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.

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.

Ireland and Iceland: One Letter, Six Months, Three Years On

Reading Paul Krugman’s recent posts (here and here) reminded me that I forgot to write a post about my recent trip to Iceland. I presented at a very interesting conference on sovereign debt organised by Reykjavik University. Here is a link to slides and papers, which were presented on October 7 and 8.

My presentation was titled “One Letter and Six Months? Ireland and Iceland Three Years On”–the slides are here. One issue I discussed was whether Euro membership ultimately helped or hurt Ireland.

Much of the discussion surrounding Iceland in 2008 focused on the fact that they were outside the Eurozone and so could not obtain liquidity support from the ECB. While this was viewed as a negative factor, one could argue today that the (enforced) Icelandic approach avoided the mistakes associated with confusing a solvency crisis with a liquidity crisis. My conclusion: Without a clear policy on bank resolution, the Eurozone is not a good place to have a systemic banking crisis.

Income Tax Rates

I’d be interested to know the source of the figures cited in this article by Vincent Browne on income tax rates paid by higher earners. It certainly isn’t the last Revenue Commissioners statistical release on tax payments by income distribution, which relate to 2009. Anyway, it’s interesting to compare the figures reported in the article with the tax payments generated by plugging in the same salaries into this useful online tax calculator.

Central Bank Mortgage Conference

A reminder that this well-timed Central Bank conference on the Irish mortgage market takes place today.