Author: Karl Whelan

Squeeze Is On for Greece’s Private Sector Creditors

Here’s a thread for people to discuss the latest stories (here and here) on Greece’s private sector creditors being asked to roll over their funds or else. A quick summary:

The governments will give Greece new lending, to be provided by the European Financial Stability Facility, the euro zone’s sovereign rescue fund, officials said. But that financing will likely come with the condition that the banks, pensions funds and other investors holding Greek bonds agree to exchange them for new bonds with a longer maturity to help fill Greece’s financing gap over the next three years, they said.

“Private investors would have a strong incentive to participate, because if they don’t, there will be a default,” said one official.

It’s the Don Corleone approach to default negotiation, involving making people offers they can’t resist.

Still, providers of CDS insurance will be thrilled to hear that

the debt-exchange process envisioned by the governments won’t rewrite existing bond contracts or trigger a credit event, the officials said, partly easing the ECB’s concerns that private creditors are being forced to contribute financing.

Can someone explain to me why it’s so important to the ECB or any government whether a restructuring scheme constitutes a credit event for CDS purposes? Are the firms that offer this insurance somehow more important sources of systemic risk than those who own Greek sovereign bonds? Or is it more for the appearance of purity — “it was not a default, now way, sure the CDS guys say it wasn’t a credit event”, that kind of thing?

Anyway, what odds are there now that holders of Irish sovereign bonds will walk away unscathed?

Anglo Bondholders to be Repaid in Full

Today’s Sunday Independent appears to provide the answer to the question I posed on Tuesday about the government’s position on Anglo bondholders. Despite Brian Hayes stating firmly on April 2 (go here and click on the April 2nd edition of Saturday View, about 56 minutes in) that the government’s position was that haircuts should apply to Anglo senior bonds, the Independent reports that the Department of Finance has confirmed that Anglo’s senior bondholders will be repaid in full.

This is a good time to point people in the direction of NAMAWineLake’s very useful post from Friday detailing all the outstanding bonds of the Irish banks by maturity. November 2nd promises to be a great day for those international hedge fund investors who chose to buy some of the $1 billion senior unsecured Anglo bond first issued in November 2006.

Leogate and Green Jersey Economics

Throughout Ireland’s economic crisis, our government has adopted policies based on overly optimistic assumptions. The language of corners turned, manageable problems and final estimates has dominated communication of these policies. And throughout this period, the approach of the Serious People in Leinster House and at institutions such as the Irish Times has been to attack those who question these overly optimistic assumptions as unpatriotic folk who are talking the economy down.

Against that background, this green jersey editorial from the Irish Times on Leo Varadkar’s comments is deeply depressing. It adopts Michael Martin’s ridiculous line about “loose talk costing jobs” as if serious businessmen thinking about creating jobs were not already aware of the likelihood of a further EU-IMF deal for Ireland. It makes claims about sovereign bond markets that serve to illustrate that the writer clearly doesn’t understand these markets. If Leo’s comments created “doubt and uncertainty in financial markets among those that most matter, the bond investors from whom the State hopes to borrow again next year” then how come sovereign bond yields didn’t budge?

Then we get this gem:

As the euro zone debt crisis has unfolded, Ireland has lost credibility and sustained major reputational damage at various levels – government, public service, banking and business – which the Fine Gael Labour Government is attempting to regain and restore. This was best exemplified last November when talks about an EU-IMF bailout were under consideration while Fianna Fáil ministers issued public denials. It will take some time to re-establish trust in what governments say and confidence they can deliver on commitments made.

So Fianna Fail lost credibility by lying about the scale of our problems and ultimately denying things that everyone knew were true. And the IT’s reaction to this loss of credibility is to condemn a minister who makes a statement everyone knows to be true and to encourage the government to repeat a mantra about “no second deal” that will, in time, be just as discredited as the previous government’s approach.

The Irish Times may not wish to hear government ministers admitting that, despite best efforts, we may not be able to get back to the bond market. However, the “everything’s going to be fine” approach runs the risk of being exposed as just as false as the corner-turning rhetoric of the previous government. And it hardly helps with negotiating better terms on the current deal.

FT on Subdebt Writedowns

FT Alphaville continue to be unimpressed with the Irish government’s over-turning of the capital structure of the Irish banks: haircutting subdebt holders while protecting preference shares.

Anglo-INBS Loan Loss Assessments

The Central Bank of Ireland has released an addendum to its Financial Measures Programme report covering loan losses at Anglo and INBS.  It concludes the loan losses estimates that were produced last September are still satisfactory.

What does this mean for the remaining Anglo bondholders (€200 million paid out on last Friday)? The government’s policy on this issue is a little unclear to me at this point. The Irish Times reported in April

the head of financial regulation Matthew Elderfield said losses may be imposed on senior bondholders at Anglo Irish Bank and Irish Nationwide Building Society if the cost of the two failed institutions rises above the current €34 billion bill.

This wording also suggests the converse—that without evidence of higher losses than €34 billion, senior bondholders would be repaid in full. However, I doubt if policy on this issue is being set by Mr. Elderfield. In the week after the stress test announcements, government politicians continued to maintain that they wanted to see burden sharing with Anglo and INBS bondholders. For instance, listen to junior minister Brian Hayes discussing the issue here on the April 2nd edition of Saturday View (56 minutes in).

There isn’t really any need to base such a decision on whether the Central Bank announces combined losses of more than €34 billion. An amended version of the Credit Institutions bill could be introduced that allows the Minister to apply haircuts to all bonds issued by banks that required enormous support from the state, and perhaps this is what government politicians have in mind when they say they are still pushing for burden sharing.

Anyway, there has been no official response to this release from the Department of Finance, who have instead preferred to issue press releases on the subdebt buybacks proposed by BoI, EBS and ILP. My guess is that the government is hoping this issue will just fade away but, if asked, they will still claim that Anglo senior debt shouldn’t be paid out on but that they’re still “discussing the issue with their European partners”.

As a purely political matter, I’d guess that if and when Ireland gets a lower rate on its EU loans, that may prove to be the moment that they admit they had to give up on haircuts for Anglo bonds. Investors who bought these bonds at steep discounts over the past year (because so many people assumed the government would not pay out on them) will have obtained a fantastic rate of return.