Category: Banking Crisis

Burning Bond Holders

The dominant view on this site seems to be that the new government should play hardball with regard to senior bondholders.   While I sympathise with the fury over the inequity of bailing out private creditors, I have reluctantly come to a different conclusion.    In the interests of debate, I give below a stripped-down overview of my reasoning.    I’m sure people will tell me where I’m wrong.

Cutting to the essentials, the State is now effectively on the hook for: (i) bank losses beyond their capital; (ii) any losses on capital the State itself has injected; and (iii) and the eventual losses on NAMA.    The ECB/CBI will provide the necessary liquidity/funding to meet all ongoing obligations to creditors.   In return, they require a shrinking of bank liabilities (to reduce their exposure) and an eschewal of loss imposition on senior bondholders given concerns over balance sheet contagion and eurozone precedents.   (Arthur Beesley reports on eye-opening estimates by Seamus Coffey on the ownership of the Irish bank bonds.)

There is a growing chorus that Ireland should insist on imposing losses on (at least) unguaranteed seniors.   This comes down to gambling the ECB won’t significantly pull the liquidity/funding support, and indeed that we should take the further risk that the fiscal components of the bailout deal will not be withdrawn.

I think most of us agree that the original blanket guarantee was a shocking mistake, and also that in ordinary circumstances losses should be imposed – Danish style – on unguaranteed bank creditors.

I think the difference in views comes down to how we see the obligations of the ECB.   If we think the ECB is simply doing its job with its liquidity/funding support, then demands to protect bondholders do seem indefensible.    (By the way, the dictatorial language used by Commissioner Rehn earlier in the week barring such loss imposition was both undiplomatic and, I thought, extremely unhelpful.)  But  if we see the ECB as going beyond its ordinary lender of last resort obligations to small set of banks within the eurozone, then proportional additional conditions do not seem unwarranted.   I think people should take a close look at what the ECB/CBI are giving, as well as what they are demanding.  From where I sit, the ECB’s willingness to act as long-term lender of last resort does qualify as extraordinary support. 

Gormley On the Guarantee: The McWilliams Option

John Gormley on tonight’s Vincent Browne show:

Gormley: We had already discussed it for about a week on and off, we had discussed this. Some people, and I took the view too, that maybe nationalisation was the way forward. You have to remember the context.

Vincent Browne: You didn’t think that you as leader of the party that was in coalition government with Fianna Fail, you didn’t think that maybe you should get out of bed and go in to the Department of Finance where these discussions were going on.

Gormley: No because we had already discussed it Vincent. That’s the whole point

Vincent Browne: You went back to bed?

Gormley: Well, of course. I said “What is the option?” I remember speaking to Brian Lenihan and said “What option are we going for?” In fact, I can tell you what the exact words I used were “Are we going for the David McWilliams option?” That’s what I said on that particular evening. And he said yes. And as far as I was concerned that was the best option as I understood it at that time.

Vincent Browne: Because David McWilliams told you.

Gormley: Well, he is a person that I think a lot of people have respect for and we had discussed it. When I had mentioned nationalisation, he said “no, that’s not a good option at all.”

Vincent Browne: How come there was a bill presented to Brian Lenihan and Brian Cowen that night? There was a bill already drafted for the nationalisation of Anglo Irish Bank. How come that happened if nationalisation wasn’t on the table over the previous weeks or months?

Gormley: Well, that’s an interesting point because it’s the one that I have gone for myself, so I suppose the Department of Finance had just put that one in, just in case we didn’t decide for the guarantee.

The McWilliams Option might sound like a Robert Ludlum thriller. Unfortunately, this wasn’t fiction. This is a senior cabinet minister’s description of how the most important economic policy decision in the history of the state was made.

Fir Tree Capital Opportunity Master Fund LP v. Anglo Irish Bank Corp.

NAMA Wine Lake reports on this case.

Debate Questions

I found last night’s debate a bit depressing. Many people had suspected that the five-way debate would prove to be an unsatisfactory format for useful discussion. In the event, it was worse than I had expected. In particular, the combination of poorly phrased questions from the audience (two of the first three questions were essentially “what are you going to do about emigration?”) and ad hoc and unevenly distributed follow-ups from Pat Kenny, served the audience at home fairly poorly.

There’s two more debates to go, albeit one of them as Gwaelge (as they say in RTE). How about we open a thread for Irish Economy blog participants to suggest questions that could be used in the remaining debates?

Here’s a few starters for ten:

1. Fine Gael are planning to reduce public sector employment by 30,000 and Labour by 18,000. Can this be achieved without breaking the Croke Park agreement ruling out involuntary redundancies or without affecting front-line services? (The core administrative civil service only has about 30,000 employees).

2. The European Commission says that it expects Ireland to be borrowing in the bond market again in the second half of next year. Should Ireland look for a bigger lending package from the EU and IMF to delay this return to the bond market or, if you accept this timeline, how do you plan to raise these funds?

3. It appears that the EU authorities want the Irish banks to repay the almost €100 billion they have borrowed from the ECB and the €50 billion that they have borrowed from the Irish Central Bank and to do this soon. How do you plan to deal with these requests?

FG Banking Policies

Fintan O’Toole has a piece in today’s Irish Times that criticises Fine Gael for various flip-flops and changes of position on banking issues. You can read it yourself and decide if these points are important or whether Fintan is over-egging it a bit.

I’m reluctant to get into political argument on this point. However, I would note that Fintan seems to have missed the biggest change in Fine Gael position. While Fine Gael are currently placing a lot of emphasis on haircutting senior bank bondholders, as recently as October this was not their position at all. Here’s a link to a Bloomberg piece quoting Michael Noonan as follows

Fine Gael, Ireland’s biggest opposition party, said Oct. 8 that it would also repay Anglo Irish senior bondholders in full. In September, the party had demanded that Finance Minister Lenihan negotiate with bondholders.

The party doesn’t want to “risk the reputation of the country” as a re-payer of its debt, said Fine Gael finance spokesman Michael Noonan.

Bloomberg also have a more detailed story on this interview which, unfortunately, is not on the web. However, here are some excerpts:

Anglo Irish Senior Bondholders Should Be Repaid, Opposition Says

2010-10-08 12:06:09.402 GMT

By Joe Brennan

Oct. 8 (Bloomberg) — Anglo Irish Bank Corp. senior bondholders would be repaid in full by an Irish government led by Fine Gael, the countrys biggest opposition party, finance spokesman Michael Noonan said.

Last month, the Dublin-based party demanded Finance Minister Brian Lenihan sought negotiations on all Anglo Irish bonds, including 4 billion euros ($5.5 billion) which lost the government guarantee on Sept. 30. Noonan said yesterday that circumstances had changed.

“The advice I got was you might get half a billion euros out of it on a negotiation”, Noonan, 67, said in an interview in the parliament in Dublin. “Now, I don’t think we should risk the reputation of the country for the sake of a half billion.”

and

Lenihan said yesterday the government wouldnt impose losses on senior bondholders via new laws.

“It was an option two years ago when there was very serious amounts, about 17 billion, of senior bonds there that wasn’t under guarantee”, Noonan said. “ The debate is effectively over now.”

One can, of course, argue that circumstances have changed again since October. But the general point that Fine Gael have been inconsistent on banking policy seems a fair charge.