonely in her fight to save the euro through painful austerity measures, write German commentators. Putting all the ‘pain’ on the ‘serfs’ rather than on the Financial System is reaching its limits … perhaps http://www.spiegel.de/international/europe/0,1518,829440,00.html Blind Biddy says NO. The center-left Süddeutsche Zeitung writes: “The collapse of the Dutch government is a bitter pill for the German government. It has lost an extremely important ally on austerity. The government in The Hague often called for stringent budget cuts. It tightened austerity and urged countries like Greece to make ever greater efforts. Now this government has foundered on austerity. And Chancellor Merkel could soon lose her closest ally as well. If Hollande wins in France, Merkel will have to renegotiate one of her pet projects, the fiscal pact which forces national governments to maintain budget restraint. The Socialist politician wants to add a growth pact to the fiscal pact.” “The challenger has promised voters not to economize as much or as quickly, and to create jobs and growth instead. That is being welcomed by the French, and not just by them. Many Spaniards are hoping the French Socialist will win. They hope the Madrid government will impose less stringent saving measures if the big neighbor relaxes its austerity. The sentiment in Italy is similar.” Business daily Financial Times Deutschland writes that the collapse of the Dutch government is more dramatic for the increasingly nervous financial markets than the prospect of a Socialist French president. “If the economically relatively well positioned Dutch aren’t in a position to stick to the 3 percent deficit rule, how can one expect euro countries with much bigger problems to do so? The answer is: You can’t. The fiscal pact would be finished. The resignation of the Rutte government in the Netherlands has once again shown that the pro-cyclical austerity program in Europe is the biggest recycling program for governments in recent history — and a gateway for radical movements.” “There is one lesson from the Dutch debacle that may surprise some people, at least those who have been defending the theory about the stable northern countries of the euro zone and the lackadaisical southern countries — a theory that is especially popular in Germany. Amazingly, the supposedly stability-oriented Dutch are no more immune than the Spanish or Italians. It is a realization that could help to stop seeing the crisis as merely a problem of a lack of discipline.” A Trillion for the Financial System from the ECB … The Conflationist Fallacy …. and Feck All for the Sovereigns! And if the pragmatic Dutch don’t do the 0.5% – what hope for others? http://rt.com/news/netherlands-government-euro-clark-908/ Neil Clarke on the ‘insane fiscal pact’, Holland about to leave the euro? “I see no ships” The ECB on credit crunches in the EZ http://www.bbc.co.uk/news/business-17839985 @ Colm B breaking my own rule here again – Chopra said absolutely nothing about senior debt bail ins via ESM funding. What he said was the ESM should be allowed fund directly to recapitalise banks, rather than via the sovereign. It would be a standard equity rights issue. @ DOD http://www.schneiderfx.com/news/comments/Financial-Times-Stocks-Rebound-but-Eurozone-Tensions-Remain/1206 “Bond bears are in control of peripheral markets and there is a cruel sense of inevitability about this crisis. Only savage austerity or an extraordinary measure by the International Monetary Fund of European Central Bank will stop them.” Perhaps at this stage they have torn the arse out of it and it’s time for Plan B. B is for Biddy. Blind Biddy to the rescue. Vote NO and invade Europe. She has the draft of the New Remit for the ECB in her apron pocket. She will print Three Trillion for Sovereigns only. Axel got out in good time and remains in reasonable standing … but Dear Lorenzo is not forgotten … nor forgiven. She has da Lisht … best not to be on it or innit …. Now if the FPD would only do the honourable thing and go the way of the PDees, the poor dears! We could have this sorted by The Fall … “Amazingly, the supposedly stability-oriented Dutch are no more immune than the Spanish or Italians.” The Netherlands has the inequality problem expressed in the form of the split of seats in parliament. Wilders is a demagogue who has the support of something like 25% of the electorate who seem to have given up on the respectable parties. And they are mostly from the lower end of the income distribution. Bond vigilante austerity is not in their interests. Belgium’s establishment parties have a big problem with the NVA. The Dutch have the Wilders problem. FF are gone. Lots of instability and austerity isn’t helping. Very interesting transport 2009 / 10 Omnibus published this morning. The only public transport system recovering to near 2007 levels is the Luas red line & Limerick buses it seems. Y2007 R.L. passenger numbers :15.825 million Y2009 :13.633 Million Y2010 :15.606 Million The Green line is recovering a bit But Dublin & Cork busses have collpased. Dublin bus passenger numbers :Y2007 : 147.532 million Y2010 : 118.976 million Cork city : Y2007 :12.6 Million Y2010 : 9.4 Million wow !! Limerick Bus travel is improving for some reason perhaps because many of the poor bastards can’t afford cars now. Limerick city : Y2007 : 3.5 million Y2010 : 3.4 million I have never seen Transport data such as this……… it is clear people simply do not have enough tokens in their pocket. Its amazing we did not have a devaluation already , simply amazing. The euros role is a misallocation of resourses is clear to see in the final chapter….Prices from 2000 to 2010 The prices of new & second hand cars have decreased by 3.5% The price of bus fares have increased by 59 % The price of taxis have increased by 58.9% rail fares by 54.5 % This is the primary reason why we are exporting our money supply to oil & BMW merchants. We are operating withen a absurd & extremely non optimal monetary system where the poor are not provided with enough tokens to simply move around. The Euro is a manifestation of pure evil. @ Seafoid et al the Dutch government didn’t collapse because it did not agree to austerity. Far from it – all ten parties agree on the basic principle. The issue is the exact measures to be pursued to rein in the deficit. Thats the part they can’t agree on, ie who should pay. The Dutch situation is being overblown in that regard. @BeB Yes – The Dutch get into discussion on the “HOW?” of budgeting … and the “WHO?” of budgeting and the “Where?” of budgeting. All we get here is ‘how much’ and it all goes on the serfs. We need much more around here on the “HOW?” That said, to have the Government of Die Nederlands dependant on the whims of a Far Right Party, considering its history, is worrying. Worth noting that ‘he’ voted No to the so called Irish ‘Bail-Out’ for The VichyFinSys Debt and the Dutch Social Democrats came to the rescue to save the Gullit-McGrath Treaty for posterity …. Hi All. Off topic: I’m signing out for a bit. The theatre world is working away in very challenging circumstances and lots of projects need my full attention now and in the near future. Many thanks for the posts, information, debate and different perspectives. Hope to be back when time allows. @ Bond 11:54 Good catch there 🙂 Good to see someone is paying attention. Re “Chopra said absolutely nothing about senior debt bail ins via ESM funding” Absolutely correct, here’s the preso here: http://www.imf.org/external/mmedia/view.aspx?vid=1573823712001 causes 1. banking crisis fueled by wholesale funds 2. feedback loops by various sectors, lack of instruments to break loops, all bank debt became sovereign debt,… 3. Modest growth, political High private debt pernicious downward cycle added to, My notes follow in brackets. Here’s the relevant part Senior unguaranteed debt paid in full 41:31 (disgraceful, my point) Fiscal plans are on track 46:41 (at .7 growth not without a lot of those fiscal stabilisers he mentions) “calling for additional European support that goes beyond the present programme” Just before ending the preso, he makes the following point: “If european facilities took direct stake in banks without going through the sovereign, direct equity stakes, that would make a world of a difference,” But, here tks to Philip Lane whose provided the documents, we have: http://www.imf.org/external/pubs/ft/sdn/2012/sdn1203.pdf As I say in 10:01 “fits in nicely with Ajai’s talk”. Its an IMF doc position paper that goes into further detail on the question of how to deal with SIFI’s (Systematically important financial institutions) Because its IMF, I’m using a tad bit of poetic license to attribute the same positions outlined in this document to a deeper position on SIFI for EMU and Ireland Ajai did not go into in his talk. I think its fair to assume Ajai can be said to hold the positions outlined in subject of this blog. So, I think its fair to assume Ajai holds the following view expressed in the IMF doc above: “I. INTRODUCTION The recent financial crisis demonstrated that the distress of a systemically important financial institution (SIFI) and its subsequent disorderly liquidation can create risks to overall financial stability. A failing SIFI can endanger financial stability in three ways…: ” Here’s the bit I was referring to above: “… whereas bail-in is a statutory power that enables resolution authorities to eliminate or dilute existing shareholders, and to write down or convert, in the following order, any contractual contingent capital instruments that have not already been converted to equity, subordinated debt, and unsecured senior debt. As a general resolution tool, bail-in would be accompanied by the power of the resolution authority to change bank management. A statutory bail-in regime and contractual contingent convertibles (especially those with high capital ratios as triggers) could form a complementary approach, with contingent capital as the first line of defense and bail-in kicking in to deal with the SIFIs that remain distressed after the conversion of contingent capital….” Repeat above…”write down or convert, in the following order, any contractual contingent capital instruments that have not already been converted to equity, subordinated debt, and unsecured senior debt.” So putting the two together,” write down or convert ” plus his points on “european facilities took direct stake in banks” is the reason for me stating in 10:01 “Interesting doc feeds in nicely as elaboration of what Ajai Chopra had to say re IMF supporting ESM participating in debt for equity bail-in for TBTF’s” I am deducing IMF supporting bail-in with debt for equity swap. QED 🙂 Re Bond 12:20 “the Dutch government didn’t collapse because it did not agree to austerity. Far from it – all ten parties agree on the basic principle. The issue is the exact measures to be pursued to rein in the deficit. ” If you click on Neil Clark above, you’ll see he also disagrees with you. Dutch government collapse is nothing to do with exact measures, but on the taxpayers having to pay an austerity bill of ¢15 bn as initial downpayment on a free ride to austerity to fuel the toxic ECB and its bad banks. @ Gavin, Great reading your posts. Re “The theatre world is working away in very challenging circumstances” I saw Focus Theatre after 40 yrs or so closing down end April, lost its grant, can’t pay its rent. Local bookshops are closing with their space being taken over by Pharmacies. @Gavin Kostick I’m signing out for a bit. Good luck with the day job Mr K, your contributions are always helpful. @Gavin Kostick “Hope to be back when time allows.” Bon chance/voyage. Look in from time to time when you have a moment. @ Gavin Kostick Good luck with the work. The EZ will shortly move onto political theatre. Yeah, i remember why i dont interact as much on here anymore. Gibberish and random copy n pasting. Wonderful. They are two seperate debates – what Ajai thinks should be done now vs what the IMF suggests be done some time in the future. Ajai is not suggesting the ESM be used to bail in the tiny amount of senior debt outstanding, or the modest amount of ELG. Failure to understand this is a failure to be able to read. @ Bond. Eoin Bond What Draghi thinks should be done is probably the most important element. http://www.nytimes.com/2012/04/26/business/global/ecb-president-urges-rigor-for-the-long-term.html?_r=1&hpw ” modest amount of ELG” ? @BEB 3:13 Re “Failure to understand this is a failure to be able to read.” Says it all. Read the document above. Its not about Ireland per se. Its about SIFI’s across the EMU of which there are many. You obviously didn’t even read the doc above. I’m sure its gibberish to you. As usual in spite of whatever evidence to the contrary, what you hold to be true, you’ll maintain as true, now that’s real tantrum gibberish. Try keeping to your own rules. And Good luck with that 🙂 Its very interesting to note in document above ‘IMF on Senior Bank Bonds and Restructuring’ the divergence in position between IMF and current Draghi approach. IMF Plan B following the LTRO firewall/ESM collapse? @Gavin Kostick Good luck with the theatre projects. The Euro tragedy/drama isn’t going away any time soon. Hopefully you’ll make it back before the final scenes are played out. @Gavin Thanks for contributing to the discussions. The ECB sends its regards too… It’s a pure staff discussion paper. They have hundreds of these . It’s explicitly not indicative of IMF policy or future policy . The document itself is very basic and doesnt really address the many legal and reg issues in how u would apply automatic bail in to the existing stock of bank capital … So has the PN story been put to bed now? Drop dead Ireland and get back under your stone. http://www.independent.ie/business/european/ecb-to-ireland-drop-dead-on-promissory-notes-3092455.html @ PR Guy Draghi wants the ELA repaid as per schedule. The PN’s can be restuctured whilst still sticking to that schedule, provided the ECB is willing to re-accept the new collateral after repayment. @ Colm the basic point is that Chopra is talking about things he wants done tomorrow to deal with this crisis, while the IMF paper is talking about hypotethical changes to regulations or legislation to prevent or limit the contagion from the next crisis in 10, 15, or 20 years time. You cant just splice the two positions together. It fails to reflect any reality, no matter how nice it sounds in your head. @ Gavin You can check out but you can’t leave 🙂 Good luck with all @ Bond, Here you go again banana throwing. I know I should ignore inflammatory and nasty comments/threads that use words like gibberish but I’ll break my own rule as you made a fair point I answered in some detail in 11:34. If you read that you should appreciate I speak with a fair amount of authority based on my interest and careful attention to Chopra I refer to in Philip Lane’s blog on the IMF progress preso; plus the very, very interesting document above on Senior Bank Bond restructring, a subject I know is anathema to you. Re “You cant just splice the two positions together. It fails to reflect any reality, no matter how nice it sounds in your head.” Let me guide you back and reconnect you to the real world: smart people constantly associate different sources of information and connect them together. Unfortunately, this thread hasn’t got a lot of traction. I would have liked the debate on the above document go a lot deeper than it has. The document above is one of great significance in regard to the looming breakup of the euro. In your head “IMF paper is talking about hypotethical changes to regulations or legislation to prevent or limit the contagion from the next crisis in 10, 15, or 20 years time”. This is merely a false construct of your own imagination:-) The reality is we are far closer to the inevitable eventuality. Its good to see the IMF working on alternative Plan B to the absurd SIFI TBTF (too big to fail) and unfortunate ECB policy of requiring us to pay up out of taxpayer pockets money speculated by unsecured senior bondholders. If you want to understand the true position of the IMF outlook on the question of default, you got to make the connection I’ve made. If you don’t, your loss, not mine 🙂 You do want another smilie, dont you 🙂 @ Colm B “I speak with a fair amount of authority” No comment. IMF on Senior Bank Bonds and Restructuring provides a good counterpoint to what we are being asked to sign up for in the coming ‘Compact Referendum’. Asking the question why we should vote no in the coming referendum with reasons that even a child could understand, I scribbled out the partial first draft below. I’d like to hear any further points in favour of a no for a ticket on the ESM zombie/ghost train. I’m sure a similar exercise for the ‘yes’ vote has already been carried out. 1. If you don’t understand it, don’t sign it. 2. It will lead to political and social instability. 3. ESM is an edict that cannot be challenged in court. 4. We can be taken to court or other sanctions taken against us if we do not follow its binding rules. 5. The Board administering ESM cannot be taken to court and is not bound by any FOI (Freedom of Information) rules. 6. The decisions of the ESM may be unduly influenced by Bundestag or other foreign governments. 7. It will subjugate our constitution to the rules of decision makers guided by policies not of our own making. 8. It will prevent us from backing out of the euro in the future by contractually binding/obliging us to pay back debt even though this debt may not be payable eg odious ¢47 bn repayable under ELA by way of the Promissory Note system. 9. The special circumstances of Ireland have been ignored in our bailout. We’ve had to pay penal interest rates of 5.8% on our bailout. Signing the ‘Compact’ would copper fasten those penal terms. 10. It would remove any negotiating position/strength as regards the negotiation of further bailouts. 11. It would involve us signing up to austerity for the short/medium/longterm with any growth benefits redirected to pay odious debt, in terms reminiscent of The Treaty of versailles the treaty imposed on Germany by the Allied powers in 1920 after the end of World War I which demanded exorbitant reparations from the Germans 12. The ‘guarantee’ for Ireland was deemed to be a failure; the ESM is a eurowide ‘guarantee’ of the banks that will damage Europe because it is a bailout of the banks and financial sector at the expense of the taxpayers of Europe. 13. Those in favour of the Guarantee do not fully understand it. 14. The ‘Compact’ does not guarantee a further bailout for Ireland. 15. It separates out influence of the peripheral countries on decision making by the core countries 16. It contains no protocols or guarantees that Ireland’s Corporation Tax or other taxation measures will not be redesigned to suit the needs of our lenders rather than the needs of Irish taxpayers. 17. It is in breach of the guarantees and rights of the Irish Constitution, in particular, 40-44 Fundamental Rights Personal Rights The Family Education Private Property 18. It implicitly enshrines a policy of support for the financial sector for SIFI ( Sytemically Important Financial Institutions ) through the ESM firewall that will be paid for by european taxpayers through austerity and erosion of their public services. Comments are closed.