"Burn the rhetoric, not the bondholders"

A good [broken link removed]by Donal O'Mahony of Davys in today's Irish Times

The incessant vox pop on this issue has been ill-served by a crass misrepresentation of the senior bank debt investor. Far from being the reckless high risk/high reward speculators characterised in various dispatches, senior bondholders are the most risk-averse of species. They are placed alongside rank and file depositors at the very top of the creditor pecking order, where return of capital rather than return on capital is the absolute byword. Senior debt provides term financing for bank credit creation that stretches well beyond the limits of ordinary deposit maturities. Continuous repayment of this debt, alongside that of the pari passu depositor, is the confidence glue which sustains the “maturity transformation” process of modern commercial banking.

Senior bank debt, like deposits, is not risk capital, and does not share in the profits (or losses) of banking operations.

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...

Risk capital resides further down the balance sheet in the form of subordinated debt, preference shares and common equity. It bears reminding that such capital has already played a substantial role in the burden sharing of Ireland’s bubble burst. Destruction of shareholder value (and loss of capital reserves) across the banking system amounts to circa €55 billion, while a near €10 billion haircut has already been applied to subordinated bondholdings following numerous liability management exercises.

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It was a similar perception of systemic support loss for senior subordinated paper in early October that contributed to a vicious contagion of junked credit ratings, surging bond yields, seized-up funding markets and dramatic deposit flight, all of which culminating in the EU/IMF interventions of late-November.

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Would this be the same Davy's that told us in Feb 2008 that

 Ireland's potential growth rate is 3.5-4% until 2011, comprising trend
productivity growth of at least 2% and labour force growth of 1.5%.

[...]

 Trend productivity growth of at least 2% can be maintained due to:
– the huge increase in the capital stock over the last decade;
– consistent investment in education;
– light regulation of business;
– the flexibility of the Irish labour market; and
– a relatively small public sector.

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And which part of his comments in the original post do you disagree with?

I disagree with this:

Far from being the reckless high risk/high reward speculators characterised in various dispatches, senior bondholders are the most risk-averse of species.

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We wouldn't have a european-wide banking crisis if they were so risk-averse.

Holding Irish bank debt while they were hopelessly insolvent is not risk-averse. Junk is junk, senior or not.

I disagree with the premise of the post/article that;

a) Davy can distinguish between their posterior and their elbow when it comes to economics, and
b) Davy staff speak for 'the national interest'.

Davy staff speak for Davy clients.

Complainer said:

I disagree with the premise of the post/article that;

a) Davy can distinguish between their posterior and their elbow when it comes to economics, and
b) Davy staff speak for 'the national interest'.

Davy staff speak for Davy clients.

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In other words, you can't find anything wrong in the article?

Brendan

shanegl said:

I disagree with this:
We wouldn't have a european-wide banking crisis if they were so risk-averse.

Holding Irish bank debt while they were hopelessly insolvent is not risk-averse. Junk is junk, senior or not.

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That is the same as saying that depositors are not risk averse because they made the mistake of putting their money on deposit in Irish banks.

The bondholders did not measure the risk correctly. Nor did the depositors.

Brendan Burgess said:

In other words, you can't find anything wrong in the article?

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I gave up shortly after the first paragraph which is largely unreadable for the average reader.

"The incessant vox pop on this issue has been ill-served by a crass misrepresentation of the senior bank debt investor. Far from being the reckless high risk/high reward speculators characterised in various dispatches, senior bondholders are the most risk-averse of species. They are placed alongside rank and file depositors at the very top of the creditor pecking order, where return of capital rather than return on capital is the absolute byword. Senior debt provides term financing for bank credit creation that stretches well beyond the limits of ordinary deposit maturities. Continuous repayment of this debt, alongside that of the pari passu depositor, is the confidence glue which sustains the “maturity transformation” process of modern commercial banking. Senior bank debt, like deposits, is not risk capital, and does not share in the profits (or losses) of banking operations."

I just thought that others who can/do read it might like to keep in mind Davy's track record and reputation.

shanegl said:

I disagree with this:
We wouldn't have a european-wide banking crisis if they were so risk-averse.

Holding Irish bank debt while they were hopelessly insolvent is not risk-averse. Junk is junk, senior or not.

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So how does a pension fund taking up a long term bond a highly rated Irish bank cause a banking crisis???

We're not talking about hedge funds here, we're talking about pension funds, life assurance companies and the like.

Jim