Can you tell from the AIB accounts how much of it will have the guarantee expiring?
All of the commercial paper, most of the deposits and all of the repos will expire before the guarantee. My guess is that it will be refinanced, but at increasingly shorter durations to coincide with the expiry of the guarantee. (So a six month commercial paper sale that expired in May 2010 will be refinanced as a four month one).
From p.216 there's 4.5 bn in subordinate liabilities and other capital instruments which either does not expire or is dated for five years or more (from end 2008).
I recall that AIB issued bonds under the auspices of the guarantee that were dated to September 2010, but can't find them in the annual report, so they may have been this year? (This is a problem for all of us in keeping track of the current situation in the banks, much of the activity is outside the reporting periods. We'll have to wait for trading updates?).
This is assuming that there is no announcement on a new guarantee.
Is this then the best argument for not nationalising the banks? It gives the government the option of not extending the guarantee.
I don't know that it's the best argument, but it's certainly a good one. To me the best argument is that the banks will be able to fund the deficit as private institutions where they might not be as state ones. But it certainly gives the state the option to put a 'better' guarantee in place -
- more limited liability - 'new' issues only, limited issue types
- better value for money for the state - reflecting the increase in cost of state funding and the loss of the AAA rating
With the current state of the proprty market (in particular the commercial property market) in the countries that the banks have lent in, the unemployment situation in those countries, and the 'shortage' of cheap capital, I can't see the banks being able to survive without the guarantee never mind prospering the way that many want them to.
Could the government not extend the guarantee selectively?
Yes. I think this the only sensible thing to do. What will be interesting is what they do with the deposit guarantee in particular. At the moment, deposits are still flighty, so any dilution could have stability consequences. Not guaranteeing existing, but guarantee new bond issuance is a bit of a no-brainer, really and is what they should have done in the first place (like the Germans did) and guaranteeing for a range of maturities to avoid a refinancing crunch (like the Germans did).
Where can you monitor the prices of these bonds?
I believe they're quoted on the ISEQ, but you need to know the code to reference them. They are, I believe, quite thinly traded so there is only the odd reference sale. If they had to be sold in bulk, the price would likely be quite different to that of the reference sales. But I'm not a trader and don't have a Bloomberg terminal to see...
If they fall significantly below par, couldn't the government buy them?
All bonds trade above or below par depending on the coupon, the time to maturity and sentiment. Par is only a useful concept if you are holding to maturity. Otherwise, price/yield is the thing to look at. So if the face value of a 2% coupon bond is 100 euro, and the bond is sold for 90 euro initially and the duration is ten years, the yield is 3something% ((100-90/10)+2%). There's a formula for working it out, but I can't either find it or get my head fully around it (despite having kind posters here and elsewhere point it out to me! Apologies if I have it wrong again!).
But you get the idea - the current yield is based on how much the bond pays you plus what you pay for the bond. And that price, more or less, is dependent on demand. So if the government started to buy bank bonds, the price would go up (even if no-one knew it was the government buying).
It's one reason I intensely dislike the ability of companies to make an accounting gain based on how much it would cost them to buy back their debt vs. how much that debt is worth at hold to maturity. If a company started to buy back debt, the price would increase, so the accounting gain is a fiction. Further, if the company can afford to buy back its own distressed debt, then it is not in such dire straits after all, so there is less reason for the debt to be distressed.
(Sorry about the ramble!)
