# Very little to be gained by burning the bondholders



## Brendan Burgess (2 Mar 2011)

Figures released today by the Central Bank



|Senior Bonds Guaranteed|Senior Bonds Unguaranteed Secured |Senior Bonds Unguaranteed Unsecured |Subordinated Bonds
AIB| 6,063 |2,765 |5,872 |2,601
BOI| 6,178| 12,284 |5,164 |2,751
EBS |1,025 |1,050 |472 |65
ILP |4,704 |2,999| 1,156 |1,203
Anglo|2,963| 0 |3,147 |145
INBS |0| 0 |601 |175
Total |20,934 |19,098 |16,413| 6,940


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## Brendan Burgess (2 Mar 2011)

*Anglo
*Anglo has €3 billion of unguaranteed and unsecured bonds. There is no real point in burning them on their own.  €145m of subordinated bonds can be bought in the market at a huge discount bringing down the real cost to around €40m(?)

*INBS
*€600m of unguaranteed bonds. Again little point in doing this.

They have offered the subordinated bonds 20% today. 

*Bank of Ireland
*€5.1 billion in unguaranteed bonds and €2.7 billion in subordinated. 

The Bank of Ireland is probably solvent, so there is no basis for attempting any burning of these bondholders. 

*AIB 
*€5.8  billion  in unguaranteed seniors  and €2.6 billion in subordinated bonds*.

*Is it worth losing a systemic bank for €8.4 billion?  Given that half of these are probably held by Irish institutions on behalf of Irish individuals, probably not. 

*Irish Life and permanent
*These figures are pretty irrelevant given that they are backed up by the assets of Irish Life.


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## Brendan Burgess (2 Mar 2011)

It's a pity that this information was not released during the General Election campaign, so that we would not have been distracted by the "burn the bondholders" campaign.


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## DerKaiser (2 Mar 2011)

Brendan Burgess said:


> It's a pity that this information was not released during the General Election campaign, so that we would not have been distracted by the "burn the bondholders" campaign.


 
As opposed to your campaign of blindly committing resources the state does not have to protecting depositors and bondholders of insolvent banks?

Had the banks been entirely honest about their true solvency levels 2.5 years ago, the figures in the table above at that point would have been much bigger than €40bn+ in unguaranteed debt we have now. And we certainly would never have backed guaranteed debt had we known the true position.

If the banks made a realistic assessment of their current solvency levels now, taking account of the likely default rates on their mortgage books, the €40bn+ in non-guaranteed debt across the banking sector would need to be seriously looked at.

I'm not happy for the banks to drip feed us a gradually deteriorating solvency position anymore. The depositors and bondholders are fleeing unscathed, limiting our options ever more as time progresses.

We, as a state, cannot "burn bondholders" of private banks in any case, we can choose to "bail out bondholders" by paying them off with our own money. 

Unguaranteed bondholders still stand to lose €40bn+ from their investments in Irish banks. This is not a trivial sum of money. I agree there's nothing to be gained for the state in any scenario, but there's a lot of money we can choose not to throw away (money we clearly don't have) by bailing them out through the nationalisation of private losses.


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## Brendan Burgess (2 Mar 2011)

> As opposed to your campaign of blindly committing resources the state  does not have to protecting depositors and bondholders of insolvent  banks?



Hi Kaiser

Not sure what that means.

I have always been opposed to guaranteeing the deposits and the bondholders. 

In fact, I have gone further and suggested that those depositors and bondholders who got a retrospective guarantee should pay a retrospective levy to contribute towards the cost. 

However, the guarantee was given. The bonds have mostly matured or have been bought in at a discount, so there is on point in burning what is left.


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## DerKaiser (2 Mar 2011)

Brendan Burgess said:


> The bonds have mostly matured or have been bought in at a discount, so there is no point in burning what is left.


 
Is there not over €40bn of unguaranteed debt there?

You could do a lot with €3bn from Anglo in the state coffers rather than the pockets of bondholders.

There's a lot of room for restructuring €8.4bn of unguaranteed unsecured debt in AIB without necessarily losing them as a bank.

Is the secured debt not also in play as it is secured on crap loan assets?

Fair enough, we haven't recapitalised ILP as of yet, but if we do ultimately lose €10bn+ in the capital we've placed in BOI it will be pretty silly to have left the unguaranteed bondholders off the hook for want of establishing the true solvency poistion (taking a realistic view of expected bad debts on the mortgage book).


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## jpd (2 Mar 2011)

Remember, it seems that we hold a lot of this debt - so it'll be a case of robbing Peter to pay Peter


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## DerKaiser (2 Mar 2011)

jpd said:


> Remember, it seems that we hold a lot of this debt - so it'll be a case of robbing Peter to pay Peter


 
That's a big "we" there.

I have no doubt that bailing out bondholders could involve a simple redistribution of wealth within Ireland, but it may be a perverse redistribution.

The biggest beneficiaries of the bank bailout are those who have a lot of wealth to begin with whilst the biggest losers will be those who pay income tax and those who benefit from state supported welfare, health and eduction.

Why would we choose to tax the least well off to bail out the most well off?


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## mercman (2 Mar 2011)

DerKaiser said:


> whilst the biggest losers will be those who pay income tax and those who benefit from state supported welfare, health and eduction.
> 
> Why would we choose to tax the least well off to bail out the most well off?



In reality this may be correct, but in essence surely it is a bit more complex than that. The large deposits holders have gone or are certaily making preparations to exit Ireland.

Taxing the least well off and bailing out the most well off is part of the Capitalist system. Whilst not fully accepting that this is a correct procedure, the new Government does require to encourage those with funds to Invest here and failing this do require to be taxed.


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## Brendan Burgess (2 Mar 2011)

You have to take them institution by institution, which is what I have done. 

The unguaranteed secured bondholders have assets behind them. I am not sure which asset they have, but do they include covered mortgage bonds for example?  I suspect they do, given that Anglo and Irish Nationwide don't have any. If so, they have valuable assets behind them. If BoI has given part of its mortgage book as security, I would guess that the assets are worth more than the loans. 

On Anglo, the state has committed to putting in €25 billion. We can renege on our commitment and thus save €3 billion. It's just not worth ruining our sovereign reputation for that. 

We may have to default on our sovereign debt. That is the real issue. Burning the bondholders is a side-show.


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## DerKaiser (2 Mar 2011)

mercman said:


> Taxing the least well off and bailing out the most well off is part of the Capitalist system.


 
I thought limited liability was the main incentive for entrepreneurs, I don't think bailing out the debt holders of bankrupt insitiutions is a capitalist principle.


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## DerKaiser (2 Mar 2011)

Brendan Burgess said:


> We may have to default on our sovereign debt. That is the real issue. Burning the bondholders is a side-show.


 
I think we could go around in circles all day.  We had planned to inject something like €7bn to €10bn to bring the banks up to the target solvency ratio as per the last investigation. This will take our capital injections in the banks up to €55bn.

There is a €25bn contingency in the EU/IMF bailout money for further recapitalisations if necessary.

If we need this €25bn, we will, by definition, have lost more of the €55bn already committed to the banks than we believe to be the case at the moment.

Do you think we should stop at that point and say we will inject no further capital until the bondholders take their hit? 

Or would you say we should use the additional €25bn from the EU/IMF to recapitalise and continue to leave the unguaranteed bondholders take 100% as they mature?

We can't keep throwing ourselves under the bus and pushing the bondholders out of the way.

The sooner we act the lower our sovereign default will be.

The longer we dither the more severe the damage to us as a country will be.


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## Brendan Burgess (2 Mar 2011)

Hi Kaiser

Take it institution by institution and propose a specific course of action. 

The problem is that people use slogans "burn the bondholders" which are meaningless. I think if you work it through each institution, you will see that there is little point. In the case of each institution, burning the shareholder will be only a tiny part of the problem and won't solve anything. 

Brendan


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## DerKaiser (2 Mar 2011)

OK

Step 1, try assess the true level of solvency in these institutions before anymore is done.  Bear in mind the ECB are looking to flog enough assets to generate €100bn in the short term. This scenario should be the basis for the solvency assessment.

*Anglo & INBS:*

€35bn capital injections to date including promissory note.  Not a cent more, if this is insufficient let the €4bn non guaranteed debt take the next hit.

*AIB*

€7bn capital injection to date. If more capital is needed, the €11bn non-guaranteed debtors need to share in the responsibility.

*BOI*

€3.5bn capital injection to date. If more capital is needed, the €20bn non-guaranteed debtors need to share in the responsibility.

*EBS*

€0.9bn capital injection to date. If more capital is needed, the €1.5bn non-guaranteed debtors need to share in the responsibility.

*PTSB/ILP*

Don't even dream of injecting state capital in here.

In summary.  There is nothing to be gained by taking any more Anglo/INBS losses on board. AIB & BOI non-guaranteed bondholders need to contribute to the solution. 

If there are probable serious losses left to emerge (on the mortgage book and arising from the possible firesale to pay off the ECB) we need to gauge what they might be i.e. if it looks like there is a €30bn hole the state can't fill it.


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## Chris (3 Mar 2011)

DerKaiser, I am with you on not giving one more cent to bail out bond holders, which should have been done in the first place.

But I also agree with Brendan on the following:


Brendan Burgess said:


> We may have to default on our sovereign debt. That is the real issue. Burning the bondholders is a side-show.


There are two separate issues when talking about burning bond holders and from a purely fiscal point of view the sovereign debt level is a far greater problem. But that does not mean we should take on any further private debt for any reason whatsoever.
Do we know exactly how much of the Irish sovereign debt was taken on in order to finance the various bailouts?



Brendan Burgess said:


> On Anglo, the state has committed to putting in €25 billion. We can renege on our commitment and thus save €3 billion. It's just not worth ruining our sovereign reputation for that.


At this stage there is no more sovereign reputation left to ruin. If anything Ireland's reputation would benefit in the long term.




mercman said:


> Taxing the least well off and bailing out the most well off is part of the Capitalist system.


I believe you are committing text book Orwellian Doublespeak here. What you are referring to is Cronyism, which has absolutely nothing in common with true Capitalism.


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## DerKaiser (3 Mar 2011)

Chris said:


> DerKaiser, I am with you on not giving one more cent to bail out bond holders, which should have been done in the first place.


 
Yeah, thinking through it further, even if the negotiation was that the senior bondholders agreed to roll over their non-guaranteed debt in BOI and AIB, that would be a start.

We are in a situation where the ECB, the Central Bank and the State are pumping liquidity into the system despite being under no obligation to do so.  

The implication to date of this was that bondholders have been receiving their full payoffs and we later discover that the banks (Anglo in particular) were actually insolvent at the time.

There's no issue with a solvent bank that meets its minimum capital requirements paying off its senior bond debt.  

But if they can't meet their minimum capital requirements without ECB/Central Bank/State intervention then I can't see a reasonable solution other than a roll over of senior debt.

If they are actually insolvent on a realistic basis, we cannot wait 6 months to a year to find this out and the solution has to involve those who've supplied the existing funding taking a haircut rather than the state injecting more money it does not have.


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## Brendan Burgess (4 Mar 2011)

Further information here

25% of the bondholders are other Irish covered banks. 
25% are other Irish residents
50% are non Irish residents. 

So the amount saved by burning the bondholders is getting less and less. 

Taking Anglo's €3.3 billion if the above proportions hold true. 

€800m would have no effect at all, because we are burning other banks. 
€800m would be no saving to Ireland Inc

Foreign investors would lose about €1.6 billion if they were 100% burnt.


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## Smart_Saver (4 Mar 2011)

Brendan Burgess said:


> Hi Kaiser
> 
> Take it institution by institution and propose a specific course of action.
> 
> ...


 
DerKaiser has done as you asked in his breakdown sheet.
Now can you take it apart and justify why it should not be done.

By the way - If a poll were completed by IT or MRBI or anyone else to see what % of population want the bondholders to burden share the pain and take a "hit" or be "burnt" or whatever term you want to describe it as - I believe it would be very interesting. 

Furthermore someone queried before on AAM regards a referendum on the subject and a contributor replied that it would be pointless as we all know the result ! 

But still it seems we cannot take any course of action to save money now. Why? Becasue it is tantamount to a default - even though the majority I've seen (including on AAM) seem to believe this is the probable outcome down the line regardless.


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## DerKaiser (4 Mar 2011)

Brendan Burgess said:


> Further information here
> 
> 25% of the bondholders are other Irish covered banks.
> 25% are other Irish residents
> ...


 
A few points.

The fact that you keep using €800k when you mean €800m betrays the fact that you are trying very hard to make this look like a minor issue (you also used it in relation to INBS in an earlier post). I don't think this is pedantic when the thrust of your argument is to portray the cost of bailing out bondholders as being insignificant.

I've repeated multiple times here that just because something might not have an overall benefit to Ireland Inc does not mean we should abandon the idea. In this case a good proportion of bondholders residing in Ireland Inc would be far better placed to take a haircut on their bondholdings than the citizens of the state would be to face spending cuts and tax hikes. 

Finally, I hate the phrases "Bailing out the banks" and "Burning the bondholders". We did not bail out the banks (the shareholders have been left with nothing), we bailed out those who funded the banks. We would not be burning the bondholders, we would be simply not covering their losses out of state money.

I'm not naive here. 

I know the bottom line is that we need €50bn to fund the state over the next number of years. We have about €17bn of our own funds leaving us about €30bn short.

I know that we cannot get this money anywhere other than the ECB/IMF

I know we need a solid banking system

But the condition of putting €35bn into the banks to get €32.5bn to fund the state, placing a burden of debt of €67.5bn on the state is an obscene deal.

We can't continue with a deal whereby we potentially inject a further €35bn into insolvent banks when those who funded the banks are being let off the hook completely.

The EU has to wake up and ask itself does it want unguaranteed bondholders losing €30bn or would it rather a sovereign state defaulted on this money.


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## Brendan Burgess (4 Mar 2011)

> The fact that you keep using €800k when you mean €800m betrays the fact  that you are trying very hard to make this look like a minor issue (you  also used it in relation to INBS in an earlier post). I don't think this  is pedantic when the thrust of your argument is to portray the cost of  bailing out bondholders as being insignificant.



Hi Kaiser

To be quite honest. I think that demeans your argument and puts you into the category of conspirancy theorists. Feel free to point out my typos and I will correct them. 


> Finally, I hate the phrases "Bailing out the banks" and "Burning the  bondholders". We did not bail out the banks (the shareholders have been  left with nothing), we bailed out those who funded the banks. We would  not be burning the bondholders, we would be simply not covering their  losses out of state money.



Fully agree. We bailed out the depositors and the bondholders. 



> I've repeated multiple times here that just because something might not  have an overall benefit to Ireland Inc does not mean we should abandon  the idea.



Repeating it doesn't make it any more or less true. There is a general public view that we can solve all of Ireland's problems if we just burn the bondholders. I am pointing out, repeatedly, that it will have very little benefit to the country. Every action has its pros and cons. Burning the Anglo bondholders _at this stage_ brings very little benefit to Ireland Inc and is a distraction to dealing with the real problems facing the country.


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## DerKaiser (4 Mar 2011)

Brendan Burgess said:


> Burning the Anglo bondholders _at this stage_ brings very little benefit to Ireland Inc and is a distraction to dealing with the real problems facing the country.


 
I won't add any more than to say:

1) Getting €3.3bn from Anglo bondholders would not be a distraction. It's small compared to our deficit, but when you look at all the cuts needed to get down the deficit they are the sum of a lot of much smaller cuts each of which have very big impacts

2) If and when BOI & AIB get to the point where they run into solvency problems, we are talking much bigger numbers. To reduce this down to how much burning non-irish anglo bondholders is only looking at a small part of the potential overall issue


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