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Ireland: Haircut, sir? 15% off? 'Euro-banks set to lose €bns'

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Paul Mason | 13:44 UK time, Friday, 26 November 2010

This morning's leak to the Irish Times that the EU/IMF are, indeed, preparing to force those who have lent the Irish banks money to take a loss on their investment is being regarded as a big event in the world of finance.

Here's why.

I quote EU finance commissioner Olli Rehn at last week's deadly-dull press conference in Brussels:

"I welcomed the clarification in Seoul that any potential private sector involvement in a future permanent crisis resolution mechanism after 2013 does not apply to any outstanding debt, nor to any EU IMF programme under the current arrangements. This is also the Commission's position."

And here's Jean-Claude Juncker at the same press conference:

"With regard to this permanent mechanism, in particular we need to look at the implication of the private sector. The private sector's involvement obviously could not apply to Greece Portugal or Ireland, if you take the ones that are currently being examined. Private sector involvement would only apply from the second half of 2013."

Now for the details in todays Irish Times:

"Officials in the EU-IMF mission to Dublin are examining how senior bondholders could be compelled to pay some of the cost of rescuing Ireland's banks....

At present attention centres on two similar schemes. In the first, bank debt would be converted into equity shares. In the second, bond investors would be given the choice of injecting fresh capital into banks or face a cut in their investment. (my emphasis)

The source said there was a "common understanding" between delegations from the EU Commission, the European Central Bank and the IMF that senior and junior bondholders should each pay a share of the rescue costs.

The first step would be to seek to "persuade" senior bondholders to participate in the bailout, said the source. "If that doesn't succeed, the question is how can you force them in a legally-sound way."

I invited the UK Treasury to confirm or deny this story but they said no comment. They said the declaration made in Seoul stood...However.

If the Irish Times story is true - and it's being given credence in the City - some actual investors look set to share the burden of an EU bank/sovereign debt bailout - to cries of pain from then and delight from that now ubiquitous rostrum in the Deutsche Bundestag, from which Euro policy is now dictated.

OK. Some problems here.

First - under whose legal system do you do this? I am told the Irish legal system contains no provisions for such action so it is being partially discussed under the British legal system. This may be why Britain has to stump up - to create a legal umbrella to do any kind of deal at all.

But under anybody's law the problem is this: junior debt will get wiped out. But senior unsecured debt is, legally, I am told ranked alongside the money of depositors. So how if you cannot persuade the senior unsecured creditors to take a hit (and it's a big hit) you then face legal action where the negative outcome of the court case is, potentially, the loss of some depositors' money?

If we assume the European banks are persuaded to take a stake in the Irish banks, in return for, say a 15% loss on their outstanding debts, then that loss could amount to several tens of billions of Euros, says one investor.

I am told there will be no developments on this before we go on air this evening, but I will keep you posted.


  • Comment number 1.

    There's one thing losing Irish sovereignty to the EU/IMF. Then there's losing your "hair" to a deal under the umbrella of "the British legal system". Paul I take it you mean English law rather than Scottish law? What legal system should we use for Greece, Portugal or Spain for that matter? The crisis is truly exploring the envelope of limitations to EU economic and political governance (and Alien film plots ;). The all powerful bond markets don't even know which legal system will screw them, if any.

  • Comment number 2.

    So interest rates will be going up then? Quickly and back to double figures.

    I assume bond holders will begin to demand higher returns in return for the higher risk. Not just holders of Irish debt but of Greek, Portugeuse, Spanish... and British debt.

    Let's see Mervyn King keep IRs low now.

  • Comment number 3.

    "But under anybody's law the problem is this: junior debt will get wiped out. But senior unsecured debt is, legally, I am told ranked alongside the money of depositors. So how if you cannot persuade the senior unsecured creditors to take a hit (and it's a big hit) you then face legal action where the negative outcome of the court case is, potentially, the loss of some depositors' money?"

    The answer to that is blindingly obvious - return to the financial compensation schemes that had rational and reasonable limits rather than complete guarantees. Then those with small savings or small investments are spared much loss and those with large savings or large investments stand a substantial loss on the understanding that they should have spread their investments around to lessen the risks.

    There was nothing wrong with the compensation scheme. It was not allowed to work as intended due to panic stricken politicians.

  • Comment number 4.


    Nowehere else for the liquidity to go either, the stock market is looking like a bubble, gold is up, western consumers are broke and about to get a nasty shock in terms of their disposable income in the coming year.

    looks like the alien is slowly backing investment banking into a corner, he has his hair clippers, he knows how to use em and they are set set to a No.2

    Those with private pensions and time on their hands will be beating a path to westminster wanting to know why they are the ones to suffer when they are the ones who did everything as they were supposed to do.

    The grey haired grumpy brigade have alot of political clout.

  • Comment number 5.

    Rather depressing that Welsh and Gaelic/Irish postings are expressly banned by the house rules - so much for equal treatment for licence payers…

    However, for anglophones, I'll try to get my English right
    I was heartened by Angela Merkel's reference yesterday to making bond holders take some of the pain. Obviously it was occasioned by self-interest: Germans don't want to hand over any more money, but the move to make speculators share the pain is correct. They invested badly. Tough. Why should they be indemnified while the Irish poor have their benefits and minimum wage cut? Calming the markets to make a return to borrowing in the future is all very well, but if it's a one-way bet, the market is horribly distorted and economies will crash anyway.

  • Comment number 6.

    #5 Plashing Vole

    I was hoping that Klingon would be allowed as a posting language on here as when you combine Irish/Gaelic/Welsh and Cornish together there are still more speakers of Klingon on the planet.

    Hence, rather than get my point across to the biggest audience possible by writing in English, I would much prefer to narrow my audience to just those who speak and read Klingon.

    When I wish to narrow my audience even more I too will begin posting in Welsh.

    yIDoghQo' - that is Klingon for "Don't be silly!".

  • Comment number 7.

    The first problem is to "persuade" senior bondholders to participate in the bailout. If that doesn't succeed, the question is how can you force them in a legal way. All I can say is good luck with that! Would you voluntarily participate?
    Another problem: the UK Treasury neither confirms or denies. How come the Treasury can neither confirm or deny - no audits, no confirmation of where its money is going, just meek, sappy acceptance from the public, but more importantly from the Government. It's as though the Treasury is sacrosanct, and that is just plain ridiculous!
    As for the IMF, I wouldn't trust them as far as I could throw them - too much American input.
    I hate that this is happening in Europe - EU member or not.
    Why is it happening?
    Didn't China, at the EU Summit, declare its willingness to buy any and all EU sovereign bonds that came on the market. Is all this EU, IMF economic babble really about an all-out effort to keep China from getting a toe-hold in the EU? Last I heard China had 2.5 trillion in reserves and was looking to diversify its portfolio (i.e. dump US bonds and diversify into the EU).
    Is Portugal next? Only if the EU and the IMF continue (very likely under American pressure) to keep China from assisting.
    How desperate do the EU and the IMF have to be to go to such dire straights to keep China away from the EU doorstep?
    Irish Prime Minister Brian Cowen is in the first stages of a push to sell voters and lawmakers on a four-year austerity plan; supposedly, this was required to secure support from the EU and IMF to keep Ireland's banking sector from imploding, but Ireland said that it was funded till June, 2011, and after that it had a commitment from China to buy any and all Irish soverign bonds that hit the market.
    Back on October 4, 2010, Premier Wen Jiabao said that China will work closely with the European Union (EU) as well as directly with Greece to assist EU financial recovery. China put forward a commitment to advancing China-EU relations: "This is not an expediency, but a long-term strategic policy." China promised not to reduce its holdings of euro bonds. He said: "We sent trade and investment promotion missions to Europe and signed a series of important trade and investment contracts."
    To help Greece overcome its debt crisis, China set up special initiatives to support Greek ship owners buying vessels from China.
    In a meeting with George Papandreou, Wen said China has been holding Greek government bonds and will buy more to help the country recover from the financial crisis.
    China seeks to improve the relationship between China and the EU. So, why all the austerity without allowing China to assist, or even comment?
    Does the EU, the maker of market rules, inevitably worry about competing with China's exports?
    Is the United States that hateful towards China?

  • Comment number 8.


    Something for the weekend: The frequency of approbation (but dearth of opprobrium) in blog comments is both revealing, and true to type.

    The problems which we face are, some have astutely pointed out, critically related to the prevalence of these self-centred behaviours in our European populations.

    Is that (no doubt unpopular with many ninnies) analysis correct?

  • Comment number 9.

    Paul Tucker, deputy governor of the Bank of England (quoted in Bloomberg
    today) said at a conference in London on Oct. 4.:

    “It will mean that debt-holders as well as equity-holders are at risk, and debt-holders will monitor the downside when they lend money to banks and dealers and others, rather than taking it for granted that they will always get their money back, because they won’t”

    So technically, hedge fund managers etc, holding Irish, UK etc bank bonds could have been (and could still be) short-selling bank shares, knowing that they were relatively safe holding the same banks' bonds?

  • Comment number 10.



  • Comment number 11.


    You don't want opprobruim with high finance - that's as dumb as salt with porridge.

    Anyway, Ecolizzy is a one girl army. Bravo Lizzy! And there are plenty more putting the boot in, by my reading.

  • Comment number 12.

    Amazing! The ideal solution. Everyone's debts will be written off and wiped from the face of the earth and those owed the money can have the worthless assets in return.

    Making up the rules as they go along again? Hey Ho! it can only be the EU and their airy fairy commissioners. LA LA Land here we come.

    Just can't wait for the next instalment

  • Comment number 13.

    I suppose this is one way of forcing up rates of interest on new sovereign right across the board.

    This is one sure way of compounding a debt crisis but then those who are the most borrowed will always suffer thus. Egg and chips all round, mother!

    I will keep a light in the window in expectation of the sterling crisis which will come after the PIIGS meet their maker. You know, that time when all the chickens come home to roost in the housing market. See, we might have some bacon with those eggs!

    George! You had better get Mervyn to put the kettle on for a nice cup of QE sometime next spring, methinks!

    For what we are about to receive may the good Lord make us truly thankful!

    Happy Christmas? Ho, ho, ho!

  • Comment number 14.

    The laws of nature are now in operation, maybe. I wonder whether the ECB itself will be affected - are they senior bond holders?

  • Comment number 15.

    In times of debt deflation the strongest are those with the least debt. Follow the flow of deposits to the strongest institutions.

  • Comment number 16.

    Ode to the nemesis of Mammon

    No assets, no debts, the cry of the free
    I only covet the company of friends that I see
    My food is the bounty that falls from the tree
    For there's nothing I own to be taken from me

  • Comment number 17.

    @16 Very good Hawkeye!!!! :-D

    It reminded me of Alexander Pope's comment on the Treaty of Utrecht:

    The Balance of Europe (1715).

    Now Europe's balanc'd, neither side prevails;
    For nothing's left in either of the scales.

    We could rewrite this to predict the future of Ireland's (or Britain's) economy after orthodox ECB/IMF/Osborneomics remedies:

    The Budget Deficit (2015).

    Now the budget's balanc'd, neither public nor private prevails;
    For nothing's left in either of the scales.

  • Comment number 18.

    Wow! is that three economists agreeing at the BBC. Just give me a moment.

    Back on-line - I find it difficult to believe that even subords will suffer a significant loss in the restructuring of the Irish banks debt. Has this happened yet and what would be the market reaction? If as I suspect the creditors of the banks suffer no loss the whole basis of risk-reward investment falls apart. Lehman was to "encourage les autres" and look what followed! This is why banks/finance institutions must be supervised not retrospectively regulated, public ownership must be a strong player in the industry and financial governance and diligence must be enforceable and if necessary punishedable through the courts

  • Comment number 19.

    Suicidal. This could trigger a flight of capital from across the EU member states including divestment of Government, Private Bank, and Corporate debt.

  • Comment number 20.

    > 5. At 3:21pm on 26 Nov 2010, Plashing Vole wrote:

    Unfortunately, it is not the speculators as you call them, that will get hurt. Sovereign debt is key to the capitalisation of the banks, pensions, and other funds. Essentially the Governments are trying to rewrite the rules to suit themselves after making a mess of their economies. They may win in the short term, but such a move will in effect mean that the likes of the PIIGS will only be able to borrow from German backed EU-controlled funds. On top of that, there will be an additional risk premium and/or down-grading of ratings. The net result will be higher interest charges than elsewhere in the world.

  • Comment number 21.

    One other thought on this; the EU-sponsored Bank Risk asses met performed on the top European Banks in 2009/2010 was clearly flawed with evidence of 'tinkering' in the measures to ensure that high profile names received a pass mark.

    Bond holds and Ratings Agencies may wish to pursue this matter through the courts if there was any talk of legally imposed haircuts on senior sovereign debt.

  • Comment number 22.

    According to the Daily Mail the Duchess of York has told her creditors to accept 25% of what she owes them or risk getting nothing - maybe the Irish people should do likewise?


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