Wednesday, February 6, 2013

“Lots of Debt” in the IBRC?

On last night’s Primetime, Professor Hans-Werner Sinn seemed to support a default on the upcoming €3.1 billion payment on the Anglo Promissory Notes.  From the interview:

PK: If, for example, we decide we are not going to pay the 3.1 billion on the Promissory Note which is due at the end of March.  That means that the former Anglo bank will not have the cash to do what it needs to do – to wind down.  The ECB will say “that’s a default”.

HWS: Why don’t you let it default? Default is the best way to solve such a problem. It doesn’t mean the bank comes to an end; it just means that the creditors have to forgive some of the debt and this is quite natural.  They made the investment decision.


HWS: Well there is still lots of debt in the banking sector, including the Anglo Irish Bank, the follow-up bank, the bad bank.  It has bondholders; it has creditors.

PK: So burn them?

HWS: Well, ask them to forgive some of the debt.

“Why not let it default?”  That could be done but it is clear that Professor Sinn does not know what is left in Anglo/INBS, now known as the Irish Bank Resolution Corporation (IBRC).  Here is an abridged version of the IBRC balance for the end of June 2012 taken from its latest interim report (page 24)

IBRC Balance Sheet June 2012

IBRC does have a lot of liabilities but 85% of it is the Exceptional Liquidity Assistance (ELA) it drew down from the Central Bank of Ireland in 2010 to repay the huge amount of deposits that left at that time.  The €3 billion of “Deposits from Other Banks” is the repurchase agreement entered into with Bank of Ireland last year with an Irish government bond that was used to meet last year’s Promissory Note/ELA repayment.  The IBRC must repay this in June.

There is not “lots of debt” to renege on unless Professor Sinn means a default on the ELA that is ultimately owed to the ECB and that we should ask them “to forgive some of the debt”.  However, when pressed further he doesn’t seem to advocate this.

PK: The ECB will allow us to do this?

HWS: I don’t know what the ECB will say.

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