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?

23/1/2013: One Face of 'Irish Confidence Heroes'

Go to Minute 15 to hear this distressed assets investor bragging about forcing the Irish taxpayers to pay for his speculative bets on distressed junior bonds from BofI:
http://www.zerohedge.com/news/2013-01-22/teppers-balls-wall-reappear-lead-explosion-greatness

You wanted to see those 'investors' who have 'confidence' in Ireland? There's one. He got burned by Russians in a similar setting, but, what the hell, Irish Government conveniently made sure same didn't happen to him here. He was made whole on his exceptionally speculative bet.

15/9/2012: Brazil soaks bank bondholders

H/T to Ed - here's Brazil shutting down one medium-sized insolvent bank (link) and triggering the largets corporate bonds default in Latin America since 2002.

According to the report, ATMs still are functioning in Brazil. 

And a lovely quote from the Irish Government advising HSBC (alas via their Brazil division):

“It is quite healthy to have this kind of reminder every once in awhile that doesn’t pose a systemic threat,” said Pedro Bastos, chief executive officer of HSBC Global Asset Management in Brazil, in a phone interview from Sao Paulo. “It’s an important reminder that risk and return need to be in line with the investor’s profile.”

And lest we think Brazil's CB is not 'reckless' enough (in Irish counterparts parlance), Brazilian authorities are investigating fraud allegations - something that Irish authorities are not too keen on doing.

Obviously, there will be likely costs associated with the decision, namely, funding costs for the country medium sized banks might rise (they will most certainly rise in the short term, but it is the medium term that anyone should be concerned with as Central Banks can provide the bridge for the shorter term funding).

20/2/2012: Irish Banks - Zombies Running the Town - Sunday Times 19/02/2012

This is an unedited version of my article for Sunday Times 19/02/2011.

This week’s announcement by the Government that the Irish banks will be issuing loans to small and medium sized enterprises (the SMEs) under the cover of a sovereign guarantee has raised some eyebrows.

Throughout the persistent lobbying to underwrite credit supply to the struggling SMEs, it was generally resisted by the majority of economists and analysts, who argued that the Irish state is in no financial or fiscal position to provide such a measure. Having backed banks’ debts via the original 2008 State guarantee and emergency loans from the Central Bank of Ireland by the letter of comfort, the Irish state had also underwritten the risks associated with the commercial real estate development and investment assets through Nama. In addition, via rent supplements and mortgage interest supports, the government is propping up a small share of other banks assets and the rental markets.

Now, it’s the SMEs turn.

Per Central Bank’s own stress tests, estimated worst-case scenario defaults on all assets in the core Guaranteed banking institutions are expected to run at around 14.6%. SMEs loans had the worst-case scenario default rate estimate of 19%. We can argue as to the validity of the above estimates, but much of the international evidence on lending risks suggest that SMEs loans are some of the riskiest assets a bank can have. Add to this that we are in the depth of the gravest recession faced by any euro area country to-date, including Greece and you get the picture. Without state backing, there will be no lending to smaller firms. With the state guarantee, there will be none, still.

Subsidizing risker loans in the banks that are scrambling to deleverage their balancesheets, struggling with negative margins on their tracker mortgages and facing continued massive losses on loans might be a politically expedients short-term thing to do. Financially, it is hard to see how the Irish banking system crippled by the crisis and facing bleak ‘recovery’ prospects in years ahead can sustain any new lending to the SMEs.

Eleven months after the stress tests and seven months after the recapitalization by the taxpayers, Irish banking sector remains as dysfunctional in terms of its operations and strategies as ever.

Top level data on Government Guaranteed banks, provided by the Central Bank of Ireland, shows that in 2011, loans to Irish residents have fallen by €63.25 billion on 19% with €30.3 billion of this decline coming from the non-financial private sector – corporate, SME and household – loans. Loans to non-residents are down €40.9 billion or 29%.

Over the same period of time, deposits from Irish residents contracted €42.5 billion or 18%, with Irish private sector deposits down €11.2 billion or 10% on 2010. Non-resident deposits have shrunk 35% or €36.1 billion at the end of 2011 compared to the end of 2010.

The Government spokespeople are keen on pushing forward an argument that in recent months the numbers are starting to show stabilization. Alas, loans to Irish residents outstanding on the books of the guaranteed banks are down 7% for the last three months of 2011 compared to the third quarter of the same year. All of this deterioration is accounted for by losses in private sector loans which have fallen €21.7 billion or 12% in Q4 2011 compared to Q3 2011. Deposits from Irish residents are up €2.04 billion or 1% over the same period, due to inter-banks deposits rising €2.3 billion, while private sector deposits are down €384 million.

The ‘best capitalized banks in Europe’ – as our Government describes them – are not getting any healthier when it comes to core financial system performance parameters. Instead, they are simply getting worse at a slower pace.

The outlook is bleaker yet when one considers top-level risk metrics for the domestic banking sector. On the books of the Covered Banks, domestic private non-financial sector deposits are currently one and a half times greater than all foreign deposits combined. On the other side of the balancesheet, ratio of assets issued against domestic residents to assets issued against foreign residents now stands at 159% - the highest since December 2004. Again, this means that banks balancesheets are becoming more, not less, dependent on domestic deposits and assets, which in turn means more, not less risk concentration.

This absurdity passes for the State banking sector reforms strategy that force Irish banks to unload often better performing and more financially sound overseas investments in a misguided desire to pigeonhole our Pillar Banks into becoming sub-regional players in the internal domestic economy. In time, this will act to reduce banks ability to raise external funding and, thus, their future lending capacity.

Aptly, the latest trends clearly suggest increasing concentration and lower competition in the sector across Ireland. While ECB only reports a direct measure of market concentration (or monopolization) for the banking sector through 2010, the trends from 1997 reveal several disturbing facts about our domestic banking. Firstly, contrary to the popular perspective, competition in Irish banking did not increase during the bubble years. Herfindahl Index – the measure of the degree of market concentration – for banking sector in Ireland remained static at 0.05 in 1999-2001, rising to 0.06 in 2002-2006, and to 0.09 in 2009-2010. Secondly, back in 2010, our banking services had lower degree of competition than Austria, Germany, Spain, France, UK, Italy, Luxembourg, and Sweden. On average, during the crisis, market concentration across the EU banking sector rose by 8% according to the ECB data. In Ireland, this increase was 29% - the fastest in the euro area. Lastly, the data above does not reflect rapid unwinding of foreign banks operations in Ireland during 2011, or the emerging duopoly structure of the two Pillar banks.

Meanwhile, the banks continue to nurse yet-to-be recognized losses on household, SMEs and corporate loans as recent revision of the personal bankruptcy code induced massive uncertainty on risk pricing for mortgages at risk of default. In addition, Nama constantly changing plans to offer delayed repayment loans and mortgages protection, destabilizing banks risk assessments relating to existent and new mortgages, property-related and secured loans. The promissory notes structure itself pushes the IBRC to postpone as much as possible the winding up process.

To summarize, evidence suggests that seven months after the Exchequer completed a €62.9 billion recapitalization of the Irish banks, our banking system is yet to see the light at the end of the proverbial tunnel. Far from being ready to lend into the real economy, Irish banks continue to shrink their balancesheets and struggle to raise deposits. Their funding profile remains coupled with the ECB and Central Bank of Ireland repo operations – a situation that has improved slightly in the last couple of months, but is likely to deteriorate once again as ECB launches second round of the long term refinancing operations at the end of this month. In short, our banking is still overshadowed by the zombie AIB, IL&P, and IBRC.

Let’s hope Bank of Ireland, reporting next week, provides a ray of hope. Otherwise, the latest Government guarantees scheme can become a risky pipe dream – good for some short-term PR, irrelevant to the long-term health of the private sector and damaging to the Exchequer risk profile.

CHART

Source: Central Bank of Ireland

Box-out:

This week, Minister Richard Bruton, T.D. has made a rather strange claim. Speaking to RTÉ's News, Mr Bruton said that last year's jobs budget had created 6,000 jobs in the hotel and restaurant sector. Alas, per CSO’s Quarterly National Household Survey, the official source of data on sectoral employment levels in Ireland, seasonally adjusted employment in the Accommodation and food service activities sector stood at 119,100 in Q3 2009, falling to 118,200 in Q3 2010 and to 109,700 in Q3 2011. While jobs losses in 12 months through Q3 2011 – the latest for which data is available – were incurred prior to June 2011 when the VAT cuts and PRSI reductions Minister Bruton was referring to were enacted. But even if we were to look at seasonally adjusted quarterly changes in hotel and restaurant sector employment levels, the gains in Q3 2011 were a modest 1,400 not 6,000 claimed by the Minister. In reality, any assessment of the Jobs Programme announced back in May 2010 will require much more data than just one quarter so far reported by the CSO. That, plus a more careful reading of the data by those briefing the Minister.

18/12/2011: Ballyhea & Charleville Protest Against the Bailouts

This weekend I was honored to be a guest of a group of real patriots of our country - a group of extraordinary people who over 40 weeks, one Sunday after another, take their families and friends into the streets of Ballyhea and Charleville to protest against the injustice of the banks bondholders bailouts.

It is a remarkable group of people - coming from all walks of life, united not by an ideology or by a vested interest, but by the knowledge that what is being done to our country behind the veil of the banking crisis is simply wrong. It is wrong on a multitude of levels - ranging from ethics to politics to economics to social justice. The people behind this protest are also united by their concerns for the future of Ireland, for the rising wave of emigration, for the simple fact that our country capacity to recover from this crisis is being destroyed for the sake of rescuing a handful of institutional bondholders.

I felt truly honored - and there can be no other word to describe it - to have been asked to speak to these courageous people last night, to share a delightful pint and a long conversation with them, and to march alongside them today.

Here are a couple of pictures from the march.

The group run a website listing all bonds coming due for repayment, called bondwatchireland.blogspot.com and a Facebook page for their events (link here). These are, in my view, a must to follow for anyone concerned with what has been happening in Ireland over the last 3 years.

02/11/2011: A DofF note on Anglo Bonds Repayments

Here's the bull***t that passes for 'advisory analysis' for politicians - the copy of the note sent out to Government TDs from a specific party based on the Department of Finance information. I am publishing it here without any specific comments - judge for yourselves reading it - my only general comment is that it is uses a number of deceitful tricks, false juxtapositions and selective omissions to present the case for repaying unsecured unguaranteed bondholders in Anglo Irish Bank / IBRC.

(You can click on the pages to enlarge the text. I am publishing it without an explicit HT so as not reveal my source).

24/09/2011: Anglo Bonds and National Accounts

Note: corrected figures below (hat tip to @ReynoldsJulia via twitter).

Per Nama Wine Lake blog - an unparalleled true public service site on Irish debacle called Nama and many matters economic and financial, Irish Government (err... aka ex-Anglo Irish Bank, aka Irish Bank Resolution Corporation*) is on track to repay USD $1bn (€725m) unsecured unguaranteed senior Anglo bond on 2nd November 2011.

The gutless, completely irrational absurdity of this action being apparent to pretty much anyone around the world obviously needs no backing by numbers, but in the spirit of our times, let's provide some illustrations.

According to the latest QNA, in current market prices terms, Irish GNP grew in H1 2011 by a whooping grand total 0f €307 mln from €64,337 mln in H1 2010 to €65,012 mln in H1 2011, when measured in real terms. This means that Anglo bondholders payout forthcoming in November will be equivalent of erasing 28 months and 10 days worth of our economic growth.

According to the CSO data on national earnings, released on September 8, 2011, Ireland's current average earnings across the economy stand at €687.24 per week, implying annualized average earnings of €35,736.48. Irish tax calculator from Delloite provides net after-tax (& USC) income on such earnings of €28,287.39 per annum. This means that Anglo bond payout in November is equivalent to employment cost of 25,630 individuals.

According to CSO's latest QNHS data, in April-June 2011 there were 304,500 unemployed individuals in Ireland. This means the jobs that Anglo bond payout could cover are equivalent to 8.42% of the current unemployment pool.


I am not suggesting for a minute that we should simply use the money to 'create' government jobs - anyone who reads this blog or my articles in the press etc would know I have no time for Government-sponsored jobs 'creation'. But, folks, the above numbers are startling. We are about to p***ss into the proverbial wind the amount of money that is enough to cover our entire economy's growth over 2 years, 4 months and 10 days! For what? To underwrite 'credibility' of the institution that is a so completely and comprehensively insolvent?

* Note 1 that Anglo still calls itself Anglo (until October 14th) and still insists it is a bank as the web page http://www.angloirishbank.ie/ states clearly [emphasis mine] that: "As a Nationalised Bank since January 2009, the key objective of Anglo Irish Bank’s Board and new senior management team is to run the Bank in the public interest... The Bank continues to provide business lending, treasury and private banking services to our range of customers across all our locations."

Note 2:
The above, of course, assumes that €725mln exposure is hedged against currency fluctuations. If not, as Nama Wine Lake points out, the exposure rises to ca €740mln. The above figures therefore change to:

• GNP growth equivalent of 2 years, 4 months and 28 days
• Number of average earnings jobs of 26,160, plus one part-time job
• 8.59% of currently unemployed
  

02/06/2011: Latest shenanigans at the banks

Two junior bondholders in Allied Irish Banks - Aurelius Capital Management and Abadi Co – are taking the Irish government to court today over the AIB plans to impose burden-sharing on some bondholders in failed banks. Aurelius is a distressed debt investment vehicle which also holds debt of Dubai World so it should be well familiar with the case of haircuts.

These are not investors who bought Irish banks bonds at their full value, but those who pick up distressed debt at a significant discount. However, it is their right to maximize their returns on such investments.

Let us recall that AIB is the sickest of the 4 banks reviewed under the original PCARs back on March 31 this year. Under the stress tests, AIB is expected to lose €3.07bn on Residential Mortgages (all figures refer to stress scenario, 3-year time frame), €972mln on Corporate loans, €2.67bn on SMEs loans, €4.49bn on Commercial Real Estate loans and €1.4bn on Non-mortgage Consumer loans and Other loans. The grand total expected 2011-2013 losses under stressed scenario is €12.6bn or almost ½ of the total expected stress scenario losses across IRL-4 banks of €27.72bn.

Of the €24bn capital buffer for IRL-4 required by the Central Bank PCAR exercise, full €13.3bn is accounted for by AIB.

Which implies that AIB – accounting for just €93.7bn of the €273.94bn of loans held by the IRL-4 at the time of PCARs (just over 34.2% of the total loans of IRL-4) is responsible for over 55.4% of overall capital demands. It is, by a mile, the worst performing bank of IRL-4... Really, folks, 'Be with AIB' as their old commercials would say.

So in the case of AIB, Finance Minister Michael Noonan – the majority shareholder in AIB – is now attempting to impose losses of between 75 and 90 percent on €2.6bn of the bank’s subordinated debt. This means that the bond-holders are expected to contribute just 15-16% of the total cost of the latest bank recapitalization programme. This, of course, is a drop in a sea of pain already levied against Irish taxpayers.

The problem in Ireland is that the so-called subordinated liabilities orders (SLO), which the government is using to force a deal on bondholders is untested in law. Bondholders can claim priority over shareholders in the event of insolvency. But the banks are now existing solely on government life-support. Although they are complete zombies, they are not technically insolvent. This in turn means their equity retains some – if only tiny – value. The Irish Government in the case of AIB driving bondholders’ haircuts can be seen as the means for improving that value to the shareholder at the expense of bondholders, since equity will benefit from lower debt and changes in the capital structure.

In the case of AIB this means two possible things:

• If the court finds in favour of Aurelius and Abadi, the deal is off the table or will be more expensive to execute (lower haircuts), which will in turn imply greater demand on taxpayers to step in. Of course, this also means the Gov in effect destroying a large portion of its own shares value.
• If the court rules in favour of the Gov, the deal is on and we have a precedent for aggressive burden sharing. This, however, will only benefit the majority state-owned banks, i.e. Anglo, INBS, EBS and AIB, and only with respect to savings on subordinated debt.
  

The problem is in the timing of this burden sharing – the previous Gov insistence on paying on bonds in full means that we, the taxpayers, are now on the hook for losses on our shares in the banks via dilution. You don’t have to go far to see what happens here. Just look at Bank of Ireland (below).

Normal process of banks workout should have been:

• Step 1 – Impose losses on shareholders, while preserving depositors by ring-fencing them via specific legislation to remove equivalent status between senior bondholders and depositors. Such legislation can be enacted on the grounds that depositors are not lenders to the activities of the banks, but are clients of the banks for the purpose of safe-keeping of their money. It is also justified from the point of view of finance, as depositors are being paid much lower rates of return on their money, implying lower risk premium
• Step 2 – Impose losses on bondholders via a combination of robust haircuts and debt-for-equity swaps, but only after depositors are protected
• Step 3 – For any amounts of capital still outstanding per writedowns requirements, the Government can then take equity positions in the banks.

This sequence of actions would have prevented depositors runs and repeated taxpayer equity dilutions. It would also have given the Government a mandate to take over and reform failed banks.

By doing everything backwards, we are now in a veritable mess. This mess was not caused by the current Government – it is the toxic legacy of the previous Government which made gross errors in managing the whole banking crisis. This mess is extremely hard to unwind and my sympathies go here to Minister Noonan who is at the very least trying to do something right after years of spoofing and wasting taxpayers money by his predecessor.

Note: The Government is aiming to cut around €5bn from the total bill for bailing out Irish-6 banks. Imposing losses of up to 90 percent on junior bonds in AIB, Bank of Ireland, Irish Life & Permanent and EBS Building Society is on the cards:

• IL&P said it would offer 20cents on the euro for €840m of debt
• EBS wants to pay 10c to 20c on the euro for around €260m of subordinated bonds
• Bank of Ireland is pushing up to 90% discount on €2.6 billion worth of subordinated debt. Bank of Ireland said it would offer holders of Tier 1 securities just 10 percent of the face value of their original investment, and holders of Tier 2 securities 20 percent.

It is revealing, perhaps, of the state of our nation’s policy making that over a year ago myself, Brian Lucey, Peter Mathews, David McWilliams and a small number of other commentators suggested 80-90% haircuts for subordinated bondholders. We were, of course, promptly attacked as ‘reckless’, ‘irresponsible’ and ‘naïve’. Yet, doing this back then would have netted taxpayers savings of more than double the amount hoped for today.

And this is before the savings that could have been generated from avoiding painful dilution of equity holdings acquired by the Government in Irish banks. How painful? Look no further than the unfolding Bank of Ireland saga.

Bank of Ireland's lower Tier 2 paper is trading at 37-40 cents on the euro post-announcement of the after the announcement that T2 will be offered an 80 percent discount alongside with a ‘more attractive’ debt-for-equity swap. Tier 1 paper holders are offered 10 cents on the euro cash ex-accrued interest. Shares swap will factor in accrued interest to sweeten the deal. The debt-equity swap is so powerful of a promise that BofI shares have all but collapsed over the last few days losing over 62% of their already minuscule value. Of course, with Government holding 39% of equity pre-swap, the taxpayers have suffered the same loss as the ordinary shareholders, all courtesy of perverse timing of equity injections by the previous Government.

And there’s more. Even if successful in applying haircuts and swaps to junior bondholders, Bank of Ireland will still need to raise additional €1.6bn from either new investors or existent shareholders (including the Government). Which means even more dilution is to come.

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.

Economics 19/09/2009: Nama, bondholders and shareholders

Setting aside, for now, the issue of who subsidises who in Nama, a quick note on opportunity cost of the undertaking when it comes to the structure of Irish Financial Services in general.

June 2009 paper from a group of US and Canadian researchers, published for the European Finance Association, 2009 meeting (here) provides an interesting read. The study delivers "...a comprehensive analysis of a new and increasingly important phenomenon: the simultaneous holding of both equity and debt claims of the same company by non-bank institutional investors (“dual holders”). The presence of dual holders offers a unique opportunity to assess the existence and magnitude of shareholder-creditor conflicts. We find that syndicated loans with dual holder participation have loan yield spreads that are 13-20 basis points lower than those without. The difference is even greater after controlling for the selection effect. Further investigation of dual holders’ investment horizons and changes in borrowers’ credit quality lends support to the hypothesis that incentive alignment between shareholders and creditors plays an important role in lowering loan yield spreads."

Without giving too much technical detail, the study effectively says that inducing greater share of bond holders to also hold equity (or vice versa) results in lower cost of credit to the firm.

Now, recall that my Nama3.0 or Nama Trust proposal (here) has, as one of the first conditions for taxpayer bailout, a full or partial conversion of Irish Banks' debt holders into equity holders. This would have achieved two positive outcomes simultaneously:

1. reduce demand for taxpayer funds, while assuring that some private markets trading in banks' equity will remain post-Nama Trust implementation; and
2. per above study, lead to a long term improvement in the cost of liquidity for Irish banks.

Incidentally, the third net positive impact of such conversion would be effective risk-sharing, as bondholders will be given a direct stake in the Nama process, something that is not even attempted in the current 'risk sharing' proposals on the table.