“There will be a debate in the House next week and I expect the Deputy, as the leader of his party, to spell out credible alternatives and an economic policy that is not based on fantasy but on reality. If the Anglo bondholders are paid, they will be paid from their own resources. This will not come from the taxpayer.” Taoiseach Enda Kenny replying to a question in the Dail from Sinn Fein leader Gerry Adams, on 28th September, 2011.
“It’s Frankfurt’s way or Labour’s way” Tanaiste Eamon Gilmore on 3rd February 2011 with the launch of Labour’s economic plan in the 2011 General Election, which he later dismissed as chapel-gate rhetoric
“The Government accepts that enabling provisions in legislation may be necessary to extend the scope of bank liability restructuring to include unsecured, unguaranteed senior bonds” – Programme for Government, March 2011
“Agreed Procedures for Restructuring the Debts of Troubled Banks: Fine Gael in Government will force certain classes of bond-holders to share in the cost of recapitalising troubled financial institutions. This will be done unilaterally for the most junior bondholders (owners of preference shares, sub-ordinated debt and similar instruments), but could be extended – as part of a European-wide framework – for senior debt, focusing on insolvent institutions like Anglo Irish and Irish Nationwide that have no systemic importance.” Fine Gael manifesto in February, 2011.
“Look, it’s no longer a bank. Anglo is now merged with Irish Nationwide. It’s a warehouse for impaired assets. Its deposit base has been moved out into the pillar banks. And it doesn’t work as a bank anymore. You can’t put your money on deposit in Anglo Irish. You can’t get a loan from Anglo Irish. So the only thing that gives it the name of a bank is because it has a banking license. It needs the banking license to access the monies from the Central Bank. So I said that as far as I am concerned, this is not a real bank. This is a warehouse, and we need your assistance in dealing with the senior bond holders because we don’t think the Irish taxpayer should have to redeem what has become speculative investment.” Minister for Finance, Michael Noonan in an interview with RTE in the United States in June 2011
For the past couple of months on Twitter, there has been a daily countdown to the repayment of a USD 1bn (€730m) bond by Anglo Irish Bank on 2nd November, 2011. Anglo of course is no longer legally in existence since it was officially re-named the Irish Bank Resolution Corporation Limited last Friday 14th October 2011. The imminently-maturing bond, ISIN ref: XS0273602622, was issued on 2nd November, 2006 and matures on 2nd November, 2011. It is denominated in US dollars and based on current exchange rates will cost Anglo €730m. The market assumes that it will be repaid in full and you can track its price and examine its price history here. Anglo has so far received €29.3bn of funding from the Irish state, some in cash but most with IOUs called promissory notes that the Irish state will need repay in cash over the next 10 years.
In the small CountyCorkvillageof Ballyhea(so small it’s not on many maps) they have been holding protest marches every single week since 6th March 2011, protesting at the repayment of bonds in our banks. They brought their march to Thurles in May 2011, and then they ran, cycled, crawled from Ballyhea to Leinster House in June, to hand in a petition. There was a bread and water fast in August. For the past couple of months, they have joined up with protestors from the nearby town of Charleville and they alternate the marching venue between Ballyhea and Charleville. They will be holding the 34th weekly protest march this coming Sunday in Ballyhea, and will be joined by Declan Ganley who will also be giving a talk in Charleville on Saturday evening.
Although last night on RTE Prime Time, Europe minister Lucinda Creighton refused to confirm that the bond will be paid in full and she said that Minister Noonan continues to seek to negotiate aspects of our predicament, it seems all but certain that the bond will in fact be repaid in full on 2nd November. On that day it is generally expected that USD 1bn will be transferred from Anglo to the bondholders, who Minister Noonan describes as being mostly speculative investors at this stage.
But what would happen if Anglo didn’t make the payment? This entry is in two parts with part 1 examining the position adopted by the stakeholders in the decision to repay the bondholders, and part 2 which will be posted tomorrow will tease out the consequences of not repaying the bond in full on 2nd November, 2011.
The ECB’s view
The ECB wants Ireland to meet the repayment of senior bondholders in full and it objects most strongly to a loss – any loss – being imposed on senior bondholders. It has re-stated its position on many occasions and in recent times, the outgoing ECB president Jean Claude Trichet has reacted with impatience and irritation when the subject has arisen, for example at news conferences when Irish journalists have posed questions on the subject. The ECB’s position is that if Ireland imposes losses on senior bondholders and is allowed do so by the ECB, then senior bondholders buying bonds in any of the 17 EuroZone countries will demand higher interest rates to compensate for the increased risk of non-repayment. That would push up the cost of funding all banks in the EuroZone. Secondly there is a fear that if an Irish bank were to impose losses on bondholders then those bondholders, who might be banks in other EuroZone countries, might get into difficulty themselves and seek to impose losses on their own bondholders, and thus an Irish problem might become a French problem which might become a Spanish problem and so on. This seems to be what the ECB means by “contagion”. And what is the ECB’s locus standi in Ireland’s decision making? It seems to be two-fold (1) the provision of €150bn of extraordinary funding to our banks at low rates and (2) it is one of the three partners which comprise our bailout Troika. It should be stressed that there is no commitment given in the agreement with the Troika that Irelandwill meet 100% the cost of repaying bondholders in our banks, but according to Minister Noonan, “a nod is as good as a wink to a blind horse”
The economists’ views
There seems to be precious few economists willing to express a view in support of the 100% repayment of senior unsecured unguaranteed bondholders. But one – and an important one at that, since he is the chairman of our newly formed Fiscal Advisory Council – is John McHale, professor of economics at the National University of Ireland in Galway. In February, 2011 he set out his views on the irisheconomy.ie website; essentially he views the extraordinary funding provided to Irish banks by the ECB as giving rise to a quid-pro-quo obligation onIreland to repay senior unguaranteed unsecured bondholders in full. In the comments that follow his blogpost in February, economist Brian Lucey says that the ECB’s provision of funding will be repaid in full with interest and is not costing the ECB anything, and the implication from this is that there shouldn’t be an obligation onIreland to meet 100% of the cost of repaying bondholders. Economist Colm McCarthy said “bluntly, the risk of sovereign default is increased every time a bondholder gets paid. Market prices are shouting that the risk is already seen as large.”
The lawyers’ views
It is indeed a disappointment that during this financial crisis which began here in earnest in 2008, the legal profession has on the whole been remarkably quiet. Whilst there is an irisheconomy.ie website to discuss economic aspects of the crisis, there was never an irishlaw.ie website to perform the same functions from a legal viewpoint; which is a pity, because navigating a course out of the crisis seems to require legal expertise as much as economic expertise, particularly in the context of laws affecting our relationship with the ECB. Governor of the Central Bank ofIreland, Patrick Honohan said that he did examine the legalities of imposing losses on bondholders and concluded it was not legally possible though he has not made the advices publicly available. Whatever about the influence the ECB can bring to bear, it should be noted that there is no obligation set out in the bailout Memorandum of Understanding which compelsIrelandto repay bondholders. The legal obstacles to imposing losses on bondholders seem to focus on three headings (1) bondholders ranking equally with depositors so if we want to imposes losses on bondholders then we need do the same with depositors and (2) since Anglo has minimal deposits remaining and presumably these are associated with lending accounts, following the sale of Anglo’s deposits and accompanying assets to AIB in February 2011, that Anglo has deliberately disposed of assets which might have been used to repay bondholders which might expose the bank to actions under a fraudulent conveyancing heading and (3) since Anglo has received €29.3bn of state funding, it is a solvent bank and normally it would be the shareholder (that is the government on our behalf as citizens) that absorbs the first loss.
The politicians’ views
It’s worth saying that if this bond is to be repaid, you can expect the Government to downplay the benefits, and highlight the risks, of imposing losses on bondholders. The only political view that will really matter in terms of the bond repayable on 2nd November, 2011 is the Government’s, and remember that it has a complement of 112 seats in a 166-seat Dail and practically no dissent so far (save for Denis Naughten who lost the FG whip over his stance on Roscommon hospital thereby reducing the complement from 113 to 112). And within the 17-member cabinet, it is really Enda Kenny, Eamon Gilmore, Brendan Howlin and Michael Noonan’s opinions that matter. And the view seems to be that (1) Ireland is putting clear blue water between itself and other PIIGS, is generating positive albeit modest growth, is rebuilding a tarnished reputation and has seen its 9-year bond rate fall from a high of 15.5% on 18th July to 8.3% today and does not want to jeopardise any of this by adopting a position that is contrary to our partners in Europe and (2) whilst the country is still running an annual deficit and is dependent on a bailout to pay day-to-day costs – “salaries of nurses, teachers and gardai” – it does not want to jeopardise the continuing funding from the Troika by adopting a contrary position and (3) whilst Irish banks are dependent on the ECB for €150bn of cheap funding, it does not want to jeopardise the continuing provision of this funding by setting its face against the ECB and lastly (4) a suspiciously recent topic to emerge has been the funding of the Anglo promissory notes which are set to cost us €30bn plus interest in the next 10 years and the suggestion is that we might get a deal from our bailout Troika on the cheap-funding of these promissory notes if we would only let this issue pass.
Part 2 of this blogpost will be posted tomorrow and it will tease out the detail of the consequences of non-payment of the bond on 2nd November.