Archive for June 26th, 2011

There’s a scene (here on youtube if you’re interested) from that great 1980s movie “(This is) Spinal Tap” where the British manager of the hapless eponymous rock group,  tries to understand why the record company won’t approve the new album record sleeve just because it’s sexist (“what’s wrong with sexy” says one of the dopey band members) and the American record company executive says “money talks, bullshit walks” and the manager, who’s the smartest of the bunch, looks at her cross-eyed not knowing what the hell she means. I suppose the expression wasn’t too well known in the early 1980s. Well that’s how I felt listening to Minister for Finance, Michael Noonan’s interview on RTE Radio 1’s “This Week” programme today (available here, the interview is at the start and lasts just over 20 minutes). The reason that Ireland must repay €16.4bn of unguaranteed senior bondholder debt is because “a nod is as good as a wink to a blind horse”, meaning that the ECB didn’t need to threatenIreland with a withdrawal of funding, it was understood. Why was it understood if it wasn’t explicitly stated? Maybe we got the wrong end of the stick? This entry reproduces the relevant part of the transcript from the interview and examines what the Minister said; the RTE presenter was Dr Gavin Jennings and the bold highlighting below is mine to indicate what are probably the most important bits.

Gavin Jennings: Before you came into government, you described the bailout deal as a bad deal forIreland. And when you came into government you wanted a cut in the interest rate, a firmer and longer-term promise of cash for our banks from the ECB and to burn some bondholders. Now in Washington recently you talked about doing just that to some bondholders, some senior bondholders at Anglo Irish Bank and Irish Nationwide banks. Will you do it?

Michael Noonan: Well you made three points there. I said that it was a bad deal as Fine Gael did in opposition and it was a bad deal; principally it’s been priced too high. The money that we are getting is being borrowed at 2.8-2.9% and we’re paying almost 6%. You know 3% of an add-on handling charge is extravagant and the previous government should not have agreed to that pricing on the bailout. And we’ve had difficulty in re-negotiating the interest rate down but that agreement should never have been made in the first instance. On the bondholders when the debate started there was no way whatsoever when Richard Bruton was arguing the case as FG finance spokesman, that bondholders should share the burden. No-one in Europe would agree that even the junior bondholders, the subordinated bondholders would share the burden. And yet, that has been allowed now and as I say in the last three weeks alone, that has been worth almost €4bn to the Irish taxpayer in the negotiations we are doing with AIB and Bank of Ireland. On future bondholders, when we reorganised and restructured the banks last April, I had talks every 10 minutes at the end of that negotiation with Mr Trichet and he would not agree that there would be burden sharing with the unguaranteed senior bondholders and because we were recapitalising the two pillar banks, AIB and Bank of Ireland we made a commitment that once they were re-capitalised, there would be no future talk of burden-sharing there because the whole arithmetic would have been changed and we had to give a solid base to the banks but we parked the issue of Anglo Irish Bank and we said we would see how it was going and what capital would be required. And I said in Washington that I would re-open that conversation, particularly with the ECB, in the Autumn. The reason I’m picking the Autumn is that there’s a fairly large payment of an unguaranteed senior bond in Anglo Irish Bank just before Christmas, at the end of November.

GJ: But you say the Autumn, the IMF, the EU, the ECB are going to be here looking at our books as part of a further review in two weeks time. Will you bring it up with them then?

MN: I will bring it up but I won’t bring it up not on the basis of starting a negotiation. I will be bringing it up on the basis that this is an issue that has not been resolved; it’s an issue that we will have to come back to.

GJ: Can you just remind us what’s to stop us going ahead on your own. It’s not in the Memorandum [of Understanding]. It’s not in the bailout deal, there’s nothing there to say that you can’t do this.

MN: What’s stopping it is that we are dependent on the ECB for the ongoing funding, day-to-day funding of the banking system inIreland-

GJ: But is there a threat, Mr Noonan, from the ECB if you were to go ahead and burn these bondholders that they [the ECB] would remove that money?

MN: No, no there’s no threat and they never threaten –

GJ: So why not go ahead with it?

MN: You’ll notice that just about ten days ago when there was talk of burden- sharing on the sovereign side in Greece, they, Mr Trichet said that the bank, the central bank in Frankfurt would not be able to honour Greek paper and use it as collateral for liquidity in their [Greek] banking system but no such threat was put to Ireland; but you know a nod is as good as a wink to a blind horse so we know what their negotiation position is.

GJ:  I mean Patrick Honohan recently spoke of other people to use his expression exerting influence, again to use his expression on us to commit to repaying the senior bondholders including those at Anglo Irish and Nationwide who you’ve referred to. I mean again that’s not in the deal. Who exactly was he referring to and what influence was he referring to?

MN: I don’t know what he was referring to but I mean at a level of general principle, the ECB take up the position they take up because they’re afraid on the first instance of other banks in Europe being affected by a decision that we would make here, and secondly they’re afraid that some banks in Europe are funded by unguaranteed senior bondholders and that funding would be cut off from certain European banks if we acted unilaterally in Ireland. So it’s a very delicate kind of situation and we are conscious of that, and you know while we would like to do it, we are not in a position to do it unilaterally but I would hope because Anglo Irish and Irish Nationwide are no longer giving out loans, they’re no longer talking in deposits, they’re not really banks anymore, I will be making the case that they are in a different category to trading banks.

To put the above in context, when Minister Noonan assumed office in March, one of the first tasks was to review the results of the stress tests and restructuring plans put in train by the previous government at the behest of the IMF/EU. On 31st March, the stress tests indicated that some €24bn of additional capital would be required from the pockets of Irish citizens to re-capitalise the banks. Minister Noonan had talks with the ECB and stated that he did not want to repay unguaranteed bondholders. What happened next? Mr Trichet said he didn’t like that idea because it would cause problems elsewhere inEurope. So presumably Min Noonan said he was very sorry about that, but Irish citizens should not be held liable for private investment debts owing to other European banks. What happened next? Remember there was no threat and “the ECB doesn’t threaten” (a patent load of rubbish evidenced by the fact that Min Noonan, a moment later, illustrated perfectly the ECB issuing a threat to Greece). The expression “a nod is as good as a wink to a blind horse” in this context presumably meant that we, the Irish, knew that the ECB would withdraw funding if we didn’t co-operate and agree to repay senior unguaranteed bondholders. How did we know that? They threatenedGreece, did they threaten us?

To quote Taoiseach Enda Kenny upon assuming office in March : Paddy likes to know what the story is. And we would all like to know why we are repaying €16.4bn of unguaranteed bondholders in Irish banks. Also what authority had Minister Noonan to give “a commitment” to the ECB to spend €16.4bn on behalf ofIreland. Isn’t that the sort of spending decision that in a democracy should come before parliament and be debated, along with options and alternatives? It makes a mockery of our society that a €500m annual jobs initiative might absorb days of parliamentary debate, yet €20bn has gone based on a series of presumably rushed one-to-one telephone conversations in March.

As for Minister Noonan, I wonder how many times in his life has he walked down a street and met someone coming in the other direction, and taken out his wallet and handed over all his cash; not because he was threatened, but because “a nod is as good as a wink to a blind horse”. Minister Noonan is taking €4,000 out of every man, woman and child’s wallet to repay €20bn of senior unguaranteed bondholder debt without any threat. Minister Noonan grandly gave a “commitment” to Jean-Claude Trichet that there would be no future talk about burning unguaranteed senior bondholders. Should he be allowed keep that commitment?

This was the bondholder position in Irish state-guaranteed banks (covered institutions) in April 2011.


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This is the third in the weekly GreekWatch series (Week 1 is here, a mid-week special is here and Week 2 is here), it follows on from a daily GreekWatch feature at the end of May which chronicled the days leading up to the Greek/IMF/EU staff-level agreement at the start of June.

First up, the timeline

28th/29th June (Tuesday/Wednesday) – Greek parliament debates and votes on austerity and privatisation agreement, that has been agreed with the IMF and EU. Loads of media catastrophising, watch out for otherwise calm journalists dial up the panic, it stokes up the value of the media after all.

3rd July (Monday) – Meeting of the Eurogroup (17 EuroZone finance ministers chaired by Luxembourg’s prime minister, Jean-Claude Juncker and including our own Minister for Finance, Michael Noonan), agreement of second bailout structure

8th July – IMF board due to meet to agree release of the next tranche of bailout number one  (a total of €12bn which will bring the Greek draw-downs to €65bn from a total bailout of €110bn)

11th July – final agreement by troika of EU, ECB and IMF to the Greek draw-down of the next tranche of bailout number one, and potentially agreement of second bailout

15th July –Greece is due to start repaying maturing debt for which it presently doesn’t have funding. This is the backstop deadline for sorting out Greece’s immediate issues; otherwise there will be a default. And a messy one at that, if not planned.

Secondly, what’s happening to the second Greek bailout?

Well this is indeed a little puzzling as it seems agreed that Greece does in fact need a second bailout of about €120bn (that’s on top of the €110bn first bailout agreed to last May 2010) yet there seems to be little progress with agreeing the terms. The main reason Greece needs the second bailout is that the country has existing bond debt that is maturing in the next three years and with Greek bond yields still in the stratosphere, Greece will be unable to borrow fresh funds to repay existing debt. Here’s what Greece has to repay:

So in 2011, 2012, 2013, 2014 Greecehas close to €150bn of maturing debt, which if you deduct that already repaid in 2011 gives you about €120bn. These are rough numbers.

The IMF’s own operating rules forbid it from lending to debtor countries unless those countries have the prospects to repay/roll-over maturing debt in the next 12 months. And Greece doesn’t, which is why a second bailout has to be agreed by 8th July when the IMF board meets to decide whether or not to release the €12bn tranche of bailout number one.

As regards the second bailout, the plan hasn’t changed. Greece is to meet some of the requirements itself with additional privatisations (€30bn was mooted). Then there is to be a purely voluntary agreement by about €30bn worth of existing private bondholders, banks and pension companies for example, to extend their loans to Greece by a number of years (seven is mooted) in return for sweeteners (increased interest rate, preferential creditor status might be on offer). And this is where we’re firmly re-located to Alice in Wonderland; French president, Nicolas Sarkozy says discussions with French banks and pension companies have been positive and the French are hopeful that their banks will agree to an extension of credit. Germany likewise seems upbeat. But why on earth would an existing bondholder accept an extension of maturing Greek debt when instead, he could insist on getting repaid now and then he could immediately go out and buy Greek 3-year bonds that pay 30%? The answer of course is that he won’t unless there is an element of threat or arm-twisting. But if there is, the ECB won’t agree to the arrangement and furthermore the independent (that is, non-European) ratings agencies who referee these matters will blow the whistle and declare a default. Complete Alice in Wonderland and the betting on here is that the EU or EU/IMF will stump up the entire second bailout (less the additional Greek privatisation proceeds) – and when we say EU, it looks like we won’t mean non-EuroZone countries like the UK. And further the betting is the IMF will not agree to the second bailout, or will not agree to its contribution being as high as one third, which has been the IMF proportion in Greece’s first bailout as well as Ireland’s and Portugal’s.

What’s likely to happen?

The betting here is that the austerity and privatisation plan will pass in the Greek parliament on Tuesday. The prime minister nominally controls 155 of the 300 seats though there appear to be two flagged dissenters, let’s call them Jackie Healy-Raeandrou and Michael Lowryious. If there is a serious prospect of the Greek parliament voting against the plan, then expect to see pork-barrelling on a whole new scale. If the worst happens on Tuesday this week, I would expect an immediate intervention by the EU and an alteration/softening of the plan and its immediate re-submission to the Greek parliament where it will be passed. Nothing is certain but I think there are good odds of this happening.

As for the media predicting Armageddon, well it is a little amusing to see reporting which implies Athens is ablaze with riots and protests. It is a city of 4m (four times bigger than greaterDublin) and unless there are 250,000+ protesters then I don’t think the Greek government will be too concerned. There is a permanent non-political, non-union protest in front of the Greek parliament buildings in Athens which grows to perhaps 10-20,000 protesters each evening as people get off work. It’s noisy and they appear to be dab hands with green laser pens but it’s peaceful and frankly unlikely to change much. There is a two-day general strike planned for this coming Tuesday and Wednesday, there is likely to be violence but the betting is that demonstrations will be too small and ineffective to change anything happening in parliament.

So by the 15th of July, the expectation is that the IMF/EU will release the fifth tranche of bailout number one1 and will have in place an agreement, in principle if not indeed in fact, for the second bailout. I have seen some suggestions that the second bailout will increase Greece’s debt:GDP of 160% but that isn’t necessarily true as the bailout is presently intended to repay existing debt that is maturing.

So this crisis may well pass. Greece will have its austerity plan which it probably won’t implement so we might be back here in September/October 2011. However it looks as if Spain is reaching a funding tipping point and that €660bn of debt that Spain has to repay/roll-over in the next 24 months might be the final denouement in this crisis because at that point, we might have reached the limits of EU bailout funding, unless the EU wants to start printing more euros..

Are there opportunities here for Ireland?

Well it’s at least good that we are considering the possibility of opportunities because up to now, we appear to have been so brow-beaten that we have just rolled with events. Sadly however, unless Ireland wants to contemplate vetoing a second Greek bailout then no, it looks like the €24bn (less some discounts on subordinated bondholders) will be shovelled by the government into the banks in late July. It doesn’t look as if France is amenable to the collegiate, solidarity type of approach which will be exemplified in the second Greek bailout, or at least she is isn’t from Taoiseach Enda Kenny. As for opportunities to burn senior bondholders, Minister Noonan’s interview on RTE radio today was just depressing and will be covered in a post later today.

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