McWilliams on Anglo
- Thread starter ontour
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You can't "sell" deposits. Lucy makes it sound that some bank will come in pay €20 billion for €25 billion deposit book. That wouldn't happen. You can transfer the book to another institution but you are going not going to get €20 billion cash for it so I don't know what he is talking about when he says we can use this money to pay back creditors. You can't turn into a liability into an asset.
in this context I believe he means that Anglo Pay €27bn to say AIB in return for them accepting a €27bn deposit liability. This would pave the way for a targetted default on bondholders.
He makes an excellent point which I will try summarise through example.
Debt repayment history is not as important as future propects when it comes to the international investment markets seeking out investment opportunity.
If we default on €10bn of Anglo's debt the extra purchasing power in the economy in the future will more than offset the reputational damage done through default.
To look at it another way, we'll be so broke honouring all of this debt that no one will touch us with a bargepole with past repayment history counting for nothing.
Which of the following candidates for loans would you prefer to avoid:
1) Someone who always paid off their loans but recently lost their job with no prospects of getting another one?
2) Some who's missed repayments on their car loan a few years ago but is now in steady employment?
We need to be looking forwards not backwards.
McWilliams is right about what he says. Eventually the markets forgive and will open up. I see two problems with the idea of default either for Anglo or the Soverign and I don't know the answers and I think this is what terrifies the Government.
1. We are not just talking about Anglo. Our entire banking system is still on life support through Government Guaranteed and ECB funding. If Anglo goes bust and makes the senior bondholders take the hit even after the Guarantee expires, the market will re-examine Ireland as a whole. Credit Rating agancies would likely drop their ratings for the other banks on the back of the fact that State support was unlikely. If this happens, and investors pull out of Ireland, our banks will be left with huge funding needs that someone will have to pay for if we want a banking system. I think the Government really fear becoming the only lender open to the banks. And rightly so. People say the markets will always lend but they will charge for the increased risk if they lend at all.
2. Letting Ireland default, getting our house in order over a couple of years and go back to markets and say sorry sounds good in theory but the problem is that we are a member of the EURO. I have no idea what would happen if a member of the Eurozone defaulted. Not sure I want to find out and am not even sure if Europe would allow it. Be interesting to see what happens with Greece in that regard.
Another point worth making is that we are not a large emerging market. We are a small peripheral Country. The markets needed Countries like Brazil and Russia even when they defaulted. That's why they forgave so easily. They don't need us. We burn them and they won't be in any rush back in.
The problem is all the unknowns. It's like when the US let Lehman Brothers go. They thought they had all the pros and cons worked out and decided it was the right thing to do. Instead they nearly brought down the entire Global Financial System. Paulson now admits it was a mistake.
Not comparing Anglo with Lehman but the lesson is the same. We need to be very very careful about what we do as there could well be unforseen consequences.
1. We are not just talking about Anglo. Our entire banking system is still on life support through Government Guaranteed and ECB funding. If Anglo goes bust and makes the senior bondholders take the hit even after the Guarantee expires, the market will re-examine Ireland as a whole. Credit Rating agancies would likely drop their ratings for the other banks on the back of the fact that State support was unlikely. If this happens, and investors pull out of Ireland, our banks will be left with huge funding needs that someone will have to pay for if we want a banking system. I think the Government really fear becoming the only lender open to the banks. And rightly so. People say the markets will always lend but they will charge for the increased risk if they lend at all.
2. Letting Ireland default, getting our house in order over a couple of years and go back to markets and say sorry sounds good in theory but the problem is that we are a member of the EURO. I have no idea what would happen if a member of the Eurozone defaulted. Not sure I want to find out and am not even sure if Europe would allow it. Be interesting to see what happens with Greece in that regard.
Another point worth making is that we are not a large emerging market. We are a small peripheral Country. The markets needed Countries like Brazil and Russia even when they defaulted. That's why they forgave so easily. They don't need us. We burn them and they won't be in any rush back in.
The problem is all the unknowns. It's like when the US let Lehman Brothers go. They thought they had all the pros and cons worked out and decided it was the right thing to do. Instead they nearly brought down the entire Global Financial System. Paulson now admits it was a mistake.
Not comparing Anglo with Lehman but the lesson is the same. We need to be very very careful about what we do as there could well be unforseen consequences.
What is the cost of defaulting? Will our cost of borrowing not increase if we default? Does default have the potential of slowing the recovery and undermining confidence in Ireland? If there is no impact of default it is a no-brainer.
But we are not talking about missing repayments, we are talking about defaulting on loans, if that is the way to go maybe all mortgage holder should do the same.
I am not saying it is a bad idea to default - i just don't buy in to the black and white explanations of Lenihan or McWilliams.
Duke of Marmalade
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The problem is that there is very little to default on. Even McCool sees depositors as sacrocanct, hence his suggestion to "sell" them to AIB. (I presume he means transfer them along with good quality backing assets e.g. NAMA bonds).
Not sure where he stands on the ECB/ICB's 24bn. I know he wants to ditch the euro so maybe he sees the ECB as fair game. That is a whole different ball game.
So let's say that for the purpose of this thread he agrees with everyone else that we cannot welch on the ECB. No point welching on the ICB, that is just welching on ourselves.
So as Brendan has explained we are down to a handful of subbies and seniors, maybe 9bn in total and after the liquidation process they will get paid something. Furthermore some of these seniors/subbies will be other banks and so will fall to the taxpayer anyway.
Bottom line, if we do surgically isolate the subbies/seniors we might save about 4bn. Meanwhile we have to find 70bn funding and we have blotted our copy book - I'll agree with McCool that this last is not too serious.
Doesn't seem a very clever idea to me.
Not sure where he stands on the ECB/ICB's 24bn. I know he wants to ditch the euro so maybe he sees the ECB as fair game. That is a whole different ball game.
So let's say that for the purpose of this thread he agrees with everyone else that we cannot welch on the ECB. No point welching on the ICB, that is just welching on ourselves.
So as Brendan has explained we are down to a handful of subbies and seniors, maybe 9bn in total and after the liquidation process they will get paid something. Furthermore some of these seniors/subbies will be other banks and so will fall to the taxpayer anyway.
Bottom line, if we do surgically isolate the subbies/seniors we might save about 4bn. Meanwhile we have to find 70bn funding and we have blotted our copy book - I'll agree with McCool that this last is not too serious.
Doesn't seem a very clever idea to me.
I'm definitely not going to be dogmatic and say we should default.
Just looking at a couple of factors that we need to consider:
1) Realistically how much can be saved - I wouldn't scoff at €5-10bn
2) How badly would it be received for Ireland if Anglo defaulted
3) What makes us believe that Anglo as an organisation can be trusted to manage the post NAMA book of loans effectively or even efficiently. I can't see how they add value over the scenario where we simply transfer the remaining portfolio to a bank with future propects of remaining a going concern
On the other hand, yes, government are scared that external funding would dry up in the event of a bank default here and this was/is a very valid concern.
I recently read someone ask 'who are the bondholders?' in anglo. The view is that the cautious investor would have traded out of Anglo senior debt by now with speculators holding the debt at deep discounts.
Just looking at a couple of factors that we need to consider:
1) Realistically how much can be saved - I wouldn't scoff at €5-10bn
2) How badly would it be received for Ireland if Anglo defaulted
3) What makes us believe that Anglo as an organisation can be trusted to manage the post NAMA book of loans effectively or even efficiently. I can't see how they add value over the scenario where we simply transfer the remaining portfolio to a bank with future propects of remaining a going concern
On the other hand, yes, government are scared that external funding would dry up in the event of a bank default here and this was/is a very valid concern.
I recently read someone ask 'who are the bondholders?' in anglo. The view is that the cautious investor would have traded out of Anglo senior debt by now with speculators holding the debt at deep discounts.
Duke of Marmalade
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That's probably what he does mean which shows how little he knows about the legal basis of our economy. Imagine I run a family firm which has got into trouble. Only way out is liquidation. But before I pull the plug I get the company to look after all my relatives who lent to the company and then "target" (aka stuff) the other creditors. I presume that's jail for me.
Senior bondholders rank pari passu with depositors. That's why they accepted such a low interest rate. If they thought that the name of the game was that if Anglo got into trouble it could look after its depositors first before going into liquidation they would never have subscribed.
And the conclusion is that we can get very little out of seniors for everything we do get must be shared proportionally amongst the other "preferred" creditors and these outnumber the seniors by about 10 to 1. In other words every 1bn saved from the seniors will incur a call on our guarantees (implicit or explicit) of the order of 10bn.
Brendan Burgess
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Hi Duke
I have accepted this as Gospel. Where does it stem from? Frin the bond documentation or from banking practice?
Does it mean that we could not extend the government guarantee selectively?
Could we not allow the guarantee to expire in September. All the depositors would be out by then and most of the seniors.
Then stuff whoever is left.
I am not proposing this. I am wondering if it would work like that?
Brendan
Duke of Marmalade
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Brendan, we have to differentiate between the obligations of Anglo to its creditors and the actions of the government to the populace. Anglo cannot discriminate between pari passu creditors in advance of a liquidation.
The government can be quite discriminatory in its guarantees. It could limit these to deposits of a certain size. It could limit them to individual depositors rather than corporate. It could limit it to residents of Offaly (might be constitutional hurdles on this). It could exclude seniors if it wished. That is why the blanket guarantee was so controversial, though even with hindsight they probably had no choice.
Whether seniors rank pari passu with depositors depends on the legal basis of their relevant contracts. I suppose there might be seniors and super seniors but I think in general there are subbies with all other creditors ranking pari passu (but behind the Revenue).
The government can be quite discriminatory in its guarantees. It could limit these to deposits of a certain size. It could limit them to individual depositors rather than corporate. It could limit it to residents of Offaly (might be constitutional hurdles on this). It could exclude seniors if it wished. That is why the blanket guarantee was so controversial, though even with hindsight they probably had no choice.
Whether seniors rank pari passu with depositors depends on the legal basis of their relevant contracts. I suppose there might be seniors and super seniors but I think in general there are subbies with all other creditors ranking pari passu (but behind the Revenue).