The ECB have issued a legal opinion on Credit Institutions (Stabilisation) Bill 2010 (documents here). One highlight: “these emergency powers interfere significantly with the property rights of institutions’ shareholders and creditors. Thus it is important for any regime to properly balance these fundamental rights with the general interest in the financial system’s stability.”
The government have published the Credit Institutions (Stabilisation) Bill which is scheduled to be debated on Wednesday and enacted by the end of the week. It appears to be a sort of mini-special resolution regime bill. The Minister for Finance’s statement on the bill notes that “it is the first important step in putting in place an extensive Special Resolution Regime (SRR) that will provide for a comprehensive framework to facilitate the orderly management and resolution of distressed credit institutions.”
For our legion of subbie-watchers, the relevant sections are sections 28 to 32. They appear to empower the Minister for Finance to make debt-for-equity swaps to subdebt holders and to have various rights of these debtholders to be set aside if the state has provided financial support required to allow continued viability of a bank. As speculated here recently, the bill appears to allow the Minister for factor in past equity investments when considering whether to introduce a “proposed subordinated liabilities order” which would allow such powers to be introduced.
For me, this raises two questions: First, what is there in this bill that couldn’t have been introduced two years ago? Second, if the bill gives the Minister the powers to make certain rights of subdebt holders cease to be exercisable, then is there a legal impediment to the Minister having the power to deal with other creditors of a bank.
The Irish Times has an article today by Rory Gillen of Merrion Capital. Gillen takes issue with arguments raised in a recent Irish Times article by Fintan O’Toole and also, to a lesser extent, with arguments in the 46 economist piece.
There is one argument in piece that I think is worth highlighting. It relates to subordinated bond holders. The 46 guys piece makes it clear that “certain classes of bondholders” should take a hit. Gillen presents this proposal as disastrous. He says that the
argument that bond holders should also be scalped is, in my view, a very short-sighted one. The cost of Ireland’s debt would most certainly increase, further hitting the majority of mortgage holders and businesses.
In the eyes of the international community, it would also link us to such bedfellows as Argentina, Russia and Iceland. I, and surely our descendents, would rather not be stuck with that particular stigma.
Raising the spectre of Argentina, Russia and Iceland here is unfair and, funnily enough given the title of Gillen’s article, alarmist. An Irish bank defaulting on its subordinated debt is not the same as our government defaulting on its debt (Argentina, Russia) or our banking system refusing to pay up on huge amounts of foreign liabilities (Iceland). And as for the cost of “Ireland’s debt”, some highly respected sovereign bond analysts have repeatedly pointed out that a resolution of the banking crisis in a manner that eases the burden on the taxpayer will have a positive effect on market’s assessment of Irish sovereign debt.
There is the question of the guarantee. However, some of the subordinated debt is not guaranteed while the rest is only guaranteed up until September 2010. A signal that the guarantee will not be extended for this class of assets would in no way be similar to a sovereign default.
More generally, subordinated debt is, by definition, at the back of the debt queue in terms of being paid back when a business gets into trouble. Sometimes businesses default on their subordinated debt—that’s sort of the point—and this happens not just in the countries mentioned by Mr. Gillen but also in the US, the UK and every other capitalist country in the world. We will not automatically turn into Iceland if a few subordinated bond holders don’t get their money back.
I’ve been looking into the AIB debt buyback program, details of which were announced on Monday (Irish Times story here.) Why in God’s name would I be doing that during a rare sunny week in this country? Well, between the state guarantee and NAMA, pretty much everything the banks do these days has implications for the taxpayer, so it’s worth taking a look at. That and the fact that I’m a nerd. Wonky corporate financey post below the fold.