Saturday, February 12, 2011

12/02/2011: Just how much are the bondholders in Irish banks worth to the taxpayer?

In recent weeks the question of bondholders and the extent of our banks exposure to the bonds-linked debts has been hotly debated in the media and by the political parties.

Many supporters of the Government position have repeated, in their defence, the claim that at this moment in time there are virtually no unpaid bond holders left, so applying ‘burden-sharing’ haircuts to their bond holdings will produce little gain, while causing much of pain to Ireland’s ‘reputation’.

So the question is – just how much of bonds is left for a potential haircut and what such a haircut might save for the country.

There is a lot of confusion in this area, some caused by the fact that the Central Bank does not readily publish any real information about the six banking institutions covered by the extended guarantee. I personally heard a number of times the following two figures used as an estimate of the total bonds-backed debt still outstanding: €15bn senior bonds and €6bn subordinated bonds.

This implies that total bonds outstanding amount to €21bn and any savings that can be had from these would be on average around: 40% senior debt haircut + 70% subordinated debt haircut, to the total amount of €10.2bn maximum.

However, the figure of €21bn is simply not a true or correct estimate of the total bonds still remaining outstanding.

The table below provides what we know officially (note: the last column refers to the unpublished document that was Minister Lenihan’s clarification of his own statement on record to the Dail, not published previously).

So per table above, the total amount of bonds outstanding for the six guaranteed credit institutions is €50bn. Of this
  • ca €28.1bn is guaranteed senior bond debt - standard haircut assumption for CDS pricing – 40% or €11.24bn;
  • un-guaranteed senior debt roughly of €11.7bn (we can assume a haircut of 50%, which is smaller than the simple average of the senior guaranteed and subordinated un-guaranteed debt), to the potential savings of €5.85bn;
  • subordinated debt (all un-guaranteed) of €10.2bn (which can be subject to a 100% write-off, but let’s assume it is haircut at 70%) generating potential for savings of €8.4bn.

So total scope for savings under relatively normal (by market pricing) haircuts is a cool €25.49bn (with a full hit on un-guaranteed debt we can save €33.14bn) – more than the cost of rescuing Anglo to-date (€23.9bn).

Note: hat tip to P.D. for providing the two documents referenced in the table above.

Update: related story today here clearly shows that the markets now expect significant haircuts and that any resistance by the ECB to such haircuts is, at this stage, irrelevant from the markets/investors perspective.


School4Surgeons said...

At least there is some hope of salvaging something from the fiasco. However, what is the timescale? Haven't many bonds already been redeemed (at full value) - when does the decision need to be made about the discount to be applied - is this something that can wait until after the election or is it even further away. So much time has been wasted already ....

Seamus said...

Hi Constantin,

Interesting figures and these are substantial potential savings. Per the latest CB statistics, domestic banks have €64 billion of debt securities in issue. It is not unreasonable to assume that most of these are from the banks covered by the guarantee. €50 billion seems about right and a haircut of about 50% would provide for big savings.

The CB data also show that more than 50% of the bonds are held by Irish residents. Back when the guarantee was introduced Irish residents held only 24% of domestic bank bonds.

Other holders of bonds, particularly from outside the Eurozone (London?) have pretty much scarpered. And most of gotten out of here pretty much unscathed. Looks like Irish people will be taking the pain one way or the other - but at least this way it is the people who have the money that are bearing the cost.