Author: Karl Whelan

The Guarantee Extension Decision

Much of the reporting of yesterday’s guarantee decision (DoF press release here, explanatory notes here) seems to be a bit confused.

Most of the coverage has focused on something called “the guarantee”. However, there are in fact two separate state guarantee schemes. The original is the Credit Institutions (Financial Support) Act 2008 or CIFS, which was conceived on September 29, 2008. This covered essentially all liabilities of the covered banks apart from undated subordinated debt. However, the cover only extended to the end of September 2010, so that if a bank defaulted on any of these liabilities on October 1, 2010, the government would not have any responsibility. Because of this limitation, most of the bonds issued after CIFS was put in place matured in September 2010.

To allow banks to issue debt that matured later than September 2010, the government then put in place the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 which is known as the ELG scheme. This allowed bonds to be issued with maturities of up to 5 years, with the bonds having the full backing of the Irish government out to their maturity. This scheme also guaranteed deposits and other short-term liabilities.

The ELG scheme was originally supposed to run out at the same time as the CIFS guarantee, so there was only a relatively short window in which bonds could be issued and still carry the ELG cover to maturity. Actually, there was some confusion in these parts about whether the ELG scheme was supposed to run out in June 2010 or September 2010. Whatever the original date, in June, the Commission allowed for elements of the scheme to be extended to December. As the DoF’s explanatory note states

On 28 June, the Commission approved the extension of the issuance window under the ELG Scheme from 29 September to 31 December 2010 for liabilities of between three months and five years duration (except interbank deposits) and retail deposits regardless of maturity (up to a fixed term of five years).

Yesterday’s announcement relates to the ELG scheme, not the CIFS scheme. What was announced was as follows:

This announcement adds the remaining liabilities under the ELG Scheme to the extension being short term liabilities (0-3 months) including corporate deposits and interbank deposits so that now all liabilities under the Scheme benefit from the full extension of the issuance window to 31 December 2010.

I have seen reporting today claiming that yesterday’s announcement is an extension of the CIFS guarantee with the exception of the removal of subordinated debt. That does not appear to be the case. It is not an extension of the original CIFS guarantee, though it does lead to deposits that had been covered under the CIFS scheme retaining their coverage, now from the ELG scheme.

Also, unless I’m misunderstanding something, it seems as though more than just subordinated debt is losing coverage. As the DoF note explains, in relation to bonds, the ELG only covers “specific issuances of eligible debt securities and deposits (of up to five years) placed during the relevant issuance period.” Based on this, my interpretation is that senior debt that is currently covered by the CIFS scheme but which has not been issued under ELG scheme will no longer have a state guarantee as of 1 October.

With all the acronyms and complications, I may be misunderstanding this. If so, please let me know and I’ll post a clarification.

Ten Year Bond Spread at New High

A bad day in the sovereign bond market. Irish ten-year bond yields are up about 25 basis points, hovering at about six percent. Spreads over German equivalents are at about  370 basis points, well above the levels that prevailed in May prior to the announcement of the EU-IMF bailout fund.

Just reporting it, so don’t shoot the messanger. It seems worthy of discussion. Is this a temporary overreaction to relatively minimal news (WSJ story on the stress test deficiencies and some other stuff) or is this the markets catching up with the grim reality of the fiscal situation? The beginning of the end or a great buying opportunity for Irish sovereign debt?

Anglo’s Plan to Save Subordinated Debt Holders

It is now widely expected that the EU Commission will not approve Anglo’s Good Bank Bad Bank split and so there won’t be a good bank.

The media’s constant focus on whether the bank is being fully wound down or not has always been somewhat misplaced (I’ve been making this point for quite a while). Yes, the government would have to put extra money in to recapitalise the new bank but it wouldn’t be much (perhaps a billion or so) and, in theory, this investment could be earned back if the new bank was eventually sold off. In addition, the new bank would allow for the highest level of continuity for depositors and this could help restrict depositors leaving the bank which would complicate any adjustment to a new structure for Anglo.

In practice, there probably isn’t the basis there for a profitable new bank and there are other ways to deal with deposits, so I haven’t been a big fan of the split idea. However, this debate has been a distraction from the main issue affecting the cost of the bank to the Irish taxpayer, which is what the policy will be on the treatment of bondholders.

Now, however, a new reason has emerged to be against the new bank proposal. I had questioned here whether Anglo would have considered transferring subordinated debt liabilities to the New Bank. Now, Sunday Tribune journalist, Neil Callanan, informs us that Anglo’s management have informed him that their plan is to transfer some of the bank’s subordinated debt “to round out capital structure” (Thanks Neil.)

This is a bad idea on so many different levels. The idea about “rounding out the capital structure” sounds plausible but is, in fact, nonsense. International regulators have generally encouraged the issuance of subordinated debt because small numbers of professional bond investors may be better positioned to provide “market discipline” for the bank’s management than the shareholders, who tend to be poorly organized and easily deceived. The idea here is that the subdebt holders will lose all their money if the bank becomes insolvent, so they’ll pay close attention.

Now we have a bank which is insolvent and whose subdebt holders should get nothing. And the bank’s management wants to hive these bonds off into a new institution, fully capitalised at the expense of the Irish taxpayer, which would see the debt paid back in full.

One can only assume that Anglo’s management are aware that New Bank could “round out its capital structure” by issuing new subordinated debt, in return for which the state-owned bank would actually receive some money. But, for some reason, they would prefer to see the bank take on a legacy liability of Sean Fitzpatrick and co and pile it onto a new state-owned institution. The question is why they would want to do this.

The EU’s impending decision to prevent the new bank should stop all this. However, the planned subdebt transfer raises very serious questions about how exactly Mr. Aynsley and Mr. Dukes believe they are serving the Irish public with their plans for New Bank.

Your Country, Your Money

Five finalists have been announced for the Your Country, Your Call competition which, you may recall from the large advertising campaign earlier this year had the modest ambition of finding “two major proposals that, when implemented, will transform our economy – or significant elements of it – by creating jobs and opportunity.”

Competing ideas include installing solar panels on wind farm sites, creating “an Irish Content Industry Association which would then drive the development of a cultural and creative quarter. A media park would be established to attract global content industries” and, my favourite, “Building a world-beating entrepreneurial and innovation ecosystem around digital services aimed at positioning Ireland at the forefront of its associated spin-off industries.”

Two winners will be selected. They will be awarded €100,000 and then be given a development fund of, em, up to €500,000 each to implement the ideas. (Isn’t it great how these transformative ideas are so cheap?)

Obviously, it’s easy to poke fun at this competition. However, there is a serious question. The Times reports

The Department of Enterprise, Trade and Innovation said yesterday it had not provided money to fund the competition but a spokeswoman said formal arrangements were being put in place to allow a payment to be made. Earlier this year, Your Country, Your Call asked the department for €300,000 in funding for the initiative.

The question is whether public money should be used to support this idea. Just to be clear, my answer would be no.

A Comment on Comments

I think this blog has been a useful initiative and the comment feature has been an important part of this success. The large number of comments that the site receives is proof of its popularity and impact. However, unlike some popular economics blogs from other parts of the world (Calculated Risk, Baseline Scenario) the debate in the comments is often (not always) well informed and useful. Also, unlike many other blogs, the contributors here have often shown a willingness to engage with the commenters.

As everyone knows, the underlying economic news has generally been pretty bad over the past couple of years. And, even with signs of economic recovery around, there are lots of serious problems and things to worry about. For this reason, many of the posts focus on facts and figures that are negative.

Over time, certain patterns have emerged in the debate in the comments. Some of the commenters on this site have decided that there is somehow a conspiracy of bias among the contributors to deliberately focus on negative things or to (sigh) “talk down the economy” or that contributors are motivated by some sort of political agenda. For people who are contributing in an unpaid manner in their spare time and motivated by the desire to inform the public, this stuff is quite disheartening.

Debate in the comments is practically never censored – personal abuse and Don’t Get Philip Sued are, as far as I can tell, the only things that trigger contributors to lose precious time deleting comments.

However, policy on policing of comments is generally up to the individual contributor. Other contributors can make their own rules but, after what has been a particularly fractious week in the comments, I’ve decided to make the following request of people commenting on my posts:

1. No personal abuse of the economists who contribute to the site or other commenters.

2. No insinuations about grand conspiracies on the part of the evil blog henchmen or commenters.

3. No insinuations about contributors being motivated by their support for some political party.

Those who fail to honour the request should not be too surprised if at some point in between doing all the other things I actually get paid to do, I decide to delete their comments. Personal abuse of named individuals by those who decide to use a nom de blog will be particularly frowned upon. Also, comments whinging about having your comments deleted will also be deleted.

In return, those who keep to the guidelines can disagree with me all they want.