The cynics and conspiracy-theorists might be looking out for another arrest as happened to coincide with the St Patrick’s Day visit to Washington by then taoiseach Brian Cowen in 2010, or re-arrest as happened last November 2011 to coincide with the payment of a USD 1bn (€730m) bond at Anglo – both arrests associated with the Anglo investigation by the Gardai which is now in its fourth year. Economists might be looking out for a “we’re really, no seriously, REALLY, trying to renegotiate Anglo’s promissory notes” Others might be looking out for bread and circuses or “panem et circenses” as the Romans used say, referring to officially organised distractions from the real problems facing that Republic. But how many of you would have expected the imminent payment of the €1,250m to Anglo bondholders on Wednesday to have inspired the Minister for Transport and Tourism, Leo Varadkar to defend the payment in the way that he has, and to have criticised those opposed to the bond payment as “misinformed and mischievous”.
Speaking to RTE television’s “The Week in Politics” yesterday, the sometimes plain-speaking, occasionally outspoken minister introduced some novel new arguments in favour of the payment:
(1) It will raise electricity and gas prices! This is certainly novel, and you’re unlikely to have heard this argument before, despite over €1bn of bonds being repaid last year under protest at Anglo and Irish Nationwide Building Society. Even though our gas and electricity prices remain higher than the EU average and amongst the highest in Europe, according to Minister Varadkar, they may even increase more! What the minister means is that Irish semi-state companies like the ESB and Bord Gais borrow from corporate bond markets and if Ireland doesn’t pay the €1,250m owed by Anglo on Wednesday, then the corporate bond market might charge higher interest rates on new lending because of the perception that the State might not back the ESB or Bord Gais if they got into trouble. The ESB for example – latest annual report for 2010 here - had €4.1bn of borrowing at the end of 2010, of which €1.6bn is repayable in the next two years and the fear implied by the minister’s claim was that the ESB would find it more expensive to refinance that debt that was maturing. The minister ignored the fact that Anglo is a defunct institution that doesn’t take deposits or engage in new lending, it is one of the biggest corporate failures in the world. Might corporate bond investors not be able to distinguish between the non-payment of bonds in Anglo and the ESB? S&P rates the ESB broadly in line with its rating for Irish sovereign debt; the ESB corporate bond rating is presently BBB+ which is one grade above junk and the outlook is negative; the Irish sovereign rating from S&P is Ba1 which is junk. Is Minister Varadkar seriously suggesting the ESB’s near junk rating with negative outlook will deteriorate to the extent that it needs raise electricity prices, if the Anglo bond isn’t paid? Apparently so. And in any event, the ESB is firmly in the Government’s cross-hairs for privatisation in the next year or so, so the link between State and company is likely to be severed in any event. But Minister Varadkar didn’t make any mention of this.
(2) The saving isn’t real money, it would be like deciding “not to pay off your credit card” argued the Minister who went on to say that the €1,250m that might theoretically be saved in not paying the Anglo bondholders, would only become available once Anglo was wound up which might be 10 years. Now like Anglo’s loan loss estimates and capital requirements, the Anglo wind-down period seems to yo-yo around the place, seemingly depending on what side of the bed, its chairman Alan Dukes arose from that morning. Last September 2011, Alan told an Oireachtas committee that he thought the merged bank would wind down in less than the 10-year time frame agreed with the EU/IMF in November 2010, or less than 9 years from today. More recently he seems to be using 10 years from today. Regardless of the wind-down period, if the €1,250m weren’t paid to bondholders on Wednesday, it would theoretically be available to invest in Irish 9-year bonds on Thursday that presently yield 7.5% per annum, thereby netting the State €2.3bn in 2020.
(3) It will raise the cost of mortgages. This is an interesting claim because Ireland’s banks hugely rely on ECB funding to the tune of about €150bn at present, and the traditional bank bond market for banks right across Europe is moribund with little new issue. So the only way the cost of mortgages would go up, would be if the ECB increased interest rates. But such an increase couldn’t be selective – or could it, Minister? is this what you meant by a “bomb going off in Dublin” – it would affect all banks acrossEurope who have €1tn of lending from the ECB.
(4) Those suggesting that the €1,250m payment equalled the sum total of revenue expected from new taxes in 2012 (of the €3.8bn Budget 2012 adjustment, €1.3bn is from new taxes and €2.5bn is from cuts to welfare and the public sector) or suggesting that avoiding the payment would not diminish the need for austerity were dismissed as “misinformed or mischievous” by the Minister, I don’t think there is any serious commentator that denies that the country must close the gap, or deficit, between our national income and expenditure. Comparisons with current austerity measures seek to illustrate the enormous scale of the payment on Wednesday.
If the above is representative of the extent to which this current Government plans to go to desperately defend the payment on Wednesday of €1,250m to unsecured, unguaranteed bondholders at a defunct bank, then perhaps the Gardai should, instead, ready themselves for another high profile arrest in the Anglo probe.
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