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.
NAMA Wine Lake 
[…] the latest update on the government’s position on Anglo debt, I recommend this post from NAMA Wine […]
Just think of the efficiencies in analysis that the internet and information technology are bringing to bear on economic and political governamce. Are cicil servants roles being enhanced to the point of near faultlesness or are lots of them in reality redundant?
Might as well repeat my thoughts from earlier in the most appropriate slot:
Noonan today confirmed Ireland’s decision to excuse senior unsecured unguaranteed bank bondholders from “participation” has been entirely voluntary – at least under the new government, making it clear that JCT throughout many conversations never said or threatened that such action might lead to the ECB withdrawing its liquidity provision to Irish banks. He directly contrasted this with the threat made in respect of the collateral eligibility for Greek paper recently. He then went on to say “but a nod is as good as a wink to a blind horse”.
So Irish negotiators have done the ECB a great favour of behaving as if they had been threatened – and granting the ECB the positive benefit to their negotiating position of the threat – but without making the ECB suffer the consequences in terms of reputation or responsibility for the ultimate course of action of having made the threat. What a gift.
Ireland’s negotiators should have extracted the threat in reality if they were going to proceed as if it had been made. Once made, the threat could have been used to batter the ECB at every opportunity, firmly dumping discontent among the public (not just in Ireland) on the institution. It is not hard to imagine a popular movement of discontent among the wider European population over this (now) clearly ECB instigated policy. Getting rid of that unpopularity would have now been part of an incentive for the ECB to back down on the question of senior bondholders. as it is Ireland’s government have shielded them from the flack.
Who is it that is coming up with Ireland’s strategic thinking?
Hi NWL,
Thanks for the transcript. It was a startling interview and to see the text of it just emphasises that. We can only hope that our country’s future is being determined by more than nods and winks.
You use the €20 billion figure extensively but is it not the case that the key remaining bonds are the €16.4 billion of unsecured unguaranteed bonds. The secured bonds are likely over-collateralised and are going to be repaid one way or another.
On those €16.4 billion it is likely we could impose a maximum haircut of maybe 50% (and even that might be difficult) so we are dealing with a repayment of €8 billion rather than €20 billion.
This is still a huge amount of money but it does change the arithmetic if the “nods and winks” or “influence” of the ECB mean they would pull, or even increase the cost of, the €130 billion of funding the banks are getting.
@Seamus, as always fair and sober points.Yes it is €16.4bn rather than €20bn, and I will amend that to avoid confusion. We are really getting into the most serious economic territory here. There is a legal argument, which would probably be strongly contested, that guaranteed bondholdings could be made unguaranteed by imposing laws on what is termed “odious debt” for example. Under the very draconian powers of the Credit Institutions (Stabilisation) Act, we have given ourselves such powers to arrange the affairs of banks that even the concept of “secured” might be challenged or undermined. I realise that such suggestions might be considered madness or at best a useless rant.
On the political front, we appear to have an ignorant approach (which is really no different to the previous administration) that refuses to acknowledge the massive cuts and taxes that lie ahead. In the next five years, we’ll have 15% compound GDP growth perhaps and we will have five years of emigration to take the strain from the dole queues and both will cushion the effects of austerity but we will still have huge cuts and taxes. €3.6bn, possibly more, will need be addressed in the budget in five months.
The point of this is we have serious economic considerations on the bonds but we also have serious considerations on what the cuts and austerity will do to our society. And it is logical, is it not, that there is some tipping point in the cost/benefit analysis of complying with the ECB’s wishes that we say “that’s not worth it”. If bondholders cost us €1tn then the decision might be black and white. If the cost was €1m, it would also be black-and-white at the other end. I tend to think that the costs are too much and when we consider the sort of society we’ll have with the cuts and taxes, the larger class sizes, the lower healthy life expectancy, the fear and fact of crime.
So let’s have the debate, acknowledge the ECB funding of our banks (which is not costing the ECB a penny though there is risk), consider the savings, consider Plan B and its costs and benefits, set out the likely cuts and taxes and then decide for better or worse to accept this or not, that is if further negotiation is not possible which seemed to be Minister Noonan’s suggestion yesterday at least with respect to AIB and Bank of Ireland.
NWL,
You are absolutely right. This debate should be out in the open. It is utterly wrong that one of the biggest decisions this country has ever faced is being undertaken in the shadows. All the details should be out in the open so that the process that leads to the outcome can be analysed.
Instead, everyone with an interest in this is chasing their tail try to justify one outcome or another, when in reality we are firing arrows in the dark and no one really knows where the target is.
On Vincent Browne’s show on the night of the stress tests, Patrick Honohan was questioned about repaying the unguaranteed bondholders. He used the words calculate or calculation about ten times when stating that he felt the net outcome for Ireland in paying off these bonds was positive. Unfortunately, he was not pressed on the elements he put into this calculation.
This decision is of huge importance but the inputs into it remain cloaked in mystery. When someone keeps something hidden it is difficult to avoid jumping to the conclusion that they have something to hide.
It is always refreshing to learn that more established scholars are in agreement with:
1. This discussion suffers from to many layers of secrecy.
I would go even further and take sides with Axel Weber on the issue of ECB sitting at the same table with Irish negotiators, EU-Commission and IMF, they do not belong there, plain and simple.
2. The public has a right to all relevant information and express their opinion, which in my view should be expressed in a referendum.
With the ECB taking both, the moral and political high ground, I would remark that the call for subtleness in the negotiations appears to be avoiding the issue.
@Seamus, I remember that VB very well, as I was more than astonished on VB not digging deeper. PH expressed that THEY calculated the outcome of burning the bondholders to be more costly scenario, and I sat there white knuckled awaiting Vincent to ask for the specifics, he did not, and I dismissed the interview as somewhat stage managed and questionable form a journalistic point of view.
@Georg
While I agree with point 2, one thing the public willnot be getting is the chance to express an opinionin a referendum. The only functionof the public is to pick up the tab.
Perhaps I am wrong in my line of thought here, but if I take Greece as an example, and I stand to be corrected, but it would appear to me that apart from this here:
Click to access r_qa1106.pdf
we do not know the true CDS exposure of Institutions such as Bank of America, Morgan Stanley, Goldman Sachs etc. as they ‘are allowed’ to treat their CDS position a secret in their reports.
Correct?
This is my point, I conclude this to be the true secrecy which enables a certain blackmail potential, as the Banks in question will always threaten systemic risk when faced with demands they dislike. I remember to well how all this started, the drip feeding of Information flow Banks -> Government, with always a few weeks later, ‘we need more’. to be the result.
Not?
As for BIS, while Greek liabilities for example are 93,5 % with european Banks and only 5% with US banks, 30% of the total has CDS contracts attached, in the total value of over 60 billion and here the relationship changes dramatically, as these both, direct and indirect derivatives are held to 56,3% by the US and 43,1% by European Banks.
So in essence, the power of Banks to threaten systemic risk in negotiation only exists because they are still allowed to treat this information as a business secret.
Well, a glance around the Irish media today suggests they have entirely ignored the ‘nod & a wink’ story. So if we did not have the fantastic & public spirited efforts of NWL here, there would be virtually nil transparency.
Combined with the comments of Patrick Honohan on VB, it must surely be now regarded as incontravertible fact that the financial burden of the still undefined ‘systemic’ risk to the EU/Eurozone is being dumped entirely on the ordinary citizens of the periphery states. And our own ‘authorities’ are colluding with this.
I can’t help being completely disgusted by behaviour of the well remunerated people in politics & media who pretend to support the wider majority public interest. They so clearly do not.
“the stress tests indicated that some €24bn of additional capital would be required from the pockets of Irish citizens to re-capitalise the banks”
Sorry for nitpicking NWL but that technically isn’t true either. €6-7 billion of the 24 billion will come from subordinated bondholders and selling off part of ILP, so around 17-18 billion comes from “taxpayers pockets”
@Patrick, nitpicking welcomed as it improves standards. Yes you are right to state that the stress tests did identify €24bn of additional capital requirements but that the Minister’s announcement afterwards was that a substantial contribution (I have €4-5bn at the back of mind) would be sought from subordinated bondholders. So in the end, AIB, Bank of Ireland and Irish Life and Permanent may require an additional sum that is less than €20bn.
On a related matter, we have yet to hear what the credit unions and Anglo/INBS might additionally cost us – the Central Bank is not responding to questions on INBS which was already insolvent on 31 December 2010, even after getting €5.4bn of public funds, and the latest stress tests indicated loss levels predicted last year were still valid but that would mean several hundred euro million was required by INBS, and Anglo’s needs might be more.
@Patrick
The 17-18 billion has to be borrowed therefore it will work out much higher. Even if some theoretically comes from the NPRF there is the lost interest that it would gained.
A good pickpocket tries to make sure that he come back later if needs must.
@JR
Very true, the NPRF earned interest on its non-discretionary fund (i.e. investments they were allowed to make themselves – NOT directed bank recapitalisations) was around 7% in 2010 if I remember correctly.
This lost revenue is rarely mentioned.
I always thought that the phrase “a nod is as good as a wink to a blind horse” meant that a message was ineffectual due to the inability of the recipient to receive the message. Mr Noonan seems to be saying that the message is being received. This is confusing. Who does he think the blind horse is? Him or JCT?
@John, I shared your confusion, and that’s why the piece was introduced with a film reference to a British band manager being confused by an American record executive using a new phrase. You are right that the phrase usually means the recipient (the horse) wouldn’t understand a wink, so why would the sender expend effort on a wink when a nod would do just as well (I think this is getting into the area of muscle usage akin to the smile and frown saying, and that a nod needs less effort than a wink).
However thinking about it I think it means that Ireland is the blind horse and the mere presence of the sender is enough to move us to action and that neither nod or wink is necessary. But yes, I was cross-eyed or eared when I heard him use the phrase.
[…] been a threat over repudiating unsecured and unguaranteed debt (as transcribed by Name Wine Lake here). In answer to the question: …is there a threat, Mr Noonan, from the ECB if you were to go […]
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