Archive for June 15th, 2011

There has been a major spike in activity on the Greek front today, meriting a special GreekWatch entry outside the now weekly roundup. Greek 10-year bond yields touched 18% this morning before finishing the day at a record closing of 17.75%

A relatively disappointing (by Greek standards) 20-50,000 protesters made a stand in the square in front of the Greek parliament building in Athens. It’s a disappointingly small protest given that there was a general strike today (one half of Greece’s 5m workforce is understood to be unionized) and detail of the new austerity measures have seeped out.  The square in front of the Greek parliament is called Syntagma (or “constitution” in English) Square and it has seen protests with over 50,000 participants during the past three weeks. Athensis two hours ahead of us, and the expectation is that the crowds will swell as people get off work, temperature is in the mid 20s and there is minor violence at present. For pictures of today’s protest see here.

But the major news today is on the domestic Greek political front. Their prime minister who leads the PASOK party which controls 160 of the 300 seats in the Greek parliament, has taken steps to improve the likelihood that an austerity and privatisation package will be adopted in parliament by the deadline of 29th June. Remember Greeceabsolutely needs the next €12bn tranche of IMF/EU bailout by 15th July 2011 to repay maturing debt, so no tranche draw-down will mean that Greece defaults, and worse, defaults in a very messy manner. The steps taken by the Greek PM today reportedly include an offer to his main Opposition party opponent to stand down in the interests of forming a national unity government – remember that concept in Ireland when we were in the unknown depths of the crisis, well that’s where Greeceis today, sadly. This evening, the Greek PM has made a televised address to the nation and announced a re-shuffle of his cabinet which will be detailed tomorrow (rumours that Greek finance minister, Giorgos Papaconstantinou is to be replaced), and he will seek a vote of confidence in his leadership (which he is likely to win). Meanwhile the main Greek opposition party continues to display belligerence towards both political co-operation and the plan. The betting on here still is thatGreece will approve an austerity and privatisation plan by the end of June 2011, though plainly there are major hurdles to overcome.

Outside of Greece the EU v ECB battle royal continues to rage, with the IMF on the sidelines scoffing popcorn just waiting to see whose opinion emerges on top. The EU (especiallyGermany) wants bondholders to extend the maturity of their bonds and want that to happen to reduce the second Greek bailout bill and possibly to establish a precedent forIrelandand other countries. The ECB doesn’t want bondholders to be forced into anything – “there shall be no element of compulsion whatsoever”, the ECB president Jean-Claude Trichet said last week. The reason for the ECB stance is that it wants to avoid credit rating agencies declaring a default event which would ripple out from Greece and potentially deplete the ECB’s capital base and generate damaging contagion across EuroZone banks.

Greece needs a second bailout and its estimated that it will need €120bn which from a German viewpoint would comprise €60bn of a contribution from the EU and potentially IMF, €30bn from additional privatisations in Greece and €30bn from bondholders who would agree to roll-over their maturing debt (eg a bondholder has a €100 bond paying 5% which matures in July 2011 would agree to be repaid in 2018 instead, though be compensated with a 7% interest rate).  The ECB hasn’t set out its position in detail, presumably it too would support a €120bn second bailout, but it would require a different composition which would exclude a contribution from bondholders who are unlikely to “purely voluntarily without any element of compulsion” agree to extending their debts.

CORRECTION: There is to be a EuroZone finance ministers meeting on Sunday next 19th June (brought forward from Monday) to discuss what now seems to be accepted as the EuroZone’s most serious crisis. That will be followed by an EU summit on 23-24th June where Enda Kenny will be batting for Ireland but I suppose we will be told again that – too bad, so sad – there is no time to discuss our pleadings. There will be the usual GreekWatch roundup at the weekend.


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For those who thought this day might never come, it might be an anti-climax but Minister for Finance, Michael Noonan is reported to have said on his trip to the US that steps will now be taken to impose haircuts on senior bondholders in Anglo Irish Bank (“Anglo”) and Irish Nationwide Building Society (INBS). Information from the Central Bank of Ireland in March 2011 suggested that Anglo had €3bn of senior guaranteed bondholders and also €3bn of senior unguaranteed unsecured bondholders, though some €200m of that was repaid in May 2011 without any haircut whatsoever. INBS has approximately €600m of senior unguaranteed unsecured bondholders remaining. Anglo has so far received €29.3bn of citizens’ funds whilst INBS has received €5.4bn. Billions of euros have already been repaid across both institutions.

Reporting from RTE suggests that at this stage Minister Noonan is targeting the €3.5bn of senior unsecured unguaranteed bonds in Anglo and INBS. RTE also say that “he would be going to Ireland’s European partners to propose significant cuts in the money to be paid to the bondholders”

It is not clear at this stage if the Minister is proposing a unilateral burning of senior bondholders or if any burning will be, as is the case now, contingent on permission from the ECB. It is also not clear why there has been a change of stance. Has the ECB moved? Will the ECB change the arrangements for its non-standard liquidity programme which presently sees some €80bn of funds costing just over 1% in Irish banks? Many questions remain unanswered. This post will be updated later when more details emerge.

Of course, as was reported here last week, it is likely that INBS will need additional capital on top of the €5.4bn already injected, and Anglo may be in a similar position – remember the Central Bank of Ireland (CBI) two weeks ago just confirmed that loans loss estimates remained in line with previous estimates; as the analysis of INBS’s year end accounts showed, there were additional losses to loan losses. Anglo may find itself in a similar position. The CBI is declining to respond to the question of whether new capital is needed for INBS.

The last question is whether moves are afoot to burn senior bondholders at Irish Life and Permanent, AIB and Bank of Ireland. CBI governor Patrick Honohan referred to “current policy discussions” in respect of protecting senior bondholders in his Vincent Browne interview last Friday. Are we about to stoke up the fires?

UPDATE: 15th June, 2011. It seems that the sole source for the above is an RTE one-on-one interview with Minister Noonan in Washington where he is presently visiting the IMF and US Treasury Secretary Timothy Geithner. The interview was played on RTE Six One News and will be available online for free play-on-demand here shortly. Having seen the interview, I don’t think it merits the headline billing being given it by RTE. Minister Noonan is to present the ECB and EU with a plan to allow a degree of haircut on Anglo and INBS senior unguaranteed bondholders. The Minister seemed to me to be pursuing an angle of Anglo and INBS no longer being banks and that consequently their debts to bondholders should be treated differently. From this perspective, it is difficult to see the ECB reacting positively to the plan but RTE certainly seems to think it has legs.

UPDATE (1): 16th June, 2011. It seems that Minister Noonan’s one-on-one interview with RTE was not a solo run, as  Tanaiste (deputy prime minister) Gilmore has provided more background to Ireland’s position, He is reported by RTE  to have said “The Irish economy is in an entirely different situation than the economies of some of the other countries whose budgets are in trouble. Therefore we are in a much stronger position today than we were at the beginning of this Government and certainly than we were in November to negotiate with the European Central Bank” It is hard to see how, taken in isolation, Ireland is in a better economic position now compared with last November, though the bank stress tests have overall been well-received which might give some confidence as to the funding required there. The Irish Times today reports what is likely to be the Irish line in any new request to the ECB “I put my cards face up on the table, saying: ‘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 […] we don’t think the Irish taxpayer should have to redeem what has become speculative investment” and “the officials “understood our position fully” and said “they would work with us to seek to resolve it […] our difficulty on this and on previous occasions was never with the IMF. The difficulty is what attitude the European Central Bank may take.”

UPDATE (2): 16th June, 2011. We are still in the dark as to whether the Noonan “plan” has any prospect of being approved by the ECB, but it is clear that there is a degree of co-ordination now in evidence in the grish Government side. In the Dail this morning, the Tanaiste said that the Government would consider new legislation to impose haircuts on senior bondholders and not just at Anglo/INBS, but that any such legislation would be subject to approval from the ECB. There has not been any reaction from the ECB yet, nor specifically from the EU though RTE quote a spokesperson for Olli Rehn as saying it was “always ready to consider any proposal in the context of completing the restructuring of the Irish banking system” It seems curious that almost 24 hours after the yesterday’s statements by Minister Noonan in Washington, that the ECB has not given a reaction, very curious as the 17 governor members and the six board members are usually happy to give their (unco-ordinated) opinion.

UPDATE (3): 16th June, 2011. The transcript of the one-on-one interview with Minister Noonan is now available from RTE.

UPDATE (4): 16th June, 2011. Ransquawk is reporting that Minister Noonan will not “touch” bondholders in AIB or Bank of Ireland, and that “every red cent” will be repaid to senior bondholders in those two banks.

UPDATE (5): 16th June, 2011. Minister Noonan’s interview on Bloomberg TV in the US today is now available here. During the interview he asserted in very strong terms (an “absolute commitment”)  that “every last red cent” will be repaid to senior bondholders in Allied Irish Banks (AIB) and Bank of Ireland – he didn’t specifically mention Irish Life and Permanent. Minister Noonan claimed that it was the plan all along to discuss senior bondholders at Anglo and INBS in the Autumn 2011 but that recent events had brought that forward. Apart from the banks, Minister Noonan spoke about Greece and said his primary concern for Greece was on the domestic political side but that he expected the next tranche would be paid in July 2011.  There was a bit of spin when Minister Noonan claimed we had the strongest government ever in Ireland – it’s a coalition today whereas we have had majority governments 30 years ago. He indicated a decision on Greece on 11th July which appears to be on the brink of Greece’s obligation to repay maturing debt on 15th July.

UPDATE: 17th June, 2011. The Irish Times seems to have secured the first (and possibly  the last) ECB reaction to Minister Noonan’s mooted “plan” for Anglo and INBS senior bondholders – “The general stance of the ECB is known and is very unlikely to change. This particular issue has to be looked at when the time comes” said an unidentified source, but it has the ring of solemn truth about it.Now that the smoke is clearing from the bombshell in the US, it seems that Minister Noonan will not be broaching the subject with the ECB until “the Autumn”. I don’t think there will be any more forthcoming from the ECB at this stage so to summaise and wrap up this episode: two days ago Ireland’s finance minister said he had plans to impose losses on senior bondholders at Anglo and INBS (he didn’t mention AIB or Bank of Ireland at the time), yesterday he made it absolutely clear that there would be no losses at AIB and Bank of Ireland and said this was a plan which he had intended broaching with the ECB in the Autumn anyway but that the circumstances in Greece had brought the timing forward and today we get what’s likely to be the most expansive ECB response to the “plan” which is “get lost”, and also Minister Noonan won’t now raise the “plan” until the Autumn. At home, Fianna Fail public expenditure spokesman Michael McGrath criticised the announcements by Minister Noonan claiming they were motivated more by political concerns surrounding the first 100 days in office of the new Government. It’s hard not to place some credence in what Deputy McGrath says.

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It says something for the lack of transparency in public life in Irelandthat we still feel we are largely in the dark about the bailout negotiations last November 2010. So much in the dark in fact that the memoriam to the late Brian Lenihan on TV3 last Friday night which was presented by veteran journalist and broadcaster Vincent Browne might be less remembered for anecdotes of the late former Minister for Finance displaying his talent for playing the piano and more for the fact that we appear to have had the most insightful description of the bailout negotiations so far, from the governor of the Central Bank of Ireland, Patrick Honohan.

And Vincent then followed up that special programme by devoting his regular week-night programme on Monday last to the contribution from Patrick Honohan. He started out the programme by playing some 10 minutes of the previous Friday’s programme recording and he then chaired a discussion by commentators about the bailout. But I couldn’t believe my eyes and ears when he cut short the recording of the previous Friday’s programme at the VERY point when Patrick Honohan revealed the most noteworthy aspect of the whole negotiation : that we accepted the burden of paying back senior unguaranteed bondholders because of “influence” from “the people”. To be specific, this is the transcript of the end part of the main contribution from Patrick Honohan on last Friday’s programme with a marker at where Vincent cut the recording on Monday night (the bold highlighting which follows is my own where it seems that particularly important information is being imparted).

Patrick Honohan: 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.

Vincent Browne: 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. [MONDAY NIGHT RECORDING ENDS]

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]

Surely what is needed is an understanding of the “influence” that “the people” brought to bear on the negotiations. It probably won’t be very surprising and the betting is that the ECB stressed that Irish banks had some €182bn of ECB funding (€138bn from the ECB, most of which was non-standard liquidity and €44bn from the CBI, which of course operates within the Eurosystem under the auspices of the ECB – the €138bn would have been provided at around 1% and the €44bn at 3%, both are rates that the banks couldn’t possibly access in the open market if indeed they could access any funds at all). And the ECB’s influence therefore would presumably have revolved around the fact that this €182bn of liquidity at low interest rates was keeping Irish banks open. But presumably the “influence” went further than stating the obvious. In order for the reality of the ECB provision of liquidity to transform into “influence”, there would presumably have been some threat to withdraw it. Now such a threat would certainly bestow “influence” upon the ECB, but in the diplomatic world of international relations and negotiations, such a threat would have been impolite – just like it would be impolite forIrelandto openly threaten to veto any second Greek bailout today. So despite a 30-minute programme on Monday last, we are still no wiser as to the “influence” of “the people”. Mind you, the commentators on Monday were unlikely to know much about the “influence” either but maybe Vincent can corner some guest in the near future and wheedle that information out of them.

In addition to “the influence” we are still apparently in the dark as to the content of the secret side letter that accompanied the Memorandum of Understanding signed with the IMF and EU. The existence of the side letter was revealed in the media at the time – the Irish Times reported “the Government has withheld from publication a side letter agreed with the EU and IMF outlining confidential measures for the banks” – and there was an intimation that the content was secret as it had the ability to change share prices. But surely now in June 2011, now that the stress tests have been published and the liability management exercises (buying back subordinated bonds with an enforced haircut) are in full swing and share prices of the three quoted banks are on the floor anyway, we can now know the content of this secret side letter. Did it give effect to the “influence” quoted above, for example did it commit the ECB to providing non-standard liquidity in return forIreland not seeking burden-sharing on senior bondholders?

It might be some time before Governor Honohan takes the “pole” seat on the Vincent Browne show again, but hopefully this most dexterous of journalists can apply his immense skill to getting others to provide transparency on the negotiations last November, 2010 which, to quote from last Monday’s programme were probably the most significant negotiations since the Treaty in 1921/2.

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