Can we make the bondholders pay?

Complainer said:

So how do we know what damage it might or might not cause?

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Do you really think Governments choose to put the taxpayers on the hook because it is the easier option and that bondholders are much more important to them politically?

I can speculate what would happen and you could speculate what you think would happen but I for one hope we never find out the correct answer.

Northstar is correct. We need to move past this debate if we are ever going to solve this. At this stage, NAMA is the best option on the table. Its not perfect and it can be ammended. Thats what we should be debating.

Sunny said:

Do you really think Governments choose to put the taxpayers on the hook because it is the easier option and that bondholders are much more important to them politically?

I can speculate what would happen and you could speculate what you think would happen but I for one hope we never find out the correct answer.

Northstar is correct. We need to move past this debate if we are ever going to solve this. At this stage, NAMA is the best option on the table. Its not perfect and it can be ammended. Thats what we should be debating.

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I'm an interested amatuer on this issue. I don't have any real experience of bonds. But I have to say that your position above reads like a diversion tactic. If you want us to 'move past' the debate, you need to present a clear rationale (not a chicken licken sky is falling) as to why this option should not be considered.

I always worry when people try to brush over discussions, particularly on something as important on this.

Rather than brush over this discussion- if we accept that Irish banks are going to have to substantially increase lending to cover their own customers and those of the withdrawing overseas banks; lets focus the discussion on how best to achieve this quickly and thereby reduce the costs and potential risks to the tax payer.

By that I mean the quicker the economy stabilises, the sooner the property sector will have some turnover and we will have better visibility on valuations.
The policymakers have the option of putting additional levies on the banks at a future point when they are profitable and providing the required lending to the economy.

[broken link removed]by Richard Bruton in today's IT clarifies things somewhat. First of all he is only talking about Sub Bondholders. He says that by letting shareholders and Subs off the hook the taxpayer is paying €10Bn more than it should. So we are not really talking about a silver bullet after all. Shares are worth €5Bn today so that values the subs at €5Bn.

Senior debt on the other hand is little different from deposits and there is no way we can welsh on these, RB seems to belatedly accept that.

This seems to me to be backtracking by RB. He accused the government of gambling €90Bn on NAMA, it now appears that at best FG would reduce this gamble to €80Bn. Thus while they still deny it, they effectively accept the concept of NAMA after all.

Having said that, I do agree that as much of this problem as is practically possible should be lumped on the banks' risktakers i.e. shareholders and Subs, but it is a relativley minor issue though capable obviously of great populist interest.

What has happen to the bondholders in Anglo Irish Bank since it has been nationalised?

Yet another piece of irresponsible reporting on the issue by Bruce Arnold in todays independent. He quotes Richard Bruton

Bruton says: "The pain has to be taken by professional investors who knowingly went in -- these would be bondholders as well as shareholders. We have to be clear that taxpayers' money should only be used to kick-start good bank activity, not to tidy up the mess.'' How right he is. He wants bondholders who have lent to the Irish banks to take the burden, since that, in a normal society, is their business.
Another part is for the banks -- not the Irish taxpayers -- to come to terms with those investors and get them to share the burden. Bruton gives the example of the EU Commission, approving Anglo-Irish Bank aid, insisting that the Government "would not pay any coupon to people who hold senior debt in Anglo-Irish. So the EU have actually instructed the Government to inflict pain on a group of investors in Anglo-Irish, which the Government weren't going to do themselves. And the Government seems to react somewhat hysterically when we say this principle can be applied more generally -- but it can."

I don't mind people debating the issues but they should at least get the facts straight. Senior debt holders in Anglo Irish continue to be paid coupons because there is no contractual clause that alllows it to be stopped except for declaring a defualt. The EU, as a condition to State Aid is insisting that all banks that recieve aid and have issued sub debt that contains cluases for coupon deferral or loss absorption features should not continue to pay interest on these instruments to conserve capital. The difference is that is is allowed under the terms of the notes and so does not constitute an event of default.

What FG indicated but have since retreated from was that they were willing to allow the banks default on their debt. However that view is still being reported in articles like above. This is type of confusion that FG have caused by opening their months and playing political football.

Agree entirely with you Sunny, awful ill-informed stuff from BA. Garret the Good has a piece in the IT. GG is a clever economist unlike BA and he has the humility to admit that he is nervous about commenting on NAMA because of the complexity but in his article he makes an exception, he states that the banks cannot default on Senior Debt.

FG made a complete haims of this. When they said that come September '10 they would hive off the toxic assets and the banks' risktakers into a legacy bad bank, they obviously were counting Senior Debt as risk takers, because there isn't nearly enough Sub debt/equity to enable this silver bullet.

RB in his piece in the IT backed off including Senior Debt as risk takers but he hasn't the courage to back off this myth that this can all be solved by carving out a bad bank and letting the banks' "risk takers" take all the pain.

At least the Labour policy is coherent, temporary nationalisation is an option which extracts maximum cost from the true risk takers in the banks i.e. the equity and subs.

I don't really blame RB for the FG blunder, it is that craven self seeker Enda Kenny who smells a kill. This is difficult complex stuff for an unpopular government to get across to the public. The G46 academics would do us all a favour if they now came out and stated that the FG solution was in serious error and that we cannot default on senior debt - there is no silver bullet.

Just who are these bond holders who lend the banks 90 billion to lend to property developers whose asset value now is a fraction of the loaned amount.
Why was the government so quick to guarantee the bondholders so fast...at least make them sweat a bit.
If the bond holders took the hit it would save the irish taxpayer ...say 90 billion....that is 90,000 million......thats 20,000 for every man,woman and child in the country.
Of course they could cut off the money to finance the deficit if we decided to not fully pay the bondholders.
So now the international investors won`t lent us any more money to finance our 400 million weekly deficit....money that will have to be paid back with high interest over god knows how many years.
Would we not be better off living within our means....i.e. not running a deficit and playing hardball with the senior bondholders who I feel must take some share of the blame for their reckless lending to the banks.
The amount of money involved is so big that not paying the bond holders the full amount owed to them can`t be dismissed out of hand.
The irish government and banks seem to be addicted to the credit drug, in the form of international loans and bonds.Their solution to our present dilemma is to try to keep these loans rolling over and borrowing even more...of course taxes and unemployment will rise sharply and there will be massive cutbacks as our government meekly pays back the international bond holders.Maybe instead they should try to wean the country off all these loans and borrowings.

Sunny said:

No Government has done it with senior debt holders.

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Sunny , I am not familar with the different categories of bondholders, but an article by David McWilliams suggests that NAMA will prevent money from being invested in the country rather than encourage it.
He mentions that when banks went bust in other countries during banking crisis, international investors were not put off, citing Sweden as an example. This is just one quote from it.

Most proper investors realise this, which is why money flooded back into Sweden after it let a bank go bust. It is why money flooded back into Finland, the US and Ireland (in 1993) after we broke our promises to bond and currency investors and devalued our currencies. Likewise, in the Asian crisis, investors took their losses on banks and moved on.

http://www.independent.ie/opinion/c...could-be-our-economic-stalingrad-1875206.html

Sunny said:

What bank bondholders have taken a haircut? Even if for some strange reason they decide to take a haircut, this probably constitutes a restructuring event in the CDS market so it would be a default and the ratings of the Irish banks would plummet below investment grade.

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Eh? It's not even "probably" - it would definitely constitute default. Did I claim otherwise? I was countering the impression that bondholders would be wiped out. From my rough calculations senior debt holders they would recover maybe 80% of the par value. Not great but not on the scale of high profile defaults internationally.

And I don't know where you got the impression that I believe that a bank can default on its debts and continue operating as a bank. I was clear that this would be part of the process precipitated by the government sticking to its 2 year guarantee schedule which would probably result in the collapse of some of the banks. In such a case the bondholders would pay. And as a professional fund manager, you think it is normal for governments to step in and compensate shareholders, sub and senior bondholders when private enterprises fail? Can you cite examples of this? Because if you want, for every one case you can cite, I could cite 100 examples of companies going into liquidation where governments did NOT step in and where bondholders took a hit.

Government bonds are a completely separate issue and nowhere did I suggest default on government bonds would not be a complete disaster. It may be helpful to the more hysterical arguments for NAMA but confusing the two is disingenuous.

darag said:

Eh? It's not even "probably" - it would definitely constitute default. Did I claim otherwise? I was countering the impression that bondholders would be wiped out. From my rough calculations senior debt holders they would recover maybe 80% of the par value. Not great but not on the scale of high profile defaults internationally.

And I don't know where you got the impression that I believe that a bank can default on its debts and continue operating as a bank. I was clear that this would be part of the process precipitated by the government sticking to its 2 year guarantee schedule which would probably result in the collapse of some of the banks. In such a case the bondholders would pay. And as a professional fund manager, you think it is normal for governments to step in and compensate shareholders, sub and senior bondholders when private enterprises fail? Can you cite examples of this? Because if you want, for every one case you can cite, I could cite 100 examples of companies going into liquidation where governments did NOT step in and where bondholders took a hit.

Government bonds are a completely separate issue and nowhere did I suggest default on government bonds would not be a complete disaster. It may be helpful to the more hysterical arguments for NAMA but confusing the two is disingenuous.

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This is going around in circles. I am not going through your whole argument but can you name me any banks from around the world that the have received State Aid and were allowed to repudiate their senior debt obligations? You might find one or two individual banks. But has any Country allowed ALL their banks to default? Iceland comes to mind but I don't think we really want to go down that road. Anyway, the only reason they didn't live to their obligations was that they couldn't afford it. It may not be ideal and as a taxpayer I hate the idea but I also accept the reality of the situation.

We will just have to agree to disagree. If you think economic recovery can be achieved in a reasonable timeframe by having our main banks default on their obligations then fair enough.

Shawady said:

Sunny , I am not familar with the different categories of bondholders, but an article by David McWilliams suggests that NAMA will prevent money from being invested in the country rather than encourage it.
He mentions that when banks went bust in other countries during banking crisis, international investors were not put off, citing Sweden as an example. This is just one quote from it.

Most proper investors realise this, which is why money flooded back into Sweden after it let a bank go bust. It is why money flooded back into Finland, the US and Ireland (in 1993) after we broke our promises to bond and currency investors and devalued our currencies. Likewise, in the Asian crisis, investors took their losses on banks and moved on.

http://www.independent.ie/opinion/c...could-be-our-economic-stalingrad-1875206.html

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Money will come back in but only after a significant period of time and because we will be paying a massive premium for it. Remember we are not just talking about one bank defaulting here which might be just about manageable. We are talking about all our banks which I have never heard done before. As I say Iceland comes to mind. Do we really want to use them as our roadmap? Especially when the our Government has a deficit of over €20 billion to fund themselves.

As far as I know the UK Banking act passed this year included legislation that bonds including senior can be converted to equity. (Open to correction on this) They could try including something like this in NAMA legislation and guage market reaction. I reckon it could get spooked but it would be a good test.

Instead of the government giving 80 billion to the banks who will then use the money to pay back the bondholders, why couldn`t the government use a fraction of this money to an post bank so everyone can bank and lend with an post bank, if the other banks go bankrupt.Of course deposits will simply be transferred to this safe bank and will be protected.
It just seems incredible that the goverment could hit the taxpayers with 80 billion, which will take a generation at least to pay off and severe pain,while meekly giving 80 billion to the senior bond holders who lent recklessly to the banks.
It seems to make a lot more sense to hang on to the 80 billion( especially in these recessionary times), and let the senior bond holders have the property portfolio of the banks.
I`ve asked before about information of the bond holders and their relationship to irish companies or individuals and no information is forthcoming.
Ther may well be many rich irish people who will be the beneficiary of these bonds...nothing wrong with that but I think taxpayers would like to know.

If Ireland needed to borrow €25bn this year to keep paying its bills, is it too simple to say that if we default on our banks' bondholders then we will have very great difficulty getting anyone to lend us a cent, much less the next €25bn which we presumably will need to pay next year's bills?

Yes but we as taxpayers would have the 80 or 90 billion that would otherwise go to the bondholders.Of course the government would use this to continue our 20 billion yearly deficit for another 4 or 5 years..not good.
Anyway it`s not going to happen as the powers that be are going to pay back the senior bondholders and thinking about it maybe its just as well as our gov. would just waste it anyway.

Given that Independent News and Media are about to default on some of their senior debt, should the Irish government step in to cover the shortfall?

Surely this is vital in order to protect Ireland's reputation, make it easier for the Irish government to borrow in the future and to ensure that Ireland remains an attractive place for international investors in the future?

I am being facetious, of course.