Archive for June 12th, 2011

[This subject has been covered on the irisheconomy.ie website. This entry adds the transcript of the programme to highlight the precise words spoken by the governor. Also part 2 of “Burning the bondholders” will now be published tomorrow]

The under-rated Vincent Browne broadcast a special edition of his week-night programme on Friday night last as a memoriam to former Minister for Finance, Brian Lenihan who died earlier on Friday after a 2-year battle with cancer. In the “pole” seat, that is the one nearest Vincent was Patrick Honohan, the governor of the Central Bank ofIreland. Other guests included Minister Joan Burton and journalist Fionnan Sheahan. Vincent started off gently discussing Brian Lenihan with the guests in the stall seats. And then about 17 minutes in he got to Governor Honohan. And Vincent gently probed the governor for his memories of his dealings with then-Minister Lenihan. And for about four minutes, Vincent tenderised the governor. And having covered the tittle-tattle about how nice Governor Honohan’s office was, we had the following:

Patrick Honohan: It was the end of August last year and I had to tell him [Brian Lenihan, BL] that the budgetary situation wasn’t going well. And I showed him a number of numbers that we had calculated and said that it is not going to come right unless the budget is tougher. And he said “Your numbers are wrong!” and we talked about it, but afterwards he told me that he had made up his mind at that point that the situation was quite serious and it had changed all his political calculations at that stage. That was at the end of August of last year.

VB: Tell us about how the EU/IMF thing emerged. There are two- as I understand it, there are two stories about this. One is that yourself, Kevin Cardiff who is the Secretary General at the Department of Finance and John Corrigan, Head of the National Treasury Management Agency simultaneously came to a view that we’re in desperate trouble and we’d better go an approach the EU and IMF for a rescue package and you went to Brian Lenihan and he agreed with you. The other [story] is that actually the initiative came from the ECB and Ireland/he was bounced into this thing by the ECB and he tried to resist it and didn’t want it, that’s why there were denials about the negotiations.

PH: Well there’s some truth in both these things and of course at the very end – At the very early stages we all saw “maybe this will get so bad that it has to be the IMF” and November the 4th [2010] was the date that I decided that the market situation had got so bad that we’d have to do it. And I talked to these officials and other people and it was clear that this was the way we’d have to be thinking –

VB: Did you go to BL at that time?

PH: I had talked to him about the possibility beforehand –

VB: Did the three of you go [presumably PH, John Corrigan and Kevin Cardiff to see BL]?

PH: No, no there was no set piece meeting.

VB: Was it made clear to him as far as you are aware, you made clear to him himself that a deal was necessary or rescue package was necessary  – As far as you know did Kevin Cardiff or John Corrigan make  –

PH: I’m sure they did, I’m sure they did, yes. No I’m sure that Kevin – I talked to Kevin all the time. So the momentum was there long before the famous arrival in the particular Thursday morning. I mean there had been very detailed conversations, very, very extensive –

VB: Did you contact the ECB and EU and IMF. Was it you, did contact come from you or was it them ringing up and saying “lads we’re coming and you better get ready”

PH: No, no contact came from our side, yeah, but there had been, I mean these organisations talk to each other all of the time, contact came from our side

VB: Did BL know of these contacts, did BL know that

PH: Oh yes

VB: Was it the three of you contacted – yourself, Kevin Cardiff and John Corrigan would have contacted the people?

PH: It doesn’t exactly work like that. I mean I meet with the ECB every two weeks. And I’m on the phone to the IMF people. Whats-his-name Olli Rehn was inDublinat a certain point. I was talking to all these people. So all these communications were – There were very intensive discussions going on. The weekend before they arrived, there were very intensive discussions involving lots of people. There was no ambiguity about this. This was, you know, a pre-negotiation phase. What I don’t know was exactly what BL in terms of domestic political management. I’m sure he had to talk to people to convince ministers, backbenchers. I’m sure that that was a process that was going on in parallel that I wouldn’t have any knowledge of.

VB: Morgan Kelly, the UCD economist who wrote that spectacular article in the Irish Times, a few weeks ago, giving an inside account of how that happened. It seemed that he had been talking to Brian Lenihan and BL had briefed him on this. That’s speculation on my part; but BL’s line seems to have been that he was bounced into this thing by the EU/IMF and maybe by you because you were in the pay of the ECB rather than ..

PH: Well I’m not in the pay of the ECB. The timing may not have been right for his domestic political thing. I am sure he was slightly annoyed by that, but I had my job to do. In terms of the relations with the IMF, the negotiations with the IMF, that was all over, already in full swing so that wasn’t influenced by this. That’s just a nonsense. (It was) all happening but for whatever reason this didn’t suit (for) domestic political reasons for Brian to have announced it at that point but it certainly didn’t suit the stability of the financial markets, the outflow of capital, the interest rate spreads, there had to be a response to stabilise the markets and that’s why I did it

VB: You, off your own bat, you intervened, you rang Morning Ireland

PH: Of course that’s my job. But you mentioned that article which caused a certain amount of controversy. But I got a phone- last time I spoke to Brian. He called me that day or the following day. He called me to see “should I go on the radio to put the record straight here. To say some supportive words that you were always working forIreland” So there was no .. that’s a misreading of the situation

VB: After you’d let the cat out of the bag, or the tiger

PH: [gesturing, pushing the tiger out of the bag]

VB: Was he [BL] annoyed that you had really gazumped him. You had come out and said “Lookit the negotiations are going on and the people including BL saying nothing is happening are not telling the truth”

PH: Well I didn’t say that

VB: I know you didn’t say that but you gave that indication

PH: Well I mean I can’t be responsible for what he told other people to say but I had to represent the facts of the matter, that I was also in discussion and that these people were on the ground. I think he was slightly inconvenienced by the timing of it in terms of communication of it to the Dail and that. But other than that, but not in terms of managing the negotiations

VB: Coming back to the negotiations themselves, was he much involved in the negotiations, I know he wasn’t personally – didn’t take part in the negotiations; it was yourself and your two comrades that I have been mentioning. And others that were involved in it.

PH: There were many people involved in it. Dozens! At crucial points the three people from the troika went and had lengthy conversations [presumably with BL] which I didn’t participate in. Because eventually government decisions with Brian in the late part of the negotiations. Some crucial issues [he] talked for a couple of hours. Lengthy conversations.

VB: Who signed off on, for instance on the interest rate? Was it he or you that signed off on the interest rate?

PH:  There was no negotiation of interest rates. This was handed down from Brussels. All of these things- I’m not trying to dodge it. I signed the document as a counter signatory but all these things are decisions of government. I can’t take any decisions like that.

VB: But you could have said to him “No”

PH: I could have said “Don’t sign it” but I don’t think that would have been a good move and he didn’t think it was a good move. He didn’t understand interest rates same as anybody else. You can see how difficult-

VB: When you read the detail of this, did you have a sense that this is a really important and maybe shameful historic moment. That here we’re signing away a significant part of our sovereignty, giving these people the right-

PH: On the contrary, this was a step, a prompt step. Contrary to so many countries that wait until the last moment, they run out of every bit of cash. Brian was fond of saying “we’re fully funded for six months”. It was a matter of great strength, great political strength that he said “yes you are right, we must go and talk to these people, get a deal to ensure that we’re financed for much longer than six months” and not end up in the situation of most countries who are down to their last penny before they go to the IMF and have no negotiating position. Instead he got full sign-up by the IMF and the EU and the ECB to the entire budgetary programme for whatever it was, four years that he had laid out. Got that agreed and through government and published before, the IMF had any influence before this was- the deal, they said “this will work”. So that wasn’t something that was imposed. That was something- and I think it was to his credit, very much to his credit that as with very many other decisions, he did not shy away from the tough decisions even though he knew they would be politically difficult.

VB: You said this was done before, while we still had a negotiation position. But did you – Did we have a negotiation, what amelioration of the deal did we get in the negotiation, what were they proposing that we persuaded them not to impose on us?

PH: We gave them, or he produced the government’s proposal for spending and they said “okay, that will do” Now previously, of course there had been discussions at the European Union level because there’s a European Union obligation to [gestures karate chop] excessive deficit procedure, to get your deficit down. So the overall amount of the deficit reduction was already negotiated at European level before the IMF even arrived. So, in fact our sense at the negotiations was “they’ve come, they’ve said “yes you can have the money, you just carry on with what you’re doing, but only do it more intensively”” And then we discovered, and they said the interest rate will be the standard interest rate and since this is the first case, we have to do this technical work, we have to work how the spreads on the thing [gestures fluctuation] We didn’t like the interest rate, but you don’t discuss traditionally the interest rate in an IMF programme, you don’t discuss their interest rate, it’s written down on their website. And that was the interest rate.

VB: You said they said “carry on with what you are doing” but my understanding was that prior to then, there was some toing-and-froing over who’s going to decide what the budgetary strategy was going to be and the ECB, EU and IMF made it pretty clear what the budgetary strategy would have to be for them to agree. And whereas yes, the Department of Finance did the document, what was it

Joan Burton (waking up): The memorandum of understanding

VB: No, no the document they published before that, the budgetary document they published

Fionnan Sheahan: The four year plan

VB: The four year plan, yeah. Yes that was done by the Department of Finance, Brian Lenihan, and approved by the government I assume. But it was very much done- [smiling]

PH: Yeah, let me make that clear. It was, the magnitude of the cutbacks was negotiated inBrussels[beforehand], but not in the context of the programme. It was negotiated, I can’t remember precisely the date, it was sometime in September I would think, probably September. When they said “this will do it, this will allow you to be compliant with the excessive deficit procedure” It wasn’t in terms of the programme but that was negotiated. And by the time the EU/IMF discussions were held, there was a question “oh, well maybe it should be tougher” but the answer was “no, that’s what’s been agreed”. We just stay with that.

VB: He seemed to me that he was crestfallen after that thing had happened.

PH: Yes. I think he had expectations. I think we all had expectations that we would discuss this over a longer period of time, that we would come up with something more sophisticated in terms of a financing programme that would have more of a risk-sharing element. But instead it was a sort of plain vanilla, “yeah, continue what you’re doing, we’ll give you money for two years, and you’ll convince the market”

VB: And then of course that- On top of the EU/IMF deal they said to you that in addition to that you cannot default on even the unguaranteed debts of the banks. 

PH: I think that’s the main reason he was crestfallen.

[moment of silence]

VB: And why did that –

PH: It wasn’t part of the negotiations as such. There was no deal. There was no agreement on that. But there was talk around, about that [gestures circular movement with hands] And eventually the decision was [resolute tone] “No”. I think he was quite discouraged by that.

VB: Was there no room for us to say “Well sorry, we’re not going to finance the unguaranteed debts”

PH: It’s not in the agreement. It’s not in the agreement. I mean you know the way the world works. There’s political room. There’s no political room. No political room was offered to him by the people.

VB: What political room did he need? The deal was there. The EU/IMF deal was there. You were guaranteed the funds for three years and that was it. And you could have said “No, this isn’t part of the deal, there was no legal or moral or any other obligation, political obligation on us to do this. We won’t do it”

PH: I think, well, I mean as I say that’s not really part of the deal. That’s part of the discussion, that’s the reason he was crestfallen. I think this is a matter that remains part of current policy discussion.

VB: But why was it agreed though?

PH: This was not an agreement which I was party to. This was not an agreement. It was influence [nods head] and I think definitely

VB: Were you asked your own opinion on this?

PH: Aam, well I offered to [indistinct, put in?] a lot of opinion and my views here. I think we’ll- Let’s talk about the man.

VB: Did you advise?

PH:  We’re talking now about all sorts of current policy issues and what’s my view on this and what’s my view on that.

VB: You’re a very confident and crucial person.

PH: Yeah [signalling he has no more to say]

The obvious question that will presumably now be raised in the Dail is what was the quid pro quo (or consideration) offered in return for the agreement not to impose burden-sharing on senior unguaranteed bondholders. Or to ask the question in a more loaded manner “What “influence” was Governor Honohan referring to. Did the ECB threaten to withdraw liquidity to Irish banks unless the sovereign agreed to repay unguaranteed senior bondholders in insolvent banks in full?” If the ECB did adopt that stance, or that threat, then presumably there are now valid grounds forIrelandto adopt a hostile position towards the terms of the Maastricht Treaty which introduced the euro system. This may be an interesting week, as this stray thread gets pulled.


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It was the UK Liberal Democrat MP, John Hemming who finally revealed in the UK parliament three weeks ago that it was Ryan Giggs that was at the heart of the super-injunction/Imogen Thomas story. We might not have heard of this politician before but we are about to hear from him again. For he has now taken up the cause of some Bank of Ireland subordinated bondholders who our own Minister for Finance, Michael Noonan wants to burn. These subordinated bondholders are owners of bonds, denominated in sterling and paying 13.375% per annum. Bank of Ireland which is 36.5% state-owned but is likely to be majority owned in coming weeks, has offered these British bondholders 20p in the pound for their bonds. And they’re not happy. Some 2,000 of them have reportedly appointed a US law-firm to take Bank of Ireland to court in the UK, and they are also marshalling political support; enter the fearless Liberal Democrat, John. The UK’s Independent newspaper reports that John is to write to the Irish government complaining at the “lack of common decency and fair play”. By the way, the claim is that most of these subordinated bondholders are pensioners and orphans, though on closer reading of the Independent’s report they are in fact “pensioners and investors”.

On this side of the Irish sea, subordinated bondholders have already made it to court. Two companies holding subordinated bonds have cases before Dublin’s High Court concerning AIB’s bid to burn them. One of the companies, Abadi and Company Securities, withdrew its challenge in the past week though Minister Noonan has agreed to pay their legal costs which the Irish Times reported ran to six figures. It is not clear how much Abadi’s bondholding was worth and there may be lingering suspicions that the payment of legal costs may have contained some element of reward to offset the proposed haircut on the bonds. The other company, New York hedge fund, Aurelius Capital Management is continuing its case atDublin’s High Court. It too is an investor in AIB subordinated bonds and is apparently facing a 80-90% haircut on the nominal value of the bonds though it is not clear how much Aurelius paid for them. The company seemed to concede in court that it was a “fast money fund” as opposed to a “real money fund” with the implication that its investment expected high returns over short periods. The Irish Times reported the company saying “Attempts to demonise bondholders, irrespective of whether they were funds for “distressed gentlefolk”, orphans or hedge funds were inappropriate”. The case continues.

And in New York, the application by Fir Tree Capital against Anglo which was initiated in February 2011 seems to be held in abeyance. Yes, it seems that subordinated bondholders are not happy at being burned, despite the fact that they would lose 100% of their investment were it not for the people ofIreland providing up to €70bn of their own money to the banks. Personally I would pay good money for the opportunity to reply to MP John Hemming’s letter to Minister Noonan when he complains about a “lack of common decency and fair play”.

Despite the fact that senior bondholders in Irish state-guaranteed institutions continue to enjoy repayment of 100% of their outstanding bonds, moves are afoot to burn subordinated bondholders. This entry examines the present state of play of the various initiatives

First up, a little general background on bondholders generally.

What are bonds? They’re fancy IOUs issued by governments, banks, companies and in other countries by local authorities. The governments and other organisations which issue bonds are called “issuers”. They’re quite specific IOUs because they generally specify a date on which they’ll be repaid and also the interest rate that will apply –  the former is called the “maturity date” and the latter “the coupon”. And these IOUs are traded so the person who initially gives the bank €1,000 for one of these IOUs may sell the IOU to a third party. Bonds are fancy IOUs because they come with legal terms which set out how they will operate and how they will be repaid. You can also insure bonds so that if the bank doesn’t repay the IOU, your insurer will pick up the loss. Sometimes bonds are repaid (or “redeemed”) by the issuer not at the face value of the bond but at a discount. Why would you accept a discount? Normally because the issuer has gotten into financial difficulty and can’t repay you 100%. The discount is called a “haircut”.

What are the different types of bond? In terms of the ones we hear about in Irish financial institutions, they can be broadly classified as senior and junior. Senior means that if the bank gets into trouble, the senior bonds will have seniority or first dibs on money available to repay creditors. Junior (or subordinated) bondholders have to take their place in the queue if the bank gets into difficulty. So senior bonds carry less risk, but also a lower interest rate than junior (or subordinated) bonds. Senior bonds can be further classified as “guaranteed” and “unguaranteed” which in Ireland means are subject to the disastrous bank guarantee in September 2008 (and its subsequent extensions) or not. And these senior bonds can be further still classified as “secured” and “unsecured” with the former being secured against specific or general assets within the issuer.

How much do Irish state-guaranteed institutions owe to bondholders? According to the Central Bank of Ireland in March 2011, this was the bondholding position of the six state-guaranteed financial institutions.

Having poured some €46bn of public funds into the banks with another €24bn earmarked, have any bondholders taken a loss yet? Absolutely, ever since September 2008, the state-guaranteed banks have been buying back subordinated bonds at discounts to their face value. In 2009, for example Anglo bought back €2,571m of subordinated bonds at discounts that ranged from 45% to 73%. Since September 2008, we have paid back €7.3bn of senior unguaranteed bonds and at 30th May 2011, there were still €36bn of senior bonds in the six state-guaranteed banks. I am not aware of any haircut whatsoever being applied to any senior bondholder.

Part 2 should be published later today and will examine in detail the various subordinated bondholder initiatives presently in the public domain.

UPDATE: 15th July, 2011. It seems that MP John Hemming might have more than a simple political interest in the restructuring of the Irish banking system. It is revealed today in the Irish Times that John Hemming’s company, Scotchstone Capital is one of a number of shareholders in Irish Life and Permanent that is seeking a change to the government’s plans to recapitalise that bancassurer. John Hemming personally and Scotchstone along with, according to the Irish Times,  “Arc Asset Management, Horizon Asset Management and investors Waseem Shakoor, Paul Curtis, Nigel Bunting and another party who did not want to be named” are seeking compensation for their shares at 90c a share. The shares closed at 4c a share in Dublin yesterday. The rebel shareholders are represented by British law firm, Brown Rudnick. The government’s plan to recapitalise the bancassurer is reportedly described by John Hemming as “backdoor expropriation”. The eight have apparently made an offer to accept 90c for their shares, an offer which expires at 4.30pm today. At this stage it seems the next step by the group will be an attempt to get a new motion tabled at the extraordinary general meeting being held by the bancassurer next week on 20th July, 2011 where the government’s recapitalisation plans were set to be approved. There also exists a possibility of legal action.

UPDATE: 20th September, 2011. Just a fortnight before the start of the new legal term in Dublin, the Irish Life and Permanent shareholder case briefly came before the courts yesterday where Piotr Skoczylas, managing director of Scotchstone Capital is reported to have claimed that the case was as one of the most important cases in the history of the state as it would expose an “unprecedented abuse of power” by the Irish authorities. Not surprisingly the State is defending the action.

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