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Archive for October 22nd, 2011

This is the second part of a blogpost focussing on the repayment of a senior unguaranteed, unsecured bond at Anglo; part one was posted yesterday here. This entry examines in some detail what would happen if Anglo didn’t repay the bond.

The blogpost yesterday covered the position of the main stakeholders in the making of the decision to repay the bond. And this blogpost will start by concluding on that theme.

Is Minister for Finance, Michael Noonan a villain?
Not at all; there is clear evidence of the man going to great lengths to communicate a message to our partners in Europewho ultimately control the ECB despite all the talk of independence. He displayed bravado in the USin June this year when he met with the IMF and US Treasury Secretary Tim Geithner and announced on worldwide television that he would seek to share the burden of repaying bonds at Anglo and INBS. He raised the matter as a discussion topic with the Troika during their review mission in Dublin in July. He held meetings with ECB president Jean Claude Trichet, most recently face-to-face in Poznan. In the context of talks, he ran the marathon and then ran the extra mile. And he has failed to convince the ECB in the first instance of the merits of his position.

So why doesn’t he act unilaterally?

Because “heavy lies the crown” and Minister Noonan is facing the moment of truth with the actual burden of responsibility for the nation’s finances on his shoulders, and he presumably weighs up the €150bn of cheap funding provided to Irish banks through the ECB and the co-operative relationship between Ireland and the bailout Troika which sees our ongoing deficit being funded and concludes the risk to either, consequent to a unilateral default, outweighs the benefit.

What has happened when other EuroZone (EZ) banks defaulted on bondholder debt?
I stand to be corrected on this but I do not believe any EZ bank has in fact defaulted on bondholder debt since the introduction of the euro and the establishment of the ECB as a supra-national central bank. Outside the EZ there have been plenty of financial institution failures; in Northern Ireland, the Presbyterian Mutual Society went into administration and savers eventually received 100% compensation totalling GBP 232m from the London government. In the UK, Barings collapsed after our local, Nick Leeson (last seen on RTE Prime Time’s NAMA special) racked up dealing losses but Barings was bought for a nominal GBP 1 by Dutch bank, ING which also assumed all its liabilities. Icelandic deposit bank Icesave, part of Landsbanki, which operated in the UK and Holland collapsed and the UK government bailed out its depositors but only up to certain limits. The UK continues to seek compensation from Iceland, but to date the Icelanders have told it to get lost. And in non-EZ Denmark this year, at least three banks have failed and at least two, Amagerbanken and Fjordbank Mors have imposed losses on senior bondholders. But within the EZ itself, no bank has apparently collapsed; or rather no bank has been allowed to collapse with the usual consequence of business failure : unpaid creditors which in the context of a bank will include both depositors and bondholders.

In the US, 100 banks had collapsed in the first six months of 2010.

Irelandhas not signed up to any agreement to preserve its banks within the EZ, at all costs. Cast your mind back to 2007 when it was explicitly decided by EU finance ministers that creditors (including bondholders) and unsecured depositors “should expect to face losses” if a bank in the EZ failed. Cast your mind back to September 2008 when the deposit guarantee for ordinary depositors was only €20,000, and raised to €100,000 and subsequently made limitless. It was only three years ago when the system allowed for an EZ bank to go bust and creditors (depositors and bondholders) to face losses if that happened. Ireland has not signed up to a system whereby 20% of GDP (€29.3bn) must be paid by the nation to enable unsecured, unguaranteed creditors in failed banks to be repaid and we have also not signed up to a system whereby a bank must be financially supported at all costs.

What will happen on 2nd November 2011 if Anglo does not pay the USD 1bn bond?
One of three things (1) the bondholders have contracts with Anglo and would claim a default. They would presumably sue Anglo for their money. (2) Anglo would decide it was unable to meet the financial commitment of repaying the bondholders and would seek examinership or (3) the Government would intervene, presumably using its powers under the Credit Institutions (Stabilisation) Act , to stop the payment.

This is what the Anglo balance sheet looked like in the last accounts published for the six months ending 30th June, 2011 (page 26 is the balance sheet) There is some simplification and aggregation but simplistically the bank had €30bn of loans, €6bn owing to bondholders, €40bn owing to the ECB and Central Bank of Ireland and €27bn of accumulated losses and €29bn of state funding.

Of course there would be ructions with the ECB who might well decide to withdraw its extraordinary funding to Anglo. The Central Bank ofIreland, as part of the euro system, might decide, or be forced, to do the same. Anglo would collapse and there would be some form of examinership or receivership. If Anglo’s problems were ring-fenced, then I don’t think we would be unduly worried.

The fear would be that the ECB might alter the terms upon which it provides extraordinary funding to other banks, in particular AIB and Bank of Ireland. But to be clear, there is nothing in the bailout Memorandum of Understanding or anything that I am aware of in the agreements governingIreland’s relationship with the ECB which would allow the ECB to unilaterally act in such a manner.

And in respect of the ongoing funding of Ireland’s deficit to the end of 2013, again there is nothing in the Memorandum of Understanding which would allow our benefactors to withhold funds, as long as Ireland continued to meet the terms set out in the Memorandum and reduced/eliminated its deficit as agreed.

There has been a recent (almost suspiciously recent) suggestion that Ireland might be able to build on its good form in complying with the Memorandum of Understanding, and access additional cheap funding from the EU to pay off the Anglo promissory notes; and Ireland reneging on Anglo’s bondholders now might deter any agreement in this area, which might mean that next year we need borrow funds at 8%+ to pay off the promissory notes. That is an issue, but if Anglo was to be placed in receivership or examinership, the validity of all of the promissory notes might be tested, and some suggest that these represent what is called “odious debt” in international law and would not need be honoured by the State at all.

Society’s view
Yesterday the aim of part one was to provide a balance of the views of the stakeholders involved in making the decision to repay the Anglo bond. Whilst Society at large has no direct input, it is worth pointing out the cost being borne by Society, in part in order to repay bondholders. Since March 2011, we have had notice of three additional taxes – the pension levy, the €100 annual property charge which will start in January 2012, and the proposal for a €50 septic tank inspection charge. As unpopular as these have been, they are as nothing compared to what is coming in the next week. The Comprehensive Spending Review which was supposed to have been completed in September but which Fianna Fail leader, Micheal Martin was told in the Dail two weeks ago was still not complete, will set out savings and cuts to be imposed on state spending; it will not be popular in Society. Minister Noonan has committed to publishing a separate document “by the end of October” which will set out in “as much detail as possible” the new taxes and cuts to be introduced in the next four years; the aim of this document is to give some certainty to the economy but it will not be popular. And on 6th December, 2011 we will have a Budget which will cut at least €3.6bn out of the economy, and it will be in granular detail. Society isn’t exactly ecstatic at the moment, but in the next seven weeks it is likely to be deeply unhappy. Having said that, we know we need adjust our costs and taxes so as to balance what we earn with what we spend.

But when Society has the detail that will be contained in the three documents, the Comprehensive Spending Review, the Four-Year Plan and Budget 2012, and understands that part of the austerity is being used to repay colossal sums to unsecured, unguaranteed bondholders, it won’t just be deeply unhappy, it is likely to be incandescent.

Presently there are a number of ongoing, sporadic protests throughout the country, at a hospital closure here, a bondholder protest there, the Occupy Dame Streetprotest, and small-scale marches. To be honest it probably hardly registers with the Government. But having said that, I can’t help but notice the increased incidence of the words “protest”, “march” and “strike” in our media, and I would say that an amber light, perhaps just a soft-focus amber light at the moment, is already flashing. Taoiseach Kenny may enjoy a comfortable majority and an extended political honeymoon and it may be over four years to the next general election, but schisms happen and the Terminator-like red-eyed glint in last year’s leadership challenger, Richard Bruton has still not been extinguished; Taoiseach Kenny cannot afford to dismiss protests with the claptrap he mouthed in the Dail at the end of September, claiming that these payments to bondholders were not coming from taxpayers. Nor can Minister Noonan dismiss the question of these bondholder payments, claiming the maximum saving might be only €100m; we remember clearly enough Minister Noonan suggesting in June 2011 that an interest rate reduction on the bailout might be worth a only €148m per annum rather than the €1bn+ now achieved on the coat-tails of Greece’s woes.

What can you do?
I hope that you have a sense from the above that the payment of bondholders is not a black-and-white matter and different stakeholders take different views. If you conclude that these bonds should not be repaid, you can contact your local TD, a complete list of email addresses is here. If you are interested in a protest, you will find information here on the mechanics of the protest started by the Ballyhea villagers. The enormous sum being paid to unsecured, unguaranteed senior bondholders by Anglo on 2nd November, 2011 might not resonate with you, but when you soon see what lies ahead with austerity, part of which is needed to pay those bondholders, you may well be moved to act. The 34th weekly Ballyhea/Charleville protest march takes place tomorrow in Ballyhea and this evening at 8pm there will be a gathering in Charleville where Declan Ganley will give a talk on the subject at the Schoolyard Theatre (details of both and photos of the Ballyhea/Charleville protest are available here)

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