Wednesday, 1 September 2010

'Pluck' and reckless banks

Paul Sweeney: Regular Progressive Economy blogger on Finance, Dr Jim Stewart, has a letter in today’s Financial Times - co-authored by his TCD colleague Prof Louis Brennan - on the Anglo Irish bailout.

Commenting on that newspaper's Editorial last Friday on the debacle that is the foolish and costly Government bailout of Anglo Irish Bank, they suggest “negotiating the purchase (at a fraction of face value) of the bonds from the reckless lenders that funded the banks’ foolishness.”

Another alternative, they suggest, is that “as proposed in a recent BIS document, is that debt instruments could be written off entirely.”

Stewart and Brennan rightly warn of the “inevitable self-serving noise from the usual suspects, continuing to indulge at any cost the lenders that engaged in wholesale recklessness is a luxury that Ireland’s taxpayers and economy can ill afford.”

Is it not time to call a halt to this disastrous Government decision and for it to negotiate, hard, with the “reckless” bondholders? Or are our leaders so incompetent that they multiple every error they make. At our immense and growing cost.


Paul Hunt said...

Reality check. Ireland does not have a fit-for-purpose, legally enforceable bank resolution process. Absent this there is no means of compelling bondholders to enter negotiations. The BIS proposals are just that, proposals. Ireland is relying on the bond market to finance a sizeable fiscal deficit. Some players in the bond market might welcome haircuts for existing bondholders - so as to improve Ireland's future debt service capability, but it would be unwise to expect unanimity on this point. There is a real risk that the bond market could close for new Irish debt.

The only way haircuts may be applied is for Ireland to enter EC/ECB/IMF administration similar to Greece. Ireland would then have the protection of the European Stability Fund to access financing of its fiscal deficit. This is the last thing the Government wants and what the institutional EU probably would prefer to avoid - and it is the fear of this that maintains Government backbench discipline.

Keeping bondholders in the banks whole is the price of retaining some measure of sovereignty. This is the question for Irish voters: Is it a price worth paying?

Anonymous said...

Could Hunt’s comment be construed as an example of the self- serving noise from the usual suspects that is referred to in the FT letter highlighted in Sweeney's post

Paul Hunt said...

Thank you, Anon - whoever you may be - but you couldn't be more wide of the mark! Nothing would give me greater pleasure than seeing serious haircuts applied to bond traders on their own account and the fund managers who have exposed ordinary, under-informed savers to losses. But there has to be a due process. The only process available - which would protect Ireland's access to fiscal deficit financing - is EC/ECB/IMF administration. Any EU-wide process which would draw on the BIS proposals is probably a long way off.

Sinead Maire Ni Bhroin said...

With respect Paul, surely we already have EU cover so I'm not quite sure why we would want or need the IMF. Our fiscal reality, bad and all as it is, is very different to Greece's. What worries me from what you have written, and in fairness to you it reflects the general 'establishment' consensus, is that bondholders are untouchable. If that be the case then the establishment is creating a very unstable and unsustainable future for our banking system, and in turn society. One cannot stay untouchable forever. The longer we wait the harder the eventual fall.

Paul Hunt said...

@Sinead Maire,

Thank you, but please don't put me in the 'establishment' box! There is a distinction between EU 'cover' and EU approval of the policies being pursued by the Government. We have the latter and the expectation (hope?) is that Ireland can continue to finance its deficit on its own. I describe the Government's policy as 'kicking the can down the road in the hope something will turn up'. The so-called 'establishment' opinion is often critical of how the Government is kicking the can but there is an unspoken consensus that any serious attempt to deal with what's in the can will lead directly to EC/ECB/IMF administration.

The Government can't/won't opt voluntarily for this. However, Ireland simply doesn't have the power or resources to tackle the bondholders unilaterally; but the bond market has enough of both to test the extent to which the institutional EU will support Ireland.

And the cruel irony is that, while exiting bondholders are being protected, prosepctive bond buyers will raise concerns about Ireland's ability to service new debt issues.

I'm just saying the unsayable by suggesting that it would be better to face the inevitable and use it to get shot of these bondholders.

Jim Stewart said...

The ‘Paul Hunts’ of this world have plenty of excuses for inaction when it comes to dealing with the Anglo Bond holders. However the excuses are inconsistent, the arguments often combine a mixture of irrelevance and incoherence.

The first excuse is that because we do not have a special resolution scheme for banks nothing can be done. A bank resolution scheme for banks could not be used in the Anglo case (See:-, and P. Brierley at: Hence the issue of its existence is irrelevant. This was pointed out in my progressive-economy blog of 24/08/2010.

The process of dealing with the Anglo bond holders could be via an existing legal process such as administration, or liquidation. The threat of such action would cause those with claims on Anglo bonds to enter immediate negotiation.

Facing up to the task of writing down the value of Anglo debt will reduce the cost of the bank bail out to Irish and EU citizens and can only reduce the risk of unsustainable State borrowing.

Rory O'Farrell said...

@ Paul Hunt

As it is, Ireland is trying to swim a river while tethered to a corpse.

The financial markets know what a drag Anglo is on our ability to repay our national debt. This debt is separate to Anglo's. If we cut off Anglo the financial markets will know that we now have a greater ability to pay our debts, and will be MORE willing to lend to us.

As you say some who lend to Anglo also lend to the Irish government. I strongly doubt that these lenders will go off on a sulk because the Irish government has stopped giving them money for nothing. They will look at the interest rate on Irish debt, and our improved ability to repay, and on that basis decide that lending to the Irish government is attractive.

Here is nice 20min video which helps explain why people (and monkeys) find it hard to cut their losses.

Paul Hunt said...

I think Dr. Stewart's Trinity colleague, Brian Lucey, is far better able and qualified to engage on these issues with him than I am:

tohalloran said...

"Keeping bondholders in the banks whole is the price of retaining some measure of sovereignty. This is the question for Irish voters: Is it a price worth paying? "

Alas the only piece of Irish Sovereignity worth exercising at this moment is the right to cut loose the Anglo bond-holders. What you are saying is we can pretend to be sovereign so long as we do not exercise sovereignity in any meaninglful way. This is what psychologists call 'as if' behaviour, a mode of operation more suited to Fianna Fail than the contributors to this site.

As a German statesman once famously said "I am conceding no rights that were not long ago recklessly gambled away...." The best we can do is to set down some pre-conditions - red lines as they say in the modern vernacular.

Its time for ICTU to abandon its craven Croke Park strategy (that agreement will not be honoured by this government or any other) and bring the people on the strrets to oppose this farcial government policy. ICTU to its eternal shame, reneged on its promise to oppose NAMA. Its not too late to redeem itself by opposing selling out this country's future to the Anglo bond holders.

Who among the readers of this site would have loaned substantial sums to FF's favourite bankers? Why should we be repsonsible for people careless enough not to investigate even the basic details of Ireland's modern history before they extended billions in loans to Anglo? Maybe they did investigate, only to ignore the evidence, because they were confident that the Irish citizenry would be supine enough to under-write their crazy gamble. After all, they were supine enough to elect FF 3 times in a row, despite all the evidence.