# Can we make the bondholders pay?



## nialdel (26 Aug 2009)

*Bank Bond Holders*

I can understand the rationale behind the Irish Govt. guaranteeing funds on deposit with Irish Banks.
But the Irish Banks borrowed some 90 Billion from International Bond Holders and I see from the letter from 46 Economists in todays Irish Times that 
".... most of the bonds are in great part covered by the 2008 State guarantee ."
 Why should the Irish tax payer guarantee the investment from these international investors , when they were aware of the risks wen they  made their high yielding investment ?


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## Duke of Marmalade (27 Aug 2009)

darag said:
			
		

> And yes I agree that one of the most important issues is whether the bondholders can be made take some of the hit. But we haven't even gotten to ordinary bondholders yet. The current NAMA plan allows the shareholders and the unsubordinated bond holders to keep all their money.


I have raised this issue in other threads but it has tended to get choked off by other aspects. We need a clear honest answer to this. Many academics have publicly called on the bondholders to take the hit and Fine Gael has latched on to this. The official line seems to be that this would be disaster though it has not really been explained why. My take is as follows:

Shareholders are fair game, have already taken a major hit, and in my view no one could argue if through temporary nationalisation they lost everything.

But bondholders have a completely different legal status. If a company defaults on its bonds that company is bankrupt. That means liquidation/receivership, forced sale of assets etc. The deposit guarantee would be fully triggerred.

In non bank cases (e.g General Motors) this threat of, or actual, receivership can be used to negotiate bondholders to accept the best of a bad lot by doing some equity swap deal.

But in the case of the banks the bondholders hold all the cards, they know that the threat of liquidation is not on.

A lot is made of the fact that these bondholders knew the risks they were taken and so should now suffer. But these bonds carried almost Irish sovereign credit rating. They (the market) knew that at least for the big two defaulting on bank bonds was equivalent to sovereign default i.e. the final meltdown.

Or maybe I have this all wrong, after all Brian Lucey is much more learned than me. Maybe we can simply nationalise the banks, tell the bondholders to sod off and then start all over again.


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## North Star (27 Aug 2009)

Duke, I fully agree with your points re bondholders in the banks. One of the most important issues in the whole nationalisation/NAMA debate and one which is very frequently overlooked is liquidity and funding. As a nation we rely on huge amounts of foreign investors to fund our country's banks and government debt. This will continue to be the case in our post recovery phase. Nama will provide a huge one off liquidity inflow to the Irish banking system. Our focus and that of the press, politicians etc sjould be to encourage/demand that that is lent out to support businesses and jobs. The banks should be given new lending targets related to their NAMA liquidity inflow. (not let them just drop deposit rates)

Next to the bondholders and the banks. 
1) If the banks were nationalised it would take a very long time for international investors to trust and invest in Ireland again.
2) The cost of government borrowing would increase
3) The government would struggle to meet its borrowing requirements as a) there would be no Irish banks buying and b) international investors wouldnt invest on the scale required
4) So far the NTMA has raised approx €22bn out of a full year target of €25 bn
5) We need access to that funding to buy time until the business model that is Ireland inc is back on its feet.
6) We also need access to international capital and therefore we need to be careful not to take rash actions against these stakeholders

On a final point re NAMA , in my opinion the taxpayers will be taking the risk either way  i.e through NAMA cost (yet to be determined) or through sustained levels of high unemployment. Taking a practical perspective we need to get the Irish banks lending in Ireland ( there will be no foreign competition) , for that the banks need to rebuild their profitability and the Govt should use its stake and position to push lending targets. The quicker this happens the better the prospect of reducing the final NAMA costs.


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## Sunny (27 Aug 2009)

Both very good posts. I am sick of tired of peope saying the banks should be allowed fail or that bondholders should be made pay. As pointed out above, we need international investors alot more than they need us. They will survive writing off their Irish Investments but it will be a long time before we see them in this Country again and we can't survive without them. 

Right now the priority is fixing the problem. I don't necessarily like NAMA but I have yet to see a more attractive alternative despite the political rubbish being spouted by Labour and FG. NAMA can be improved but the concept is the correct one.


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## darag (27 Aug 2009)

Duke of Marmalade said:


> But bondholders have a completely different legal status. If a company defaults on its bonds that company is bankrupt. That means liquidation/receivership, forced sale of assets etc. The deposit guarantee would be fully triggerred.
> 
> In non bank cases (e.g General Motors) this threat of, or actual, receivership can be used to negotiate bondholders to accept the best of a bad lot by doing some equity swap deal.
> 
> But in the case of the banks the bondholders hold all the cards, they know that the threat of liquidation is not on.


Good thread.

Any liquidation/receivership would have to be timed to occur after the expiry of the guarantee.  Otherwise the government picks up the entire tab and so it would achieve nothing.

This will mean the government will probably need to continue to inject capital to carry the bank or banks over the finish line.  It would be important to ensure that this capital be in the form which has priority at least with existing bondholders.

I think it is worth separating the bond classes in this discussion.  Subordinated bond holders should not be treated in the same fashion as the rest; they have been receiving excess coupons in exchange for relinquishing their priority in the event of collapse.  I feel that they should be first in line to lose their stake.  It is likely they would be completely wiped out.  I don't think the sums are huge though.

I believe that all depositors should be paid fully but not completely at the expense of the ordinary bond holders.  I actually believe that the government should cover the depositors and then join the rest of the bond holders to share the pain of the inevitable haircut.

It is important to point out that we are not talking about wiping out regular bond holders - we are talking about a haircut.  I can't imagine the hair cut would be greater than 25% but I haven't done the sums.  This would not be catastrophic - most of these bond holders would be long-term earning relatively high coupons - so maybe they lose 3 or 4 years worth of coupons.  Not the end of the world, surely.

I very much doubt that any bond holder would have any interest in maintaining any of the smaller banks as going concerns.  The costs are too high and the economic/business prospects are not too enticing.  I estimate that keeping Anglo running for example costs at least a quarter of a billion maybe even half a billion a year.


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## Duke of Marmalade (27 Aug 2009)

I notice after I opened this thread that today's IT is in fact somewhat dominated by this very point.

Brian Lenihan has written a very helpful open letter to his pal Enda Kenny which nearly answers my question. As _darag_ says, there are bondholders and bondholders. If the T&C of the subs allow waiver of interest or even repayment then BL says that will happen and crucially will not constitute a default. 



> If the bonds rank with deposits, then even to suspend interest payments constitutes a default. According to BL, and he is supported by an opinion piece in the same paper, any default would be a catastrophe. It seems we just have to keep faith with international bondholders or else the costs of funding Ireland Inc will completely balloon or not be available at all.
> 
> It is the case that a decision has been made, as part of the State Aid submission made to the EU, not to make interest payments on certain subordinated debt of Anglo Irish Bank, but this is a very different situation.
> 
> ...


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## Brendan Burgess (27 Aug 2009)

How much of these bonds are out there? 
Are they trading at a discount? 

If a bond paying 5% on nominal, is trading at 50% of par, then presumably the state, through the Pension Reserve Fund, should buy these bonds.

The government should not do anything to increase the value of these bonds e.g. by an early announcement of an extension of the government guarantee. 

As I write this, I think we might have had this discussion before on Askaboutmoney.

Brendan


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## nialdel (27 Aug 2009)

*Re: Bank Bond Holders*

Further thoughts on Bond Holders
1 ) Irish Banks not lending 
Irish Govt, invests capital into banks
Banks then use this money to buy back the loans from Bond Holders ( yes at a discount ) .
Time for the men with white coats ?
2 )Do Bond Holders not bear a share of responsibility for property bubble with their    irresponsible funding of Irish banks ?
3) How about equity for debt with bond holders ?
4) Can we trust the bank linked economists when they tell us of doomsday consequences if we force Bond Holders to compromise seriously  ?
5) These Bond Holders lent their funds to commercial banks not to the Irish State.


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## Complainer (27 Aug 2009)

North Star said:


> 1) If the banks were nationalised it would take a very long time for international investors to trust and invest in Ireland again.





Sunny said:


> They will survive writing off their Irish Investments but it will be a long time before we see them in this Country again and we can't survive without them.


Is there any evidence or precedents to support this contention that they won't invest in Ireland again? How do you know?

I take a lot of these warnings with a very large pinch of salt. These investments aren't driven by emotion. Most of the investment decisions are being driven by software. If the return is going to be there, then the investment will come.


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## North Star (28 Aug 2009)

You are correct, international investers will/should base their investment judgments on logic. By the same logic if the risk of investing in Ireland were to rise either via a perceived failure of the banking system (nationalisation) or by forcing bondholders  accept a debt/equity swap; bond holders will either need an increased premium which translates into higher costs for all of us or they can simply choose to invest elsewhere.


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## darag (28 Aug 2009)

Complainer said:


> I take a lot of these warnings with a very large pinch of salt. These investments aren't driven by emotion. Most of the investment decisions are being driven by software. If the return is going to be there, then the investment will come.


Precisely; I have no idea where this doomsday idea that investors would never put money into Irish enterprises ever again if the holders of the banks' bonds had to take a haircut.

Does anyone have any international precedent to support this view?  Because I don't know of a single case.

I would demand proper evidence rather than a feel before feeling comfortable compensating these investors with 10s of billions of tax-payers' money.

I know that investors have quite short memories even in the case of the government bond default in Russia.  Even the serial offenders in the South America seem to attract investors after a year or two.  And in fact these are extreme cases which involve default on government bonds.  Bondholders take haircuts all the time without anyone seriously arguing that the government step in to compensate them in order to "encourage future investment".


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## North Star (28 Aug 2009)

Price can be taken as empirical evidence. The price of Irish Gvt credit default swaps has narrowed from 262 bps in March to 169 bps currently. ( Source Bank Credit Analyst- an independent internatnal research house) How much of this we attribute to increased confidence in our national and bank solvency as a direct result of NAMA and how much we attribute to general credit market recovery we can debate about forever. For arguments sake lets assume NAMA has accounted for 25% of that recovery i.e 23bps. For a full year borrowing requirement of €25bn that saves the Govt €57mio. If we assume a stable €25bn Govt borrowing requirement for the next 5 years total savings would be €687 mio. This figure is a loose calculation assuming all debt issued remains in issue.

There is an even greater CDS price contraction for AIB and BOI approx 300bps narrower than in March, however the banks have not been able to issue significant levels of long term debt to take advantage of this yet.

According to Davys foreign banks provide over 33% of credit in Ireland. Many want to withdraw from the Irish market. Over time the remaining Irish banks will need to lend to replace this 33%, otherwise the economy will be starved of credit with dire consequences.
I agree that many of the negative comments about banks and bond holders are factually accurrate and the principals behind the sentiment are correct in theory. However theory doesnt help in the real world we live in. Ask any employer/small business what they need to survive and grow; the answer will be credit availability and revived consumer spending. Both depend on the banks being able to lend, not only at their normal levels but also to take up the slack from overseas banks withdrawing. I wish more of the debate in public and even on AAM was focused on solving the problem of how to to get credit flowing and the banks lending (for all of our benefit) rather than looking to punish them and other stakeholders for past mistakes and at the same time hugely damaging our economy. 
There is evidence of the damage not having a domestic banking franchise. Ask Mike Soden ex BOI boss what happened when the Kiwi banks were bought by the Aussies.
The New Zealand economy was severly hit as the banks contracted credit in NZ at a far higher rate than in their own market. And that wasnt at a time when the global economy had gone through such a severe concerted downturn.

If you want to punish the banks  fine but make sure the punishment doesnt kill the economy. Why not introduce lending volume targets related to the NAMA liquidity inflow that the banks will benefit from?

I dont think anyone can provide firm evidence but I think it is reasonable to assume that large foreign banks wont be attracted to Ireland as a key market for retail/sme lending due to our specific challenges and the fact  that our economy is too small to deliver economies of scale. We are going to have to help ourselves to get the economy back on track. Lets have more of a practical solution based debate as how best move forward, not a backward looking critique.


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## Sunny (28 Aug 2009)

darag said:


> I know that investors have quite short memories even in the case of the government bond default in Russia. Even the serial offenders in the South America seem to attract investors after a year or two. And in fact these are extreme cases which involve default on government bonds. Bondholders take haircuts all the time without anyone seriously arguing that the government step in to compensate them in order to "encourage future investment".


 
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. This will cut off access to capital markets or as Northstar says would lead to the banks paying a massive risk premium to get funding. This will delay the recovery of the banking system and the economy because the banks will struggle to access funds or be able to provide money into the economy or if they do, at a reasonable cost. 

I will open myself to dogs abuse and admit I work for a foreign financial institution managing a fixed income portfolio that includes Irish Government and Bank paper. I accept all the negative comments about bondholders and I don't expect to be bailed out by the taxpayer but I do expect to be treated the same way as other unsecured creditors. People need to remember that bondholders simply provide banks with funding for their day to day operations. We don't invest hoping to double our investment as the most we will ever get back is par so I don't see why bondholders are being held up for such criticism by people like Enda Kenny. 

Punishing everyone might feel better for a few days but we are the ones that will pay the price in the long term.


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## Complainer (28 Aug 2009)

North Star said:


> Price can be taken as empirical evidence. The price of Irish Gvt credit default swaps has narrowed from 262 bps in March to 169 bps currently. ( Source Bank Credit Analyst- an independent internatnal research house) How much of this we attribute to increased confidence in our national and bank solvency as a direct result of NAMA and how much we attribute to general credit market recovery we can debate about forever. For arguments sake lets assume NAMA has accounted for 25% of that recovery i.e 23bps. For a full year borrowing requirement of €25bn that saves the Govt €57mio. If we assume a stable €25bn Govt borrowing requirement for the next 5 years total savings would be €687 mio. This figure is a loose calculation assuming all debt issued remains in issue.
> 
> There is an even greater CDS price contraction for AIB and BOI approx 300bps narrower than in March, however the banks have not been able to issue significant levels of long term debt to take advantage of this yet.


This only tells one side of the story. It tells you that market prefers NAMA to the vacuum that went before, but it doesn't tell you anything about how the market might view the alternatives, such as making the bondholders pay along with either FG's 'good bank' or Labour's temporary nationalisation.


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## Sunny (28 Aug 2009)

Complainer said:


> This only tells one side of the story. It tells you that market prefers NAMA to the vacuum that went before, but it doesn't tell you anything about how the market might view the alternatives, such as making the bondholders pay along with either FG's 'good bank' or Labour's temporary nationalisation.


 
Seriously how do you think the market react if they announced that senior bondholders will be forced to pay even though there is no legal obligation on them to.


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## Shawady (28 Aug 2009)

Sunny, surely when investors put their money into shares or bonds, they accept there is a risk. There seems to be some suggestion in the media that if these investors are wiped out, in the future people would not invest in our banks even after they were cleaned up and therefore all the risk to dispose of these bad assets should lie with the taxpayer.
I am not into bashing share/bondholders but I do not think it is fair that the burden is placed on the taxpayer.

On a side note: the government is going to have to make some pretty tough decisions in the next couple of budgets and if NAMA is put through in it's current format, I think it will be virtually impossible to get people to accept whats coming down in relation to social welfare cuts, property tax etc


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## Complainer (28 Aug 2009)

Sunny said:


> Seriously how do you think the market react if they announced that senior bondholders will be forced to pay even though there is no legal obligation on them to.


How do you think the taxpayers will react if they are forced to pay, even though there is no legal obligation on them to do so.

There are no easy solutions here, and the bondholders have to take their pain.


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## Duke of Marmalade (28 Aug 2009)

Shawady said:


> Sunny, surely when investors put their money into bonds, they accept there is a risk.


But what is that risk? They made a judgement that at least with the Big Two they could not be allowed to go into liquidation. So the risk was that they would be nationalised and that the Government, as is its right, would legislate to selectively screw the bondholders. That was the risk they took and they still take that risk no more than holders of Post Office Savings Certificates take a risk that they might be defaulted. 

The Government (as indeeed the private individual) always has a choice - to default and hope it will soon be forgotten - or to defend the national credit rating. That choice should be taken on purely financial grounds. Russia, Argentina, Iceland have decided that default was the lesser of two evils. Has Ireland reached that stage? FG thinks yes. FF thinks no. It is a judgement call, and I think and hope that FF are right.


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## Sunny (28 Aug 2009)

Complainer said:


> How do you think the taxpayers will react if they are forced to pay, even though there is no legal obligation on them to do so.
> 
> There are no easy solutions here, and the bondholders have to take their pain.


 
No-one is suggesting there are easy solutions but people need to get their head around that we need to have a functioning banking system with access to capital markets if we are to ever hope for economic recovery. For the Irish Government to unilaterally rewrite creditor agreements with senior bondholders would cause untold damage. I don't expect you to believe me but I can assure you that it would. No Government has done it with senior debt holders. Even if you look in the UK and at someone like Northern Rock and Bradford & Bingley which were nationalised  they have hit the subordinated bondholders somewhat but the Government has cleary stated its intention to support senior creditors.


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## Complainer (28 Aug 2009)

Sunny said:


> No Government has done it with senior debt holders.


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


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## Sunny (28 Aug 2009)

Complainer said:


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


 
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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## Complainer (28 Aug 2009)

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.


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.


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## North Star (28 Aug 2009)

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.


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## Duke of Marmalade (28 Aug 2009)

[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.


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## Shawady (28 Aug 2009)

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


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## Sunny (29 Aug 2009)

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.


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## Duke of Marmalade (29 Aug 2009)

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.


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## sunrock (29 Aug 2009)

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.


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## Shawady (2 Sep 2009)

Sunny said:


> No Government has done it with senior debt holders.


 
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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## darag (2 Sep 2009)

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.


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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## Sunny (2 Sep 2009)

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.


 
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.


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## Sunny (2 Sep 2009)

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._
> ...


 
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.


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## sunrock (2 Sep 2009)

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.


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## roland (4 Sep 2009)

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?


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## sunrock (5 Sep 2009)

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.


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## darag (6 Sep 2009)

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.


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