Category: Banking Crisis

INBS and the ECB

Today’s story about INBS issuing €4 billion in government-guaranteed debt effectively to itself (i.e. issuing it, then keeping it on the balance sheet to use for repo with the ECB) seems a bit strange. Indeed, normally the ECB doesn’t allow this kind of thing.  Page 39 of its eligible collateral documentation contains the following guideline:

Irrespective of the fact that a marketable or nonmarketable asset fulfills all eligibility criteria, a counterparty may not submit as collateral any asset issued or guaranteed by itself or by any other entity with which it has close links.

The INBS issue seems to be ok, however, because of the following qualification:

The above provision on close links does not apply to: (a) close links between the counterparty and the public authorities of EEA countries or in the case where a debt instrument is guaranteed by a public sector entity which has the right to levy taxes.

So the government guarantee appears to be what allows INBS to do this.

Business and Finance Interview with Anglo Management

Business and Finance have an interview with Anglo CEO and CFO, Mike Anysley and Maarten van Eden.

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.