It has been difficult to know what to think about the AIB debt buy back story. Luckily, Karl Whelan @The Irish Economy has done the checking and thinking for us and the outcome does not look good for the taxpayer. The longer these banks are in private hands, the more it will cost us. Time to pull the plug – ye hear us, Greens!
“On the face of it, the announcement looks like good news. AIB get to replace €2.4 billion of one type of debt with €1.3 billion of a different kind of debt. (Full gory details here.) This reduces AIB’s liabilities by €1.1 billion and boosts the core (shareholder) equity capital of the banks. To the extent that this gives the shareholders a greater cushion it’s good news for them. From the point of view of radical nationalisation advocates like me and, um, the IMF, it also means more equity capital can be used to absorb losses before the call on making up the rest of the capital shortfall moves onto the State.
However, when you dig a bit deeper, there is less to be enthusiastic about:
1.
The new bonds are “10 year bullet dated subordinated Lower Tier 2” – the key is that they are dated, so now they count under the guarantee (See page 5). So while technically, the loss-sharing burden on the state is reduced by the €1.1 billion profit that AIB booked, the contingent liability for the state is increased by the €1.3 billion that gets added to the list of guaranteed debt. And if you believe that the losses are such that they should wipe out the equity of the banks, then the extra €1.1 billion will still get wiped out and the state will have lost any opportunity to clean out non-guaranteed subdebt holders. So this could cost the state more in the long run, provided we extend the guarantee in its present form, as it appears the government wants to do. Link to full article
