Wednesday, February 5, 2014

Debt relief for Ireland?

In yesterday’s Irish Times, Chris Johns concluded an article on central banks with:

The Holy Grail of central banking, credibility, depends mostly on hitting pre-set targets. But credibility also requires honesty. And I think it is legitimate to ask whether or not the ECB has been honest with us. It clearly made a mistake when it came to the bond holders. It may well have been an error of judgement, made in the heat of battle when things were less clear than they are now. But it was a mistake. Serious people said so at the time.

For its own sake, the ECB should come clean about all of this. If it is to become the kind of institution that commands the respect it needs, honesty about mistakes is, as Haldane has persuasively argued, essential. The ECB should fess up and figure out a neat way of giving us some debt relief. It’s the right thing to do and would enhance the ECB’s standing.

Over time more details have emerged about the discussions surrounding the €6 billion of unsecured, and by that stage unguaranteed, senior bonds that remained in Anglo and INBS in November 2010.  It is well known that the IMF were in favour of burden sharing.  In an interview with the same paper last week, current Bundesbank president, Jens Weidmann, said in relation to the November 2010 discussions that:

The Governing Council then was weighing bail-in versus financial stability risks, and its majority concluded that the latter were more relevant under the concrete circumstances. In that debate the Bundesbank has always considered it important to make investors bear the risks of their investment decisions and already then favoured contributions of investors in the event of solvency problems, especially for banks that are to be wound down.

Weidmann (who was not working for the Bundesbank at the time) talks in generalities rather than the specifics of the Irish case but the interpretation easily lends itself that way.  One specific Weidmann did cover last week was whether Ireland should get some debt relief for the forced repayment of the €6 billion of senior unsecured bonds in Anglo/INBS as argued by Chris Johns.  Weidmann hints that we already got it through the Promissory Note swap engineered last February.

Some might consider the transaction as a kind of a compensation for the Irish support to its banking system, but in my view such transfers should not be the business of central banks.

I doubt this was the type of debt relief Chris Johns was calling for.  A 66% haircut on the €6 billion of senior bonds left in Anglo/INBS in November 2010 would have netted €4 billion – a massive amount of money.  Under certain assumptions, the NPV of the gains from the Promissory Note swap can be put at €4 billion.  Perhaps Weidmann’s suggestion has some merit.

Of course, the biggest black hole Ireland poured money into in “support” of the banking system was the repayment of deposits in Anglo and INBS.  There is still no sign of a smoking gun to indicate that the repayment of deposits was forced on Ireland by external forces or that Ireland was prevented from putting the banks into resolution earlier.  All indications are that these decisions were made domestically and internally there were close to no calls for depositor haircuts as the banking crisis emerged.

If a smoking gun for the deposits is found (and it needs to be from well before November 2010) then maybe a case for further debt relief can be made.  However, the indications to date suggest that it does not exist.  Then the argument is based on little more than solidarity.  There wasn’t much solidarity shown to holders of Greek government bonds or large depositors in Cypriot banks.  They made decisions and had to live with the consequences of them when they couldn’t be repaid. 

In Ireland, we made the decision to repay depositors and there are consequences that followed from that.  It is easy to look back and say decisions were wrong.  It is much more difficult to look back and find someone else to blame.  It might not be palatable but it is likely that the arrangement put in place last February is as good as it gets.

1 comment:

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