Who Owns Senior Irish Bank Bonds?

I’d like to pass on a few comments on the question of who owns senior Irish bank bonds, an issue that has been discussed on a number of occasions by Seamus Coffey from UCC.

Here’s a nice chart from Seamus’s blog using data from Table 4.2 of the Central Bank’s Money and Banking statistics. The chart shows that when the September 2008 guarantee was put in place, only €23 billion of the €97 billion in outstanding bonds of the covered banks were classified by the Central Bank as being held by Irish residents while today that share is €50.7 billion out of €77.6 billion.

There are a number of reasons why one should be careful in interpreting these statistics.

First, as I understand it, the Central Bank don’t keep track of secondary market activity in these bonds and so don’t actually know who the current owners of these bonds are. The estimates are largely based on the first holder of the debt when it is issued.

Second, in some cases, the “holder” is a trustee that manages the debt issuance and the subsequent payment streams on behalf of the issuing bank. So, for example, if an Irish bank issues debt that is held by an Irish resident firm Custodian Plc who manage the payment streams, but the ultimate beneficial owner of the debt (who ultimately gets the coupon payments, etc.) is a German pension fund, then the Central Bank statistics will report the debt securities as being held by Irish residents.

Third, much of the €50.7 billion currently deemed to be held by Irish residents is stuff like “own-use” bonds guaranteed by the Irish government. If, however, one is debating the question of failing to pay out on unguaranteed bonds, then you are generally talking about bonds issued prior to September 2008 and these are largely classified in these statistics as “foreign resident” bonds.

Finally, this may be obvious but it’s perhaps worth pointing out that the fact that some of these bonds may be owned by Irish residents is hardly a sufficient justification for using taxpayer funds to redeem them, rather than letting the pension funds or private citizens lose money on a bad investment.

To be honest, the fate of senior Irish bank bonds is probably generating more heat at this point than it should. It seems to me that there is no chance of the government adopting a policy of failing to pay out on AIB or Bank of Ireland’s senior bonds, so what is genuinely at debate is the roughly €4 billion or so in senior bonds outstanding at Anglo and Irish Nationwide. For what it’s worth, I suspect that most of these bonds are currently owned by international hedge funds and distressed debt desks of investment banks. So far, their investment strategy has been working out really well.

In relation to the cost of the banking bailout, an issue that may loom larger in the future than senior bonds is the policy the Irish government should adopt in a potential sovereign default situation to future payments on the Anglo and INBS promissory notes, keeping in mind that their major creditor is a certain Frankfurt-based institution.

Is the grievance against the ECB overdone?

Colm McCarthy and Kevin O’Rourke rightly point today to the damage that a sense of grievance towards the ECB does to political support for necessary domestic adjustment efforts (see Kevin’s post below).   While few would disagree that the ECB has been remiss on the public relations front, I think the all-things-considered case against it has been overdone. 

Two main charges have dominated the recent discussion: that the ECB “bounced” Ireland unnecessarily into a bailout; and that it has unfairly insisted that Irish taxpayers bear the burden bank losses that are rightly the responsibility of senior bondholders. 

Continue reading “Is the grievance against the ECB overdone?”

The State of Greece

The FT Analysis page provides an overview of the Greek situation  – available here.

Government Revenues and Spending

One of the problems that plaugues discussion of the Irish public finances is there is a fairly widespread confusion over how much the government takes in as revenues and how much it spends.

Many people know that the figure for “tax revenues” has been about €30 billion in recent years, via press coverage of the monthly exchequer returns. (See here for the 2010 end of year exchequer returns showing €31.7 billion in tax revenue.) Many people also know that we have run deficits of close to €20 billion in recent years.

Together, these two facts have lead to the wide repetition of statements along the lines of “we are taking in €30 billion and spending €50 billion.” Often, a particular item of government expenditure, such as public sector pay or social welfare is then compared to the revenue take of €30 billion to illustrate the huge fraction of government revenues that it takes up.

It turns out however that a more accurate description of the Irish public finances has been the government has been taking in about €50 billion and spending about €70 billion. This pattern is hard to assess from looking at the Exchequer statements because, for example, they do not count the €11.4 billion in “social contributions” such as PRSI as taxes. Indeed, the whole definition of tax revenues is a bit arbitrary. I believe the USC is being counted as tax revenues, while various levies that it replaces were not.

The most useful description of the state of the Irish public finances is the materials provided to the European Commission, for example in Friday’s Stability Programme Update. Go to the second last page and you’ll see a useful breakdown of exactly how the General Government Deficit of €49.9 billon was determined. Take away the promissory note worth €30.8 billion and this deficit would have been €19.1 billion, determined by spending of €72.4 billion and revenues of €53.3 billion. (The last page contains a description of the relationship between the Exchequer Balance and the General Government Balance.)

Unfortunately, this simple and clear presentation of the public finances is not emphasised in the materials regularly released by the Department of Finance. Perhaps one of the reforms that the two new minsters in charge of spending and taxation could agree to would be to release regular clear presentations of the tax and spending figures underlying the general government deficit.

AIB Subordinated Liabilities Order

One item that hasn’t been discussed on this blog in recent weeks is the Subordinated Liabilities Order issued by Minister Noonan in relation to AIB’s debt instruments. I guess everyone knew this was coming so the order in itself was no big deal. However, the order is now getting some attention (here and here) due to the fact that it appears to mess with existing capital hierarchies. In particular, it appears to have left the preference shares owned by the Irish government untouched while adjusting the terms of subordinated debt.

This seems to me like a bad idea. I’m all in favour of seeing subordinated bondholders in AIB get wiped out given the enormous extent of state support that has been required to keep the bank going. But if you are going to do this, then you should respect the hierarchy of claims that exists.

Many of us have questioned the wisdom of the protection of senior bondholders in Irish banks at the expense of a potential sovereign default. However, those who have argued in favour of protection of senior bondholders have generally made points about the need to maintain the reputation of the domestic banking sector in light of its huge ongoing funding gap. If this is our approach, then is it wise to get a reputation as a country which randomly up-ends existing claims hierarchies at the whim of a Minister?