# Morgan Kelly comment in Irisht Times (May 22nd) re our debt crisis



## Dinarius (23 May 2010)

[broken link removed]

In the above piece Kelly argues that we must negotiate with the bondholders in order to sort out the mess our banks, and by extension we taxpayers, are in. He argues, quite convincingly in my view, for a debt for equity swop.

A similar case has been put forward in the last few months by just above every Irish economist who isn't on the government's payroll - an overwhelmingly number of them, in fact.

In all cases (though I'm open to correction on this) those economists have implicitly argued that these bondholders are foreign financial institutions who knew exactly what they were getting into and, therefore, should be negoitated with accordingly.

However, a few weeks back, on the back page of the Irish Times business section was the following piece.......

[broken link removed]

To me, this article, which passed almost unnoticed, was a revelation. The following extract is key........

“In Ireland, half of the funding for the Irish banking system comes  from within the country. So, a default is a default on ourselves.  Everyone accepts that depositors have to be paid.


“Then there is a  case of the bondholder, who is often portrayed as some anonymous banker  with a brolly in the City of London. The reality is that credit unions  in Ireland commonly take bonds in banks, senior debt bonds."


If this is correct then........


1. Why hasn't Lenihan been screaming this from the rafters from day one?


2. Doesn't it blow the cases made by the likes of Kelly/McWilliams/McDowell clean out of the water?


3. Do we really have no option then but to put up and shut up? Or should we still pursue a debt for equity swap even if it means the likes of the credit unions owing the banks instead of all of us?


I'd be interested to hear the views of the experts on this forum.


D.


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## Brendan Burgess (23 May 2010)

Hi Dinarius

Karl Whelan did a fairly good analysis of Anglo's subordinated bonds some months ago on Irish Economy.ie . There really isn't that much to burn. As it happens, they are  not due to be paid until after 2014, so we can defer a decision on them.

Irish Nationwide's are only a few million. Again, not worth doing anything about, although I do believe it should be wound down. 

The ordinary bond holders should be treated just the same as the depositors. Pull the guarantee for the bondholders and you pull it for the depositors as well. 

With the extra capital put into AIB and Bank of Ireland and with NAMA buying their bad loans, AIB and Bank of Ireland are probably solvent so it's too late to do anything about them. 

so the only remaining issue is whether the government should burn the Anglo bondhoders. It doesn't have to make that decision for some time. 

However, Anglo has been buying back its subordinated bonds at a discount, which many regard as a waste of money.

Brendan


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## Dinarius (24 May 2010)

Morgan Kelly's 'inaccurate' piece about to be discussed on Morning Ireland.

D.


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## Superman (25 May 2010)

Brendan Burgess said:


> The ordinary bond holders should be treated just the same as the depositors. Pull the guarantee for the bondholders and you pull it for the depositors as well.


I agree that Karl Whelan has shown that it is not possible to burn bondholders.
However I do not think that it is correct to say that because bond holders are pari passu with depositors means that depositors cannot be favoured - provided that favouring comes from a third party (i.e. State) and does not involve taking money which rightfully belongs to the bondholders.  Correct me if I'm wrong.


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## Dinarius (25 May 2010)

There's been a huge reaction to Kelly's article on the IT website.......

[broken link removed]

In addition, Moore McDowell has an interesting letter in today's paper........

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And Kelly provokes more reaction on Irish Economy.ie today also.......

http://www.irisheconomy.ie/

Finally, John McManus' piece in yesterday's IT on why no one is pitching for AIB......

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.......to which I can only reply.......1. Coz AIB "barks and wears a lead" as they say in stock market parlance. 2. Coz it has "previous" as m'learned friends would say, and lots of it. 3. Coz it should have been put out of its agony a long time ago.

I can't help wondering if BofI's realtive recovery from the mess of the last two years vs. AIB's continuing decline has anything to do with the former's historically Protestant ethos as against the feckless taigs in the other place - seriously. I'm convinced there's a sociology thesis in there somewhere.

D.


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## DerKaiser (27 May 2010)

The one thing I'd say is that it is irresponsible to dismiss the current deficit of taxes versus public spending.

The public need to come around to the fact that taxes need to rise and services and public wages need to be cut back. Ignoring this fact by blaming the banks for everything is counterproductive.

The other major requirement is for the government to move on from the backs to the wall scenario of September 2008. AIB and BOI are now largely out of the woods with some possibility of recovering the funds the state has provided them with. Lenihan and co. need to focus on how the Anglo burden can be shifted away from the state. If Bondholders _and_ depositors need to lose out so be it. I originally believed that depositors should be bailed out but at a cost of €20bn+ you start to think maybe they're better able to afford it than the taxpayer and to do it now should not lead to a run on the banks.

My quiet hope is that the minister has a plan for all of this when the state guarantee runs out in September but it would obviously not be wise to flag such intentions in advance to the public. 

In summary we cannot take our eye off the current budget i.e. we need to continue cutting back our public spending. We've been on the right track up to now, hopefully the Croke Park deal does not scupper this. in addition we need to figure out who bears the Anglo losses, they cannot be simply subsumed into the government deficit.


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