Archive for July 16th, 2012

In the immortal words of Ray Burke commenting on a chance of a receipt for an alleged bung, “is it f*ck” but as fantastical as it may seem, it might be the logical conclusion of taking account of the sums paid to senior bondholders in the bailed-out banks together with the comments ascribed to ECB president Mario Draghi in the Wall Street Journal yesterday.

In April 2012, Minister for Finance Michael Noonan in response to a question from the Fianna Fail finance spokesperson Michael McGrath confirmed that between 30th September 2008 when the bank guarantee was introduced and April 2012, a total of €103.7bn has been paid to senior bondholders in the state-guaranteed banks, comprising €33.1bn to “secured” bondholders and €70.6bn to “unsecured” bondholders. And analysed by bank – €32.5bn was paid by AIB/EBS, €35.7bn was paid by Bank of Ireland, €10bn was paid by Irish Life and Permanent and €25.5bn was paid by IBRC.  To date, the State has injected €64.1bn into these four banks and in addition, NAMA has paid €5.6bn in state aid for the acquisition of loans, which represents a premium over what the loans were worth on the open market.

In a report in the Wall Street Journal yesterday, it is said that “three people” familiar with a meeting attended by ECB president Mario Draghi on 9th July 2012 say that the ECB president advocated burning senior bondholders in Spanish banks as part of that country’s response to its banking difficulties. This is a dramatic volte-face from the ECB, and flies in the face of the flat rejection of any burden-sharing with senior bondholders in the Irish case. Recall a year ago in the US when Minister Noonan proposed burning bondholders in the world’s most bust bank, Anglo. That proposal was flatly rejected by the ECB. And before that, in November 2010, the ECB is understood to have written a letter to former finance minister, the late Brian Lenihan warning him not to pursue burden-sharing with senior bondholders.

Remember that Ireland has been threatened with a withdrawal of ECB temporary liquidity assistance provided to our banks if senior bondholders were burned – Minister Noonan denies such a threat but instead says that “a nod is as good as a wink to a blind horse”. And remember also that the ECB didn’t want bondholders to be burned lest there be an increase across Europe in interest rates demanded by bondholders. And most recently, we are told by our own politicians that any solution made available to Spain or Italy or other bailout countries would be retrospectively made available to Ireland. And indeed the EU summit statement from 29th June seemingly reinforces that view when it states “Similar cases will be treated equally”

So, are we in line to get a €103bn refund? The ECB story refers to burden-sharing indicating a discount or haircut agreed, or imposed on senior bondholders, so even the Spanish wouldn’t get a 100% discount. But the main question would be “who would pay?” – in Spain’s case, it would be the bondholders but in Ireland’s case, most of these have been 100% repaid already, though at April 2012, we still had €40bn of outstanding senior bonds. So who would refund Ireland for bonds already paid? Surely,Ireland wouldn’t be expected to stand by and watch Spain burn its senior bondholders – which we are told would mean interest rates across Europe would rise – and still have to absorb the pain all by ourselves, of having funded bondholder payments in a bailout which has so far cost us more than 40% of GDP?

The ECB is understandably remaining schtum today when asked to confirm or elaborate upon the reported stance of its president, and the European heads of government are said in the same WSJ report, to be strongly against the proposal. So for the time being at least, the notion of seeing the refund of some of the billions paid to senior bondholders courtesy of the Irish state seems unfeasible, but it is an area to monitor.

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