Economist John McHale tries to pour oil on waters troubled by Morgan Kelly’s warning of a looming sovereign default in today’s Irish Times. He doesn’t really offer much reassurance…
By focusing on his criticism of open-ended bank guarantees, most commentators have glossed over Morgan Kelly’s central policy suggestion. Critically, he does not advocate default on the guarantee. Rather, he calls for the Government to follow best international practice and put in place a special resolution regime (SRR) to deal with insolvent or seriously undercapitalised banks after the original guarantee expires.
As things stand, the only way the Government now has to impose losses on bank creditors is to liquidate the bank. (Creditors might “voluntarily” agree to a debt restructuring such as a debt-equity swap, but they would only do so given a credible threat of liquidation.)
But liquidating a bank could be incredibly disruptive and would make it hard to protect depositors and other short-maturity bank funders, increasing the risk of bank runs. This risk in turn takes away any leverage the Government might have, and allows creditors to dump their losses on the public.
An SRR would give the Government special authority beyond the existing bankruptcy code to differentiate between creditors and also keep systemically important banks as going concerns. The Government’s back is then less against the wall, allowing it more scope to put the losses where they belong.
While Morgan Kelly is right to push this policy, I think he overestimates what it can save. His target is the stock of bonds that will be outstanding when the guarantee expires – some €65 billion by his estimate. These bondholders would be subject to a debt-equity swap, forcing losses on creditors and recapitalising the banks in one swoop.
The limitation of this approach is that banks would have to fall below some critical capital adequacy threshold before triggering the resolution tools. The stress tests done by the Central Bank combined with capital-raising efforts suggest that both AIB and Bank of Ireland – where the bulk of the outstanding bonds lie – are likely to pass basic capital adequacy tests.
Not so for Anglo of course. But unfortunately, the over-broad guarantee will have allowed most of the bondholders to escape by September, leaving at most €7 billion of bonds at risk. Not the kind of money we might hope for, but still very much worth pursuing.
The coming months will test Ireland’s creditworthiness. International debt markets are in a capricious mood.
I believe Ireland is fundamentally solvent, but unfortunately this is not always enough to stop a run. While putting in place the special resolution regime machinery to impose legitimate losses, it is essential not to waiver on the commitment to meet the letter of all sovereign obligations. (link to full article)
Gurdgiev as usual does not pull any punches in relation to the news from the EBS…
Well, as of today we, the taxpayers, own another banking institution – the EBS – which, up until now was regarded as the least sickly of the Irish banks. Per Irish Times report today: “The Government’s move came after the society failed to attract private investors. The State now seems set to invest up to €875 million in total over the next 10 years.”
Pardon my French, but what the h***ll is going on in our circles of power? One would naturally expect the Government and the regulators responsible for the banking sector to be in a daily contact with the institution, like EBS, while it is engaged in a major talks with potential buyers. And one would expect the talks to progress over time, with some clear indications as to whether the deal was likely or not. A sudden release of this new information is, therefore,
* either a reflection of the fact that our banking sector authorities did not have a clue as to the progression of the talks – in which case they once again failed to ‘keep their hand’ on the patient’s pulse; or
* they have at the very least did not disclose pertinent information to the markets and the public as to the state of these talks.
Either way, the news that the taxpayers are once again stuck for ca €1 billion in bailout funds (more than the amount of €600mln the Spanish Government had to inject in one of its banks, triggering a massive run on Spanish markets) without any, and I repeat, any public official making the matter public until the deal was done!
Of course, another remarkable thing about the deal is that it comes on foot of Nama being deployed in the market. Last year, myself, Brian Lucey, Peter Mathews, Karl Whelan and others have warned that nationalization of the failing Irish banks was the least costly option for their recapitalization that should be pursued. Nationalization of EBS would have cost no more than €650-800 million and would have led to a 100% ownership of the bank by the State. In return, we could have imposed a speedy reform on the bank’s board and management, and actively repaired its balancesheet.
Instead, we have paid countless millions for it through Nama, shelled out almost €1 billion in direct capital commitments, supplied it with a state Guarantee worth well in excess of €200 million in risk-related implicit costs, and still control only 51% of the bank. We are now left with a quasi-state asset that cannot be reformed and is at a risk of being left to linger like a zombie stuck between private markets and the politicos.
One wonders, will anyone, responsible for Nama and the rest of our banks policy ever be held accountable for this waste? (link to full article)
Readers who are confused about exactly how much bank bond debt is due to mature by year end might like to check this piece of research by Karl Whelan of the Irish Economy.
There seems to be some confusion out there about the extent of Irish bank bond debt, about the various types and about how much is covered by the September 2008 guarantee. The document draws together the relevant information on maturity of bank debt from the annual reports of Anglo, AIB, BoI, INBS and Irish Life and Permanent.
This information isn’t completely timely or perfect: A full Bloomberg trawl is perhaps the best way to do this. Importantly, none of the banks list September 2010, the end of the guarantee, as a maturity date in their tables. Instead, they list debt maturing up to the end of this year. It is well known, though, that the vast majority of the debt of Irish banks matures prior to the fourth quarter. An advantage of these calculations is that they come from publicly available sources and we can be clear about what it is we’re discussing.
The bottom line. By my calculations based on the annual reports showing the state of play at the end of last year—and feel free to correct me if I’ve got this wrong—these five banks had €71.7 billion in bonds due by December of this year with only €0.7 billion of this being subordinated. They then had a further €51.8 billion due after 2010, €14.4 billion of which are subordinated. (go here to download report)
