Monday, February 15, 2010

Economics 15/02/2010: Bank of Ireland ethical dilemma

So here we are folks, the state has run into a bit of a trouble.

Remember those dividends that our (taxpayer-bought) preference shares in the BofI and AIB were supposed to generate? Ok, there is a problem here.

On February 22, BofI is supposed to pay out some €240 million to us (the taxpayers, in case if you wondering) in dividends on these shares. Alas, if you recall, the EU has imposed severe restrictions on the banks dividends. This means that we are now in a no-man's land when it comes to getting paid on that €3.5 billion we put into BofI. The Government has an option to circumvent the EU rules and ask for shares to be paid in instead of cash, but this surely will open claims from the bondholders who are not being paid their coupons. And, of course, if shares are issued in the way of payment, there will be dilution. At current price, €240 million worht of BofI shares will be, ahem, 24% of the expected €1,000 million rights issue or 19.1% of the market capi of the bank. Some serious dilution, unless the EU grants an exemption to the State.

But an exemption for the Government is an ethically dubious move for several reasons:
  • In all other bank support schemes, the EU did not lift restrictions on dividends/interest/coupon payments for sovereigns. Should it do so for Ireland, what's next?
  • Payments to other bondholders who have identical rights to the state (on paper) will not be made, opening up the entire process to legal challenges.
And we (the taxpayers) were told by the Government and its stockbrokers that we've made a sound investment in the BofI preference shares... Ouch...


patrick1978 said...

€240 million in unpaid dividends is irrelevant
when you consider the reality that the taxpayer
will lose €10.2bn under the NAMA "project".

TrueEconomics said...

Yes, Patrick, except:
- I would estimate post-Nama recapitalization costs of 10-12 billion, plus Nama own losses of at least 10 billion, adding cost to date - 11 billion, you have total net loss from Nama to the economy of 31-33 billion; and
- 240 million foregone is significant only in terms of the symbolism - if it is unpaid, or pushed back until better times, the entire argument that 7 billion pumped last year into AIB and BofI was 'investment' and that the Exchequer was acting in the best interest of taxpayers is a sham.

Anonymous said...

The expected non payment of dividends on this great investment deal the Irish taxpayer was getting a few months ago will surprise no one. It just goes to show you what amateurs the gang that did the Northern Bank Robbery a few years ago were. There would be an M-50 type traffic jam if all the cash were physically loaded onto vans and driven out of the central bank...