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)
NAMA Wine Lake 
@ Namawinelake,
Irish protests are not going to work on their own. A coordinated mass protest (peaceful of course) which is organized across the entire European continent at the same time on the same day would be more effective at getting the message across to our political class. It might make it easier for Irish politicians to present our case to Europe etc.
If world Earth Hour can be organized (all the cities switching off their lights etc) then surely a pan European protest day can be arranged.
By the way I am advocating Peaceful Protest, hot heads and anacharists not invited.
@NWL
Powerful stuff. Unfortunately, you are right about what coming down the tracks over the next 7 weeks – it an oncoming express laden with taxes and cuts and with the capacity to further derail the economy.
As regards your comments about the MOU etc. containing no clauses prohibiting any defaulting on bondholders, there was talk of a secret sideletter agreed with the trioka when the MOU was being debated. Maybe that contained a prohibition.
Following up on Sporthog’s comment about protesting, why not designate a time and date when all drivers will turn on their headlights for an hour or so to signify opposition to the payment of the $1billion bond, the general terms of the bailout and austerity measures coming down the track.
Just to get something off my chest, I am sick, tired and annoyed about:
– Getting patronising pats on the back from international spokesmen while they stick their hands in my pockets to help international banks.
– Seeing the State give a bailout worth €50 billion to developers while completely rejecting modest bailouts for deeply-troubled mortgage holders.
– Watching the EU move towards massive write downs on Greek sovereign debt while preventing Ireland from defaulting on private debt owing by a non-bank, namely, Anglo.
– Being lectured at by grossly over-paid politicians, experts and administrators on austerity while their retiring colleagues get huge pensions and pay offs.
I am not sure that bulk emailing of TDs/Senators is very effective any more. I did this last December and called on all TDs and Senators to oppose the IMF/EU/ECB bailout during the Dail debate. I got about 20 individual replies – see http://www.planware.org/briansblog/2010/12/vote-against-imfeuecb-bailout.html#more
I subsequently sent at least two further emails to all TDs and Senators on related topics and was very surprised to get no replies at all other than canned acknowledgements from the Taoiseach’s office. This got me thinking that some type of block on bulk messaging had been introduced – I could be COMPLETELY wrong on this and maybe other readers of NWL could relay their recent experiences.
NWL
Thanks for that comprehensive exposition. You refer to society’s view. The view of the public is expressed periodically through the ballot box, and FF has been duly booted out. Backbench coalition TDs are golng to take a merciless pasting in coming years. One of the reasons the Mitchell presidential campaign has bombed, is that the public can see that FG pols lack the wit to do anything other than following the Troika by thye nose. Labour will go along, regretfully, while protecting their PSTU bailiwick and trying to ease the worst of the ‘adjustment’.
It won’t work.
The other way society exrpesses its views is through civil institutions, such as religious, sporitng or professional associations. Trouble is, the leadershi[p of our civil institurions has been thoroughly compromised in the bubble, while the child abuse scandals have fatally damaged the Church. Big cash windfalls from land deals, glamour sponsorship from businesses, and cozy cherry picking networks, all have an inevitably corrupting effect. End result, more alienation and cynicism among ordinary members.
Because the upper echelons in our society disgaced themselves so thoroughly in the bubble, their instinct has been to put the head down, concentrate on repairing balance sheets of self and family, keep mum about the austerity stuff, and hope the stink blows over. That will work for as as long as it works, and there is going to be lot of antique furniture going out on the boats before we are done.
Good luck to the protesters, but Ballyhea is a long way from Dublin. As our financial sector is streadily being broken up for export, Occupy Dame St may be tilting at windmills. Unemployed professionals will probably give up on Ireland, rather than challenge the leaderships of their own professions, let alone the learership of the country. Very sad. JJ Lee foresaw a lot in his book ‘Ireland 1912-85’.
We gave up in the 80’s and emigrated in no small part due to personalities like this .. It’s a 70 BIlLION RE company do you read about senior people at GE Capital,Blackrock or Fairfax with their trousers down like this … can you guys step your game up a little !!
Let’s leave it to the jocular john mulcahy….
In a discussion on the causes and effects of recent rioting in London, Mulcahy jocosely suggested that one of the contributory factors was flat-screen TVs – because they are so portable. As he pointed out, there was no way looters would have been able to lug so many of the much heavier older TV sets out of the shops. Food for thought indeed.
http://www.irishtimes.com/newspaper/property/2011/1020/1224306120179.html
Congratulations to you once again NWL. This is exactly the type of topic that Irisheconomy.ie or the national newspapers should be covering in detail but, once again, it is left to you to succinctly summarise (forgive the alliteration) the issues of the day.
I checked on Irisheconomy.ie just now to verify its continued irrelevance (‘Electric Vehicles’ anyone?). I click on this blog almost every day as any discussion of NAMA involves every single issue of importance to Ireland viz. property prices, mortgages, demographics, emigration, disposable income, taxation, exports/imports, balance of payments, legal issues, the banking crisis, lending, etc., etc.
Pity you aren’t on the ballot paper next week!
The fighting Irish? Unfortunately not. We have become a supine, submissive race – weak and docile. We need a few good Protestants, and in the full sense of the term, in order to rekindle our fighting spirit..
Bunbury
Agree about NML, but no need to knock irisheconomy.ie, which is well respected and popular.
No point in comparing Ireland to the US or Denmark, you do not have a FDIC in Ireland, you do not have a resolution system as in Denmark.
There is no basis for Ireland not to pay these bonds if you follow YOUR laws.
@Alea, I would beg to differ. Remember three years ago bondholders and depositors alike were exposed to risk in Irish banks. The state deposit guarantee was raised from €20,000 to €100,000 in September 2008 and was then made limitless. Some bonds were also guaranteed. These bonds which fall due on 2nd Nov were not guaranteed.
On what planet does a bank which has needs 20% of a nation’s GDP, use those funds to repay bondholders?
Leo varadkar has reiterated this claptrap on the Sunday news, unchallenged
@Brian, indeed he did say just that. Here’s the partial transcript
http://www.rte.ie/news/thisweek/
http://www.rte.ie/news/thisweek/-3089002-flash-257
From 4:00
Gavin Jennings: In fairness, at this stage Fianna Fail aren’t the only people who have given money to the bondholders of Anglo Irish. We’re on the verge of paying out some €700m more on that front under the lifetime of this Government.
Leo Varadkar: Well that’s not quite the case. What’s happening in relation to the Anglo bondholders is they’ll be paid from its own resources, from the sale of its own property assets for example. The only money being put into Anglo Irish by this Government is the promissory notes, the €3bn a year that we are required to give to Anglo or what is now the IBRC as a result of the deal made, made by Fianna Fail, and by Brian Lenihan [and] the Greens. And we are trying to have that changed, that is our major objective at the moment, and certainly coming out of this Summit, or if we can use the Summit in any way to advance that agenda.
My point is: Ireland has NO business picking and choosing who takes losses outside of bankruptcy court, the US has a FDIC, you don’t and Denmark has a transparent resolution scheme and you don’t.
What you have is a government and a central bank and regulators all of them have represented (and still represent) that Anglo was (is) solvent to get loans from the ECB.
Anglo is still getting funding from the ECB/CBI which implies that it is “solvent” and therefore it should pay its bonds whether guaranteed or not. Nobody can stop Ireland from starting insolvency proceedings vs Anglo, but guess what, it’s not done because you can’t afford it.
@Alea, again I would disagree with you. We have an unusual examinership process which allows a company (even a bank!) to apply to the courts to seek protection from its creditors for a short period as it restructures its business, and along with Ireland’s quite draconian Credit Institutions (Stabilisation) Act, it is not beyond the wit of the country to impose a reality on bondholders which reflects the massively insolvent nature of Anglo.
Fine, go ahead then, but do you know that means wrt ECB/CBI funding (including ELA) ?
@Alea, in respect of Anglo I expect it means that funding is at an end and Anglo will be a car-wreck. And I expect a debate over the legality of promissory notes issued to Anglo.
The ECB has no right to unilaterally withdraw ELA or other extraordinary funding to the Irish pillar banks.
Alea knows well that the ecb bluff is that.. Bluff
Call it
“The ECB has no right to unilaterally withdraw ELA or other extraordinary funding to the Irish pillar banks”
The ECB and the CBI for ELA, can only lend to solvent institutions, no choice but pull the plug if Anglo is (officially) insolvent.
@Alea, correct so farewell Anglo, it’s been emotional!
But the ECB does not have the right to unilaterally withdraw extraordinary liquidity to Irish pillar banks, no more than it has to do so by discriminating against any individual EZ country.
It can pull liquidity from Anglo, not from the other Irish pillar “solvent” banks of course…
Apologies if not clear.
@john gallaher: In the Irish Times report you linked to, it states, “Mulcahy made the audience sit up and take notice when he told them that Nama had a £15 billion portfolio in the UK, including £10 billion in London alone.”
Go figure! If the lead Portfolio Manager can’t do his sums, what chance is there for the rest of them?
I’m not the Portfolio Manager, but if NAMA has approximately €30 billion of loans at acquired value and 30% of them is in the UK, that means that they have c. €10 billion portfolio in the UK, or approximately 9 billion Sterling.
Even if he was having a sense of deja vu and was referring to the nominal value, the figure would be 30% of €72 billion or Sterling 20 billion.
It’s a farce when the NAMA execs can’t even pass kindergarten maths. But ‘shure whats a few billion here or there…… How many noughts are there in it again?
Alea, ecb will continue to extend liquidity to the pillar banks even if we burn Anglo. You, we, they all know that.
yes
@wstt What was he doing at the conference in the first place a lap of honor !
He should be in his office making deals not hitting the junket circuit at Irish taxpayers expense and senior Nama figures need to stay away from lighthearted social commentary in public.Who cares about those views what have you fixed or sold recently any thoughts on UORR ?
Decision makers appear frozen or to have lost their “bottle” probably a fall out over the disastrous bank guarantee but NO decision is a decision.
At the very least a detailed pre packaged plan for BK with all the implications should be prepared try to avoid any hasty or late ones this time.
Make the decision which should be signaled to European “partners” etc at present the price does reflect ANY real risk of non payment.Sorry to say it but my money is on payment in full on time on schedule with a nice pat on the back and a “bone” down the road.
@john gallaher “He should be in his office making deals not hitting the junket circuit at Irish taxpayers expense.”
Ain’t that the truth! The low hanging fruit in London is gone or on its way. The assets left in London are becoming a “harder sell” as the commercial property market in the city is tightening. John and his associates need to dispose of €400 million of property per month (the vast majority of it now in Ireland) in order to meet their targets. They have two chances and as Michael Campbell, now serving time in Lithuania, would say…… tick, tock……tick, tock……
P.S. To put NAMA’s task in perspective:
In 2010, Irish investment property sales totaled €241.7 million in 29 deals.
Only 4 transactions have been signed in Ireland in first 9 months of 2011 – totaling €179.25 million.
Target; €400 million per month – every month – for six years…. Only on Planet NAMA!
BTW, The above is not a like for like comparison. One compares total sales, which include non-NAMA sales. The other is what NAMA needs to sell from its own portfolio. One shows investment sales, the other includes all sorts of other rubbish – much of which is unsalable, or has a negative residual valuation
Ales
Do, if you agree with that then, why worry? The Anglo fallout will if it existsbron Anglo.
@nwl the NY times had front page piece yesterday by a very influential journalist regarding the Fed position on European Banks and “burning” trading partners and stakeholders.
Having supported and paid 100% to AIG,Freddie and Fannie counter parties there is strong view that if a Government takes any size stake or “supports” a failing financial institution it’s an implicit total guarantee. The Fed line is that Anglo is paying it’s bond in full.
http://www.nytimes.com/2011/10/23/business/dexias-collapse-in-europe-points-to-global-risks.html?_r=1&pagewanted=2&hpw
[…] a number of places and its important to highlight these. Firstly Namawinelake has a very thorough two part post which asks what would happen if “Anglo didn’t repay the $1bn bond maturing on 2nd […]