TODAY, Wednesday, 2 November, our Government is due to oversee the payment of a billion-dollar bond by the Bank Formerly Known as Anglo.*
There are three reasons not to pay this bond:
- As Michael Noonan once argued – this is not our debt.
- It is not required by the EU/IMF agreement.
- The markets will punish us for making the payment, not reward us.
1. As Michael Noonan once argued – this is not our debt:
The billion-dollar bond due today is not our debt – it is debt from a bust bank to private bondholders, who knew the risks.
This is not an original argument – in fact, it was well made by Michael Noonan, in the Dáil, last December. This is what he said:
What legal or moral compulsion is on Ireland, however, to honour in full debt incurred by Irish banks when there was no State involvement in the arrangements? These loans were entered into freely by willing lenders and borrowers with absolutely no State participation. … It is obscene that liability for these loans is now being transferred to the Irish taxpayer, in many respects to the poorest of the Irish taxpayers.
In the budget the Minister for Finance reduced social welfare payments, punished the blind, disabled, widows, carers and the unemployed and he taxed the poorest at work, and for what? It was so that the taxpayer can take on liability for debts the country never incurred and arose from private arrangements between private institutions. What a disaster and an obscenity.
The latest available bank data shows that Irish guaranteed bank debt has been sold on at a discount to hedge funds in the USA, the UK and Luxembourg, as well as to smaller speculative investors… The position has now become indefensible that the Irish taxpayer, even the poorest taxpayers, should be required to underpin the speculation of hedge fund investors. There must be transparent, open, negotiated burden sharing of bank debt.
All I can say is that I wholeheartedly agree.
2. It is not required by the EU/IMF agreement:
Although the requirements of the EU/IMF programme are onerous, and are imposing painful austerity on our economy, and on many people, protecting the Anglo bondholders is not amongst these requirements. There is no explicit deal under which we have committed to protect those bondholders.
According to the Minister for Finance, Michael Noonan (speaking earlier this year on RTE, and transcribed by the Nama Wine Lake blog), there has been no threat from the ECB to withdraw funding to Ireland if we burn bondholders.
However Michael Noonan did say of the ECB, “a nod is as good as a wink to a blind horse so we know what their negotiating position is.”
Is this an adequate basis on which to decide to pay a billion-dollar bond?
3. The markets will punish us for making the payment, not reward us:
The markets believe we are heading for default. They believe our debt is unsustainable. The reason they won’t lend to us is because they believe we can’t possibly pay our present debts, let alone any new ones. They think our promise to pay back the banks’ bondholders in full is unrealistic. Instead of gaining credit for paying back our debts, our efforts to do so make us less credible and more risky.
We have to set market expectations for burden sharing. It is regular business practice for senior bondholders to take haircuts when the bank they invest in goes bust. In the US in the last three years, 322 banks were wound up. In the vast majority of these cases, holders of senior debt in these banks took significant writedowns. Our problem is that we have set market expectations for a full repayment. Greece, on the other hand, set expectations for a default, and that encouraged the bondholders to come to the table and agree a haircut.
The Irish Government needs to start setting expectations that bondholders will not be repaid in full, and they need to start doing this tomorrow, by announcing that they are pausing the payment of this billion-dollar bond, pending negotiations with bondholders.
So what should the government do?
- Announce that they are “pausing” the payment of this bond.
- Invite bondholders to enter negotiations.
- When the ECB/Eurozone governments object, hold them to the letter of the agreements they signed.
- In negotiations with bondholders, seek a substantial “voluntary” haircut for this and future unsecured Anglo bonds.
- Proceed with other aspects of the EU/IMF programme to continue to tackle the deficit.
* Technically, Anglo on longer exists. Anglo Irish Bank Corporation Limited is now known as Irish Bank Resolution Corporation Limited.