Friday, December 20, 2013

20/12/2013: Are the bondholders' bailouts off the table now?


From late 2008 on through today, myself (including on this blog) and a small number of other economists and analysts have maintained a very clear line that burning of Anglo and INBS bondholders would have been a preferred option for Ireland.

Not to speak for others, I still maintain that writing off the Government bonds held by the ECB is the only course of action open to us today and that it should be pursued.

The ex-IMF's official statements yesterday concerning the preference for burning senior unsecured bondholders in Anglo and INBS, and the claim that this option is no longer viable for Ireland,  are neither new, nor material. For three reasons:

  1. Anglo and INBS bondholders should have been bailed-in in full regardless of their status. Those who held secured bonds should have been bailed-in via equity swaps after the full bailing-in of unsecured bondholders. The action would have saved Irish taxpayers tens of billions, not just billions as the ex-IMF-er claims.
  2. Other banks: AIB and ptsb bondholders should have bailed-in as well.
  3. ECB objections to such a course of action were exceptionally robust, but Ireland should have pursued more aggressive stance with respect to the ECB. Not quite a full exit, but possibly a combination of a threat, plus a concerted push alongside other 'peripheral' countries in the European structures to force ECB engagement.
  4. It is never too late to do the right thing: the debts are still there, only in a different form. Anglo-INBS debts are now held by the Central Bank in the form of sovereign bonds, converted into the latter by the acts of the current Government. These bonds should not be repaid. There are many ways in which such non-repayment can be structured, including with cooperation of the ECB and European officials. One example would be converting the bonds into perpetual zero coupon bonds.

In other words, late admission by the ex-IMF employee of the wrongs, backed by the claim that 'nothing more can be done' are not good enough. We need real corrective action from the EU.

Report on actual statement is here: http://www.breakingnews.ie/ireland/imf-ireland-could-have-saved-billions-by-burning-anglo-bondholders-617688.html

Update: H/T to @aidanodr for the following:
http://www.independent.ie/irish-news/politics/eu-chief-barroso-no-backdated-bank-debt-deal-for-ireland-29854504.html

This pretty much sums up the EU Commission's stance on the 'seismic' banks deal 'negotiated' by the Irish Government in June 2012. It is also wrong, offensive and belligerent. Mr Barroso's comments are simply economically illiterate. Assume Ireland did cause the euro area crisis. Can anyone (Mr Barroso?) explain how the euro can be deemed sustainable if it can be destabilised by a crisis in one of the smallest nations members of the union? Alternatively, imagine the US Dollar being as vulnerable to a banking crisis in New Hampshire in a way that euro (per Mr Barroso's claims) was allegedly vulnerable to the Irish crisis?

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