The cynics and conspiracy-theorists might be looking out for another arrest as happened to coincide with the St Patrick’s Day visit to Washington by then taoiseach Brian Cowen in 2010, or re-arrest as happened last November 2011 to coincide with the payment of a USD 1bn (€730m) bond at Anglo – both arrests associated with the Anglo investigation by the Gardai which is now in its fourth year. Economists might be looking out for a “we’re really, no seriously, REALLY, trying to renegotiate Anglo’s promissory notes” Others might be looking out for bread and circuses or “panem et circenses” as the Romans used say, referring to officially organised distractions from the real problems facing that Republic. But how many of you would have expected the imminent payment of the €1,250m to Anglo bondholders on Wednesday to have inspired the Minister for Transport and Tourism, Leo Varadkar to defend the payment in the way that he has, and to have criticised those opposed to the bond payment as “misinformed and mischievous”.
Speaking to RTE television’s “The Week in Politics” yesterday, the sometimes plain-speaking, occasionally outspoken minister introduced some novel new arguments in favour of the payment:
(1) It will raise electricity and gas prices! This is certainly novel, and you’re unlikely to have heard this argument before, despite over €1bn of bonds being repaid last year under protest at Anglo and Irish Nationwide Building Society. Even though our gas and electricity prices remain higher than the EU average and amongst the highest in Europe, according to Minister Varadkar, they may even increase more! What the minister means is that Irish semi-state companies like the ESB and Bord Gais borrow from corporate bond markets and if Ireland doesn’t pay the €1,250m owed by Anglo on Wednesday, then the corporate bond market might charge higher interest rates on new lending because of the perception that the State might not back the ESB or Bord Gais if they got into trouble. The ESB for example – latest annual report for 2010 here – had €4.1bn of borrowing at the end of 2010, of which €1.6bn is repayable in the next two years and the fear implied by the minister’s claim was that the ESB would find it more expensive to refinance that debt that was maturing. The minister ignored the fact that Anglo is a defunct institution that doesn’t take deposits or engage in new lending, it is one of the biggest corporate failures in the world. Might corporate bond investors not be able to distinguish between the non-payment of bonds in Anglo and the ESB? S&P rates the ESB broadly in line with its rating for Irish sovereign debt; the ESB corporate bond rating is presently BBB+ which is one grade above junk and the outlook is negative; the Irish sovereign rating from S&P is Ba1 which is junk. Is Minister Varadkar seriously suggesting the ESB’s near junk rating with negative outlook will deteriorate to the extent that it needs raise electricity prices, if the Anglo bond isn’t paid? Apparently so. And in any event, the ESB is firmly in the Government’s cross-hairs for privatisation in the next year or so, so the link between State and company is likely to be severed in any event. But Minister Varadkar didn’t make any mention of this.
(2) The saving isn’t real money, it would be like deciding “not to pay off your credit card” argued the Minister who went on to say that the €1,250m that might theoretically be saved in not paying the Anglo bondholders, would only become available once Anglo was wound up which might be 10 years. Now like Anglo’s loan loss estimates and capital requirements, the Anglo wind-down period seems to yo-yo around the place, seemingly depending on what side of the bed, its chairman Alan Dukes arose from that morning. Last September 2011, Alan told an Oireachtas committee that he thought the merged bank would wind down in less than the 10-year time frame agreed with the EU/IMF in November 2010, or less than 9 years from today. More recently he seems to be using 10 years from today. Regardless of the wind-down period, if the €1,250m weren’t paid to bondholders on Wednesday, it would theoretically be available to invest in Irish 9-year bonds on Thursday that presently yield 7.5% per annum, thereby netting the State €2.3bn in 2020.
(3) It will raise the cost of mortgages. This is an interesting claim because Ireland’s banks hugely rely on ECB funding to the tune of about €150bn at present, and the traditional bank bond market for banks right across Europe is moribund with little new issue. So the only way the cost of mortgages would go up, would be if the ECB increased interest rates. But such an increase couldn’t be selective – or could it, Minister? is this what you meant by a “bomb going off in Dublin” – it would affect all banks acrossEurope who have €1tn of lending from the ECB.
(4) Those suggesting that the €1,250m payment equalled the sum total of revenue expected from new taxes in 2012 (of the €3.8bn Budget 2012 adjustment, €1.3bn is from new taxes and €2.5bn is from cuts to welfare and the public sector) or suggesting that avoiding the payment would not diminish the need for austerity were dismissed as “misinformed or mischievous” by the Minister, I don’t think there is any serious commentator that denies that the country must close the gap, or deficit, between our national income and expenditure. Comparisons with current austerity measures seek to illustrate the enormous scale of the payment on Wednesday.
If the above is representative of the extent to which this current Government plans to go to desperately defend the payment on Wednesday of €1,250m to unsecured, unguaranteed bondholders at a defunct bank, then perhaps the Gardai should, instead, ready themselves for another high profile arrest in the Anglo probe.
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Excellent analysis as usual NWl:
This is pretty sad because Leo Varadkar has been one of the more plain speakers among the Government Ministers.
To say that the €1,250m is not real money is Fianna Fail grade waffle.
He has now joined the long tradition of Irish Political BS’s.
This sounds like a couple of PR smart asses thinking they need to scare the little people again because high finance is to complex for their simple minds.
Why could he not put it simply.
We have lousy choices here:
We can burn the Bondholders now and save €1,250bn (Plus €3.1bn at the end of March) and choose to cheese off the ECB royally.
Or we can play a long game and hope the ECB will allow us to write off a good chunk of the €29bn promissory notes in the long term. Or at least reduce the lunatic interest rate of 6-8.2% per annum.
It’s short term gamble versus long term gamble with no guarantees either way.
So it’s €3,350bn bet.
Stop waffling Leo. Tell us the truth. We can handle it.
Let’s face it. They are going to pay it. Period…… Plus the €3.1 billion in March. There’s not enough passion from the public to stop them. An angry mob needs to torch the Dail. That should do it.
There may have been some hyperbole in LV’s speech but surely the core message was quite accurate.
1) ESB. If we default on a bond payment by what is now a state owned entity are we not likely to be downgraded to ‘default’. It would seem unusual that the ESB is one notch above the sovereign now, as normally it works the other other way around, but if the sovereign gets rated as ‘default’ then the ESB will find it impossible to refinance.
3) Mortgage rates (and bank financing). That does seem to be the threat; selective punishment by the ECB.
2) & 4) Not paying Anglo bondholders this would would not give us an extra €1.25b to play with now. Instead, if the ECB pulled the plug, we would need even more austerity to balance our budget immediately. If we presume that would precipitate a full blown default and we stop paying interest on sovereign debt how much of a hole would that leave this year? €8b? More?
We should have taken this step long ago but, if we are going to consider it now, we should at least be clear about the possible consequences.
Johnny, your Fine Gael tendencies are showing.
I think they have pills for this syndrome!
“some hyperbole” in LV’s speech….surely not…..some mustake me finks
The ECB has shown zero inclination to pull the plug. It has given €500bn to the European banks at 1% for 3 years. Why would it risk the whole European banking system on a €3,350bn write off?
“selective punishment by the ECB.” The ECB ain’t in the punishing business it’s in the power business. If your big and critical like France or Spain you will be saved. If your small and peripheral you do what your told. Unless you can bargain with the prospect of chaos. It’s not a new tactic the Russians and the yanks had Mutually Assured Destruction (MAD) for years and the world was probably a safer place. One could reasonably argue that they have a lot more to loose, there’s a lot more of them!
Tell Leo to drop the schoolboy debating points and say it like it is….we deserve it.
@Paddy19, please be careful about playing the comments made, and not the man.
@Johnny, the ESB’s S&P rating and the meaning of the BBB+ rating are linked to in the above blogpost. BBB is just one notch above junk. S&P downgraded Ireland’s sovereign debt to junk last year. So although it is often the case that semi states will track the state, it seems there is some divergence here. The Anglo bonds are not guaranteed by the State, Anglo is a limited company 100% owned by the State; because of massive property loan losses, Anglo doesn’t have the funds to pay the debts in its own right. The Govt has provided promissory notes which enable Anglo to remain solvent. When you use the term “default”, are you saying that non-payment of Anglo bonds is a default equivalent to non-payment of sovereign bonds and if you are on what basis?
@paddy19. I’ve never voted FG in my life, least of all in the most recent General Election. I do think LV comes across as one of the least worst politicians in FG on those rare occasions when he chooses to speak his mind rather than sticking to the script but the speech above was unfortunately not one of those moments. If your assessment is that we could call the ECB’s bluff and they would not react then why, in your opinion, is the government not taking that course? Do you believe they are taking seriously a threat that you know to be a mirage?
@namawinelake. The link to the Reuters piece about the ESB’s rating seems to confirm my own understanding of the situation. That S&P has not downgraded Irish sovereign debt to junk but is still holding it at BBB+. It also articulates the same point I was trying to make about a downgrade to the sovereign debt being likely to drag down the semi-state debt too. “The negative outlook reflects that on the sovereign and our opinion that a downgrade of the sovereign is likely to result in a downgrade of ESB.” Where the confusion seems to lie is that Moody’s has downgraded Ireland to junk and left the ESB one notch higher clinging to investment grade. The divergence in this case is slight and there is nothing that I can see to suggest that the normal practice of a semi-state’s rating following the sovereign’s rate downwards would not hold true here.
Anglo is a limited company but the fact that it is controlled by the state could leave the state liable in the case of a default targetted against one class of creditor only. If senior bondholders are supposed to rank on a par with depositors in the event of an insolvency, but the state has orchestrated a situation where the depositors are made whole at the expense of the senior bondholders, then the state is open to accusations of fraudulent preference, one of the bases on which limited liability can be lifted and the shareholder made directly liable. Even before that made its way to the courts the ratings agencies could take a default by the IBRC as a cue to cut sovereign rates a further notch or two. This would not have the same effect as a full blown default but would still drag the ESB into the junk zone and make refinancing difficult if not impossible.
If the ECB also pulled the plug on us (which is the €150bn question) then we could only end up in default.
@Johnny, so you’re saying that if Anglo’s bondholders were not repaid, Ireland’s sovereign rating would suffer? There are those who would say the opposite and that not paying the bond would make our national debt more sustainable and less at risk of default, though €1,250m is not going to make a great difference.
Anglo doesn’t have deposits left in the traditional meaning of the term as they were sold last year. It does have some residual deposits but these are secured against legacy loans. The €1,250m bonds payable on Wednesday are unsecured. So even applying the “pari passu” rule and ignoring the State guarantee of deposits – and remembering the €1,250m bonds are unguaranteed as the September 2008 guarantee has expired – the State would still not have a problem.
If the ECB selectively pulled the plug on Irish banks, then yes, we would spectacularly default. The €40bn so far paid by the Troika – EU/ECB and IMF- under the present bailout would be defaulted upon. And indeed the ECB would take a hit on their €150bn of liquidity as Irish banks would fold and would not be able to pay everything back. European banks which have legacy lending to Irish banks would also see losses. And of course the ECB would face legal action from Ireland for acting outside its remit, and selectively changing the rules. This creeps away from what Minister Varadkar said, but even if he had fielded the “pari passu” argument, I think it fails.
@ johnnythefox
Strong technical arguments exist, but, there is also the argument that paying makes Ireland look stupid, and if you don’t stop the abuser then others will form a line to take their turn.
To me the technical argument reads
‘we’re closing hospital beds to pay gambling debts’
Only one path gives Ireland credibility. Resistance.
http://wp.me/p28tG9-1k
@nwl
I’m not saying the sovereign rating will suffer if we don’t pay the Anglo debts but I am saying it could suffer. I guess that would very much depend on whether the rating agencies anticipated the ECB would follow through on their implicit threats or just let things ride. So far our downgrades have been based almost entirely on the increased financial risk rather than political risk. I think it is a fair assumption that main reasons S&P has still not rated our sovereign debt as junk is that we have credibly communicated our intention to keep paying and we have the financial backing of the troika. Not paying the Anglo debt would cause doubt on both counts so could lead to a further downgrade. At the end of the day what is the difference between the IBRC and the ESB if the latter were to get into financial difficulties. You might even argue that an Ireland that was willing to leave Anglo bondholders hanging would be even more likely to do the same to ESB bondholders because it would have the extra fig leaf that, unlike the IBRC, it is not the sole owner of the ESB.
@JTFox
“Anglo is a limited company but the fact that it is controlled by the state could leave the state liable in the case of a default targetted against one class of creditor only. If senior bondholders are supposed to rank on a par with depositors in the event of an insolvency, but the state has orchestrated a situation where the depositors are made whole at the expense of the senior bondholders, then the state is open to accusations of fraudulent preference, one of the bases on which limited liability can be lifted and the shareholder made directly liable. ”
This is the weaselly wrong argument from the financial sector that is peddled to justify socializing private investment debts and has enabled the blood-sucking zombie instituions (with largely same genius management) to avoid being put out of their misery and live off the few remaining healthy parts of the economy.
What part of “limited liability” do you not understand?
In the event of a liquidation of IBRC, assuming all internal assets are distributed fairly – bond holders do not lose out at expense of depositors.
End of Story….
If the government/ECB so chooses to repay depositors up to a max amount of 100K/whatever under a general bank deposit guarantee there is nothing the bondholders could do. They are not depositors….
@sf ca writer; Slightly off topic but great poem… I could feel the anger. Almost brought tears to my eyes. Well done! ;-)
@wstt.
thanks
it’s a true story that’s why it works,
plenty more true stories to come.