Tag: senior bank bonds

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.

Moody’s Downgrades Unguaranteed Irish Bank Debt

Another day, another downgrade. However, the language in this one is particularly interesting.

EU Commission Document on Bank Resolution Framework

The European Commission has released a “working document” that “seeks views on the technical details of a possible EU framework for the management of failing credit institutions and an appropriate class of investment firms.” There’s a press release here and an FAQ here.

The document contains a lot of sensible proposals that would lead to a common future European approach to dealing with failing banks, in contrast to the chaotic and disorganised approach that was seen during 2008-2009.

There’s plenty in the document worth discussing but, given the particular focus of this blog, it is clear that the most interesting aspect of the document is the annex starting on page 86 titled “Debt writedown as an additional resolution tool”.  It’s worth reading in whole but here’s the basic idea:

Thus, to provide additional flexibility and to ensure that any write down power is sufficient to deliver the policy objectives, this consultation outlines two possible models for additional write down powers. Building on the minimum powers above, the first ‘comprehensive’ approach aims to make a broad range of senior creditors face the real risk associated with bank failure. The second ‘targeted’ approach aims to create a more focused tool for resolving in particular, institutions which have been assessed as likely to prove difficult to resolve with traditional resolution tools at a time of fast moving idiosyncratic or systemic crisis.

Resolution authorities could be given a statutory power, exercisable when an institution meets the trigger conditions for entry into resolution, to write off all equity, and either write off subordinated debt or convert it into an equity claim. However, in some cases this will not be sufficient to ensure that an institution in difficulty returns to viability so as to maintain market and creditor confidence when the markets next open. (For example, RBS’ balance sheet at the end of 2007 contained £38bn in subordinated liabilities, while losses before tax in 2008 amd 2009 amounted to around £43bn.

As is de rigeur these days the Commission argues that “Such a power would only apply to new debt issued (or existing debt contracts renewed or rolled over) after entry into force of the power.”  In other words, existing European senior bank debt cannot take a haircut in this way.

However, the problem with this argument, as well its sovereign cousin (the idea that only post-2013 sovereign debt will be open to restructuring) is that it is subject to what economists call time inconsistency. As described by Wikipedia, “time inconsistency describes a situation where a decision-maker’s preferences change over time in such a way that what is preferred at one point in time is inconsistent with what is preferred at another point in time.”

Today, Europe has lots of troubled banks and some troubled sovereigns. Ideally, the powers that  be would like financial markets to not worry about being defaulted on and to keep lending to these banks and sovereigns. No agreed EU resolution regime for banks or sovereigns is in place, so the authorities would like to reassure current lenders that they will be safe when such a regime is put in place and that it is future lenders who will take the hit.

However, when the future arrives, it becomes the present and future senior bank bond investors will consider a regime in which only they are subject to a resolution regime involving selective haircuts as totally unacceptable.

The time-inconsistency of the current sovereign debt proposals are clearly recognised by sovereign bond markets, which are pricing current Irish and Greek government bonds at yields that clearly indicate the likelihood of default. For banks that are already in trouble, it seems unlikely that these proposals will really comfort bond investors that they are genuinely safe from getting haircut by a future resolution regime.