Guaranteed Irish
26 September 2010 By Cliff Taylor
Two years after the one of the biggest gambles in Irish political history, when the government decided to guarantee the liabilities of the banks, major questions remain about the future of the banks, and the longer-term legacy of the decision. Our banking system is still in a crippled state.
The situation is having a serious impact on our Irish sovereign debt.
Is there away now to get the restructuring plan finished in the months ahead, in a way which restores our banking system to health? Do we need to change our strategy? Or can the situation be turned around at all? Here are the options.
Option 1: stick to the plan – but get it finished
Under the plan setout by the government, the following events are due to happen over the next few months.
* The remaining commercial and development property loans will be transferred to the National Asset Management Agency (Nama).
* AIB will have completed its recapitalisation by selling further assets and raising fresh capital in a rights issue.
* We will know ‘‘the bill’’ for Anglo.
* EBS will have been sold off, and there will be a plan for the other smaller institutions.
* By the end of the year, the banks are all expected to have sufficient new capital raised to meet the rules set down by the Financial Regulator.
The government had hoped, a few months ago, that reaching these milestones would have meant the banks would be in a fit state to start operating normally again and raising funds without a state guarantee.
The problem: this strategy is under threat due to nervousness on international markets, which are particularly fearful about Ireland’s prospects.
The banks are now not even attempting to raise fresh cash, regardless of the benefit of the state guarantee.
The goal of the plan - to have banks recapitalised and able to operate normally on the markets - still looks a long way off.
Lurking in the background are fears that more losses will emerge in the bank loan books in the years ahead, particularly in domestic mortgages.
Course of action: the government seems determined to push ahead, in the hope that delivering on the final elements of the strategy will calm the markets and lead to a return to normality - even if it is slower than anticipated.
The Financial Regulator also will have a difficult job in persuading the markets that the new capital standards which the banks have to meet by the end of the year will safeguard them adequately against any future losses.
Option 2: get someone else to pay
If there are such big losses in the Irish banking system, why should the taxpayer end up paying the bill? As Anglo Irish Bank is the most pressing and by far the most costly issue, let us examine the options. Are there people we can get away without paying back?
Depositors must be repaid, including the European Central Bank and our own Central Bank, which have some €16 billion in Anglo. Those who believe the ECB should ‘‘pay’’ are arguing that the EU’s taxpayers should pick up the bill for our folly.
They are not likely to agree.
Who else does Anglo owe money to? How about the famous bondholders? Its last annual report showed that it had about €16 billion in bond debt (excluding holdings of short term commercial paper).
There are three distinct groups.
First, there is around €2.4 billion in subordinated debt, investments that generated a higher return because they were more risky. Secondly, there is about €4 billion in more senior debt, which was loaned to Anglo by investors before the state guarantee was granted in September 2008.
The remaining debt - around €10 billion - was loaned by investors since September 2008.
Thus, it is subject to an explicit guarantee from the state, either under the original September 2008 guarantee or the subsequent eligible liabilities guarantee.
The problem: as the state guaranteed the banking system liabilities - and as Anglo is nationalised - investors are now assessing Ireland and our banking system as one. Defaulting or not repaying bonds in full is therefore a serious matter.
There are also legal issues - the government has argued that senior debt holders rank equally with deposit holders and that it would be very difficult to impose losses on one group and not the other. Clearly, too, the debt raised since September 2008 was under a legally enforceable state guarantee.
Course of action: there are two questions for the government - what class of bondholders to hit, and how to hit them.
The government has set its face against any outright default: in other words, it will not tell any investors ‘‘Sorry, no money here." However, it does look set to engage in a voluntary buy-back of at least some debt.
In the case of Anglo subordinated bondholders, it is likely to try to put pressure on them to accept a big discount - and, as this debt is trading at below 30 cent in the euro, this should not be too difficult.
The government and the EU would be nervous of taking an aggressive line with more senior bondholders, fearing that it would ‘‘spook’’ the markets.
Option 3: adjust the original plan
It is clear that the original plan is in trouble, and that the government - and the EU - believe that any aggressive attempt to ‘‘burn the bondholders’’ is too risky.
The problem: changing tack now is difficult, perhaps impossible. Had the government known in September 2008 the extent of the problems in the banking system, it might well have taken a different course.
However, it didn’t.
Course of action: are there other measures that can be taken to calm market fears about the future exposure of the banks?
The Central Bank has been working on bank resolution legislation - rules for closing down insolvent banks. It is unlikely that this could help in dealing with past losses, though it might provide some reassurance for the markets for the years ahead.
The Central Bank’s regulatory arm is also believed to be examining the capitalisation level of the banks on an ongoing basis. It could rule that the banks need to raise more than it previously estimated, to try to underpin confidence.
Finally, there is the option of trying to attract overseas capital to take over parts of the banking system. Given the state of international confidence, this will not be easy in the short term.
However selective asset sales are possible.
Conclusion: the original plan is in trouble. Two years on, we still don’t know what Anglo will cost; AIB, our biggest bank, is still not recapitalised; and our banks are not in a position to function normally. International confidence, meanwhile, is on the floor.
The government needs to achieve a lot very quickly to have any chance of turning this around.
Options to adjust the original strategy are limited, but some could be important. Above all, urgency is now needed in delivering on the plan.
(
Sunday Business Post | Irish Business News)
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Interessante.