Anglo Stops Payments on Bonds, CDS Implications?

Thanks to Karl D. for the tip-off on this story.  Anglo Irish has announced that it will not be paying coupons on its Tier 1 subordinated bonds and that this decision was required by “The European Commission, as a condition of its approval of the Government’s capitalisation of the Bank of up to €4bn.”  In a related story, the International Swaps and Derivatives Association has decided that a similar non-payment by Bradford and Bingley represents a “credit event” which will trigger CDS insurance.  (Bloomberg story here, official announcement here.)

Presumably, Anglo’s actions will at some point trigger the same decision from the ISDA.  This will mean that those Anglo bondholders holding CDS insurance will receive full payment.  Anglo’s announcement also discusses its “liability management” exercise, in which it is planning to buy back outstanding debt at below par.  Presumably, however, those insured by CDS will no longer be interested in a deal of this sort.  It also makes it likely that much of the debt that Anglo is planning to buy back at a discount will be owned by CDS issuers.

Update: My presumablys were perhaps a bit presumptious.  Commenter Eoin notes below that this is not (yet) a credit event.  I have checked this elsewhere and am informed that the “reference” obligation that defines a credit event for Anglo is indeed a failure to meet Tier 2 obligations.

ECB on banks and public finances

The latest ECB Monthly Bulletin carries an interesting special article on the impact of banking-sector rescue policies on public finances across the euro area: you can read it here.

Public Finances and the Recapitalisation of the Banking Sector

Scott Rankin and Rossa White at Davy Research have a new quantitative analysis on what the banking crisis may cost in terms of (i) total system losses and (ii) re-cap costs (taking into account operating profits, capital ratios desired by govt etc.) and (iii) the % of that re-cap cost that may come from the government. They also look at how much of our long-term funding has been successfully done ytd and estimate the trajectory for government debt.

The paper is available here.

1929 and 2009

Kevin O’Rourke has written a wide-ranging opinion piece in today’s Irish Times: you can read it here.

Lundgren in Dublin and A Proposal Relating to NAMA

I have written before about the incisive and articulate contributions of Bo Lundgren, the Swedish Finance Minister in charge during their banking crisis of the early 1990s.  Lundgren was in Dublin on Tuesday, giving a talk at the Institute of International and European Affairs and testifying before the Oireachtas Committee on Finance and the Public Service.  A productive guy, he also appeared on Morning Ireland.  Here’s a link to his interview on that show (scroll down to find it) which has lots of interesting material. I will post a link to the transcript of his Oireachtas appearance when it is put up.

I think there are statements in Lundgren’s Morning Ireland interview which could be probably be latched on to by all sides of the debate on banking being played out on this blog.  Rather than attempt to score points on this, I will only note that Lungren argues that a political consensus greatly helps when dealing with a banking crisis (about 7 minutes in).

In the Irish context, perhaps the key issue causing political controversy is the price that NAMA will pay for the assets.  In Sweden this was set by an independent Valuation Committee overseen by a cross-party board. The emerging details suggest that the price that NAMA pays will come from a complex valuation process recommended to the NAMA officials by HSBC (the IT today reported that 370 categories of information must be provided by banks on each developer on the loan books so that HSBC can use this information to develop a valuation mechanism.)

In relation to this, let me put forward a suggestion that could potentially lead to all-party support for the government’s approach, which Lundgren viewed as crucial: Appoint a cross-party board to approve NAMA’s pricing of assets being transferred. I think it might be hard for opposition politicians to turn down an offer like this and it could be a way to address well-founded opposition concerns about potential losses to the taxpayer as well as less well-founded concerns such as the idea that NAMA is a bailout for developers.

If the only solid support for NAMA’s pricing mechanism comes from representatives of an unpopular government, then it’s hard to see how this process will be successfully sold to a public that is already highly concerned (not to mention angry) about the potential costs to the taxpayer of solving the banking crisis.