Talking tough with Europe - the markets watch

As predicted and expected, it looks like a Fine Gael/Labour coalition government is in prospect for Ireland. While the two parties need to talk turkey before consummating their marriage, their is at least one policy area where we can already surmise the certain direction of the new government.


Debt restructure/negotiation. That means, reconsidering the position of creditors of those limited liability entities formerly known as Irish Banks. as well as some form of renegotiation of funding terms from the EU.


As has been commented on already be knowledgeable commentators, the only outcome of use to Ireland will be one that significantly reduces or curtails the prospective national debt burden, which is already at a level that arguably is not manageable.


So, is there likely to be any success on this score from FG/Lab? Monday morning gave us an early glimpse of the view of financial markets who are looking at nothing else:

So the early running on that question appears to be "no".

Go ahead, punk. Make my day.

Dirty Harry understood that for a threat to have any effect it had to be credible. He didn't stick a banana in the face of some criminal low life, but a 44 Magnum (the most powerful handgun in the world, that would blow your head clean off).

In all the trivial inanity surrounding the AIB bonus fiasco I have seen all manner of stupid nonsense aired, but the latest "threat" by the minister that AIB will have its future capital funding withheld if the €40 million in bonus from 2008 are paid is up there with the best.

I can only imagine that the Chairman of AIB, or whomever took the call from Brian Lenihan had to restrain himself from the most obvious response - "or what?". Brian Lenihan isn't a fan of the movies. He has confused his Dirty Harry with his Indiana Jones, by bringing a knife to a gun fight.

But on a serious note, Brian (he's not the messiah, he's just very naughty boy), is most certainly penny wise and pound foolish. Hooray!!!! he has saved the taxpayers €40 million. Shame he is and will be (jointly) personally responsible for costing us up to €100 billion. And he stillr efuses to turn off the tap.

But the sad indictment on the country is that electorate cheered!

How much wriggle room do we really have with the banks?

Quite a bit actually.

I just had a perusal of Bank of Ireland data and as at June 2010 they had around €31bn in various bonds on issues. That includes many things like floating rate notes, but technically all ripe for "restructuring".

€31billion would have placed a nice buffer between the banks and us poor taxpayers. It should be used.

Waiting for an explanation

What baffles me most about the Irish banking debacle is that I have not yet seen anyone offer an explicit explanation of why banks (plus buidling societies etc.) alone should be exempt from the insolvency laws that govern all other corporate entities?

It seems now to have been enshrined into the law of the land. Talk about moral hazard.

Breaking the piggy bank

So we will be spending another €12.5 billion of our National Pension Reserve Fund as part of the EU/IMF "Bail Out".

This seems to have raised some hackles, but I don't know why. Generally, in your personal finances as well as national one you would always tend to use the cheapest source of funds first.

How much does our NPRF stash cost us? Well, we could retire €18 billion of Irish 6 year government debt for more than 8% per annum. That alternative use makes this expensive money.

We are at the point where we need to do everything possible to stem the growth in our debt. Ideally, we should have been cutting our exposure to bank liabilities. But if we aren't then we have to accept our rainy day has arrived. Time to break the piggy banks.

Why did AIB retain its stock exchange listing?

It is a curiosity that AIB will retain its stock exchange listing for stock issued which accounts for one tenth of one percentage of the company's ownership. The obvious question is why??

Initially I thought it was to allow restructure and eventual sale of the company, without going through the hassle of nationalisation and a completely new IPO.

Then I read this:

http://ntma.ie/Publications/2010/SubDebtBurdenSharing.pdf

Thursday, 7 October 2010: Following the Statement on Banking made by the Minister for Finance on 30 September 2010 there has been some uncertainty among market observers and participants about the intended treatment of subordinated debt in issue from Irish banks.

In order to clarify the position the Minister has advised that prospective resolution and reorganisation legislation, insofar as it affects subordinated debt in issue, will apply only to such debt in issue from institutions which are not listed on a recognised stock exchange, are in 100 per cent State control and cannot survive in the absence of total State support.

My bold.

Note that AIB isn't going to be delisted from a recognised stock exchange, nor pass into 100% state ownership.

Comfort for AIB subordinated bond holders then. Thanks for that Brian.


Yours sincerely,

Taxpayer Bled-Dry Esq.



Oh, forgot to add. Can anybody name a bank that is not listed on a recognised stock exchange, is 100% owned by the Irish government and cannot survive without State support?

Anyone?

Closed to new borrowing!!!!!

More tripe being spouted from government circles about why we need to stay committed to pouring more and more of taxpayers' money into Irish banks in order to prevent them going into insolvency and default on their liabilities.

The cry goes out "if there is a default on bank bondholders now, nobody will lend to us in the future".

OK, let's put aside the obvious point that nobody has been willing to lend to either Irish banks and now the Irish government at an affordable rate of interest for some time now and think about that alarmist statement. It is nonsense of course.

The fact is that default on bondholders today will not in itself mean lenders or potential buyers of bonds will be scared off in the future. In fact, the result could be expected to be quite the opposite if we finally manage to do the right thing policy wise.

Why would that be?

It is pretty obvious. Nobody will lend now at anything less than completely unacceptable (unaffordable) interest rates because they believe that the massive financial burden of the current and prospective size of Ireland's debt (government + bank losses assumed by government) will make it increasingly unlikely that they will get repaid.

However, if we quickly and it needs to be quickly stop the rot now we might have one last chance to write down a mass of bank assets and liabilities (which will mean bond holders), restructure them, likely with debt to equity swaps, and emerge with smaller banks with little concern over potential additional assets and liability write downs and a cap on the additional government borrowing that would be needed to fund the banks.

In effect draw a line right now under any potential future capital demands on taxpayers from the banks by putting them into nationalised administration (which I have mentioned before) and forcing the risk capital lenders to those banks to take the losses.

If we do that we then only (only!!) need to address the smaller (smaller!!) issue of general government finances in order to put a lid on government debt at a high, but not disastrous level - something around 130-140% of GNP.

And do you know what? People will lend to us again. They won't be looking back and thinking "well, they burned those bondholders last year", they will be looking forward and thinking "the losses have clearly been taken now and Irish banks and the Irish government are much better risks now". That is how markets work. Yesterday's loss is gone and irrecoverable. Markets look forward.

It still isn't too late, but it nearly is for Ireland.

Our banks need to be put under nationalised administration using special emergency legislation and restructured by defaulting on enough of the tier 1 and tier 2 capital (that includes senior bondholders) as required to make them unambiguously well capitalised with impairment free balance sheets.

End game approaching for Ireland - what to do?

Does anyone have a plan to get Ireland out of this financial quicksand that is sucking the country under as we try and stop anybody (except taxpayers) losing money on our failed banks?

Well, yes. Here is one I made earlier - over one year earlier:

http://geckkosworld.blogspot.com/2009/08/more-nama-debate.html

But it doesn't have to be that way. The guarantee expires next year. The government can effectively renege by threatening to string out affairs until its expiry. This can be used as leverage to force the reconstitution of the banks balance sheets by wiping out current shareholders and doing debt-equity swaps on some bond holders to reestablish the banks.

If the shortfalls are too large the government could then force the banks to be declared insolvent and nationalise them on the basis that they tale only those liabilities they are required to - effectively deposits and secured creditors/bondholders. Then use taxpayers' funds if necessary to restore tier 1 capital. Only that way could you ensure that the burden on the taxpayer is kept to a minimum.

Another fun number fact

Time for another fun number fact.


100%


The value of Irish domestic banking assets (equivalently liabilities) accounted for by lending to one another, expressed as a percentage of annual national income.

For point of reference, the number for the UK - another over-banked country is 30%.



Rearrange for the following words to make a coherent sentence:


as, cards, as, of, house, strong, a



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