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News : Irish Economy Last Updated: Feb 17, 2011 - 6:38 AM


Rehn says EU finance ministers have 'simply no appetite' for Irish bank senior bondholder 'haircuts'
By Michael Hennigan, Founder and Editor of Finfacts
Feb 16, 2011 - 5:16 AM

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Fine Gael leader Enda Kenny and Finance spokesperson Michael Noonan pictured Tuesday, Feb 15, 2011, at the launch of Fine Gael's Manifesto, which is built around the party’s election theme ‘Let’s Get Ireland Working’.

The European Union's Economic and Monetary Affairs commissioner, Olli Rehn, said on Tuesday that EU finance ministers have 'simply no appetite' for Irish bank senior bondholder 'haircuts' - - forced cuts in the amount of the debt owing.

The commissioner said the restructuring of Ireland's banking sector should be done in line with undertakings already agreed with the EU and the IMF.

"We only expect that this will be done according to the memorandum of understanding which sets the frame for restructuring and reform of the Irish banking sector so that it can become again healthy and resilient,"
Rehn told reporters  after a meeting of the Ecofin council of European Union finance ministers in Brussels.

He added:
"There is simply no appetite for considering senior bondholders in this context because we want to avoid any kind of potential contagion effect and therefore this issue is not at the table and that was made very clear yesterday in the meeting of the Eurogroup."

The Fine Gael party's election manifesto, which was published yesterday, says imposing losses on senior bondholders in Irish banks would only be extended as part of a European-wide framework and would focus on Anglo Irish Bank and Irish Nationwide Building Society, which are being wound up.

Previously, Fine Gael had said that it could unilaterally impose losses on unguaranteed senior bonds, which amount to an estimated €15bn.

Minister for Finance Brian Lenihan told reporters that there was “significant disagreement” between member states on the issue of cutting the composite EU-IMF bailout fund rate of 5.88%.

The minister said the Netherlands opposes any cut while Germany wants Ireland to quicken its austerity drive in return for a lower interest rate.

Lenihan also said discussion was “very, very far” at this stage from Ireland being asked to accept a common corporate tax in return for a lower interest charge.

“The main focus of German concern has been the fiscal correction in Ireland. They want the fiscal correction expedited and this is the crucial issue in relation to the pricing policy, that if you want a better pricing policy, you’d perform in terms of the EU-IMF agreement.”

Lenihan also commented that there was “considerable shock” in Europe at the debate on bond default in the general election campaign. The debate was seen as “deeply damaging” for the banking system.

One of the options that is being discussed between Ireland and officials from the EU and IMF, is the possibility of banks selling loans of about €100bn.

The cash would be used to repay part of the €145bn that the Irish domestic banks have borrowed from the Central Bank and the ECB.

However, there is a complication where Ireland could be forced to compensate investors who buy those portfolios of loans for potential losses.

In related news, on Tuesday night in a television interview, former minister John Gormley gave some interesting detail on the run-up to the calamitous decision to issue a blanket State banking guarantee in Sept 2008.

SEE: Finfacts article, Sept 30, 2010 -- the second anniversary of the issue of the State guarantee: Lenihan says failure of Anglo Irish Bank would "bring down" the country  - - includes video clips of Prof. Morgan Kelly of UCD and financial regulator, Patrick Neary.

The median across 12 advanced countries of government-guaranteed debt issued by banks is about 6% of GDP. Ireland was the outlier in 2009  with a sovereign exposure of 55% of GDP.

The issue of ECB President Jean-Claude Trichet and the Irish State bank guarantee of Sept 2008, is reminiscent of arguments about London-Dublin cable traffic during the Treaty negotiations in 1921. The main story of course was why the head of the revolutionary government had decided to stay in Dublin not communication problems.

There was no official ECB policy in Sept 2008 on issuing blanket guarantees and neither had EU finance ministers promoted it.

Ireland was the ONLY Eurozone country to issue a blanket guarantee and a week later Denmark made a similar move.

According to the IMF, the median across 12 advanced countries of government-guaranteed debt issued by banks during the crisis or in the case of Denmark/Ireland including existing debt, was about 6% of GDP.

In ascending order, US (2.5% of GDP), Germany (3%), Portugal, Spain, France, Austria, Sweden, Netherlands, UK, Australia, Denmark and Ireland.

Denmark’s exposure was 20% of GDP and Ireland was the outlier with an exposure of 55% of GDP — all the others had an exposure below 10%.

The news on the Irish guarantee was presented as a fait accompli to the ECB, Ecofin and Eurogroup heads on the morning of Sept 30, 2008, coinciding with the issue of the news to the markets.

Once the announcement was made, it would have been very difficult to reverse it.

As regards the Lenihan-Trichet phone conversation a week before the guarantee was issued, I doubt if Trichet gave the go-ahead on a blanket bailout. Unlike his gaffe-prone predecessor, he is always measured when speaking on policy issues.

This story is akin to a unit of a multinational making a major decision without any consultation with headquarters but assuming that everything would be grand because of a conversation a week before with the CEO.!

Decisions made in a panic situation seldom turn out right.

The banks had access to the ECB’s emergency liquidity program which was in place since Aug 2007.

The unlimited deposit guarantee could have been issued and the issue of guaranteeing debt could have been discussed with the ECB in a calmer atmosphere.

If the blanket guarantee was issued to save Anglo, it was an absolutely reckless move to make in the absence of detailed information on the state of the bank.

Remember the context - - yes the crisis had intensified in the previous 2 weeks after the collapse of Lehman - - but it had been 13 months since the onset of the credit crunch; the world’s biggest insurer had to be rescued by the US government and the prospects of an Irish soft landing had evaporated and what did the Department of Finance have?

A Sept 18th PowerPoint presentaion prepared by Anglo and the financial regulator chanting his mantra on ‘resilient’ banks

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