Time to make AIB an Irish citizens' bank

Paul Sweeney:  The Government strategy for privatising AIB has focused solely on the art of the deal – the price, how much to sell, and when to sell our 99 per cent. There has as yet been no discussion about what comes next, including control of Ireland’s second-largest bank; its future governance; the importance of credit to SMEs and individuals; or where the billions raised will be invested. These longer-term considerations are far more important than this short-term focus on the deal.

Will Ireland Need a Second Bail Out?

Tom McDonnell: Willem Buiter of CitiGroup and formerly of the Bank of England's Monetary Policy Committee reckons that Ireland should negotiate a stand-by second bailout plan in the event it can’t re-access markets in 2013 on favourable terms. Inevitably the notion was attacked as 'ludicrous' by the Government and 'unhelpful' by the Commission. Words like 'fully funded' will bring a wry smile.

While Dan O'Brien argues it would be a mistake to pursue a second bailout at this time for strategic reasons, NamaWineLake, Colm McCarthy, David MacWilliams and Constantin Gurdgiev all argue that a second bailout is inevitable and desirable. I agree that a second bailout is inevitable. This bailout should be negotiated months before the State runs out of funding.

Ireland's debt maturity profile is here:


Coupled with the still gaping hole in the public finances (see page 15) and the unsustainable price (7.5%) for 10 year bonds (Bloomberg) it is clear that Ireland's funding position for 2014 is going to be very difficult.

A lot of course depends on developments in Europe, but on the balance of probability Ireland will enter a second programme of assistance in 2013. Because of the way it is structured, the current bailout mechanism (known as the EFSF) is not able to generate sufficient funds to undertake the level of bond purchases required to stabilise markets. The EFSF is inherently unstable because is is susceptible to a degenerative spiral in which less and less financially stable countries support increasing numbers of financially troubled countries - eventually the stable core simply cannot support the troubled periphery. The EFSF is already unravelling as part of a negative feedback loop and this process of unravelling will be accelerated by the recent downgrades. At any rate it is simply not feasible to expect countries like Italy and Spain to continue to support countries when they themselves are paying higher rates themselves to borrow.

The ESM (European Stability Mechanism) will replace the EFSF either in 2012 or in 2013, and if Ireland gets a second bailout it will be under the auspices of this mechanism. It is imperative that the design of the ESM differs from that of the EFSF. One option is to give the ESM a banking licence and access to ECB funding - and then allow it to buy sovereign debt directly and under defined protocols and conditions.

As part of dealing with the thorny issue of financing Ireland's debt burden, the Anglo promissory notes have understandably taken centre stage with Minister Noonan now promising that a technical paper on the issue is being prepared. Let us hope that the process will be transparent and evidence based and let us also hope that all advice and correspondence relating to the Anglo/INBS debt between the CBI/ECB to the Irish State will be released. The ECB has been notably intransigent on this point so far. The legacy of the Anglo debt is clearly a matter of grave national importance and its imposition on people living in Ireland was a scandalous transfer of wealth. The promissory note story and mechanism is variously explained here by the newly formed "Anglo: Not Our Debt" group, here by NAMA Wine Lake, here by Karl Whelan, here by politico and here by Seamus Coffey.

Ireland's medium-term debt sustainability is on a knife edge. The NTMA is forecasting a debt to GDP ratio of 119% in 2013 - equivalent to a debt to GNP ratio in excess of 140%. This places us firmly in the same ballpark as poor benighted Greece. Relief on the promissory note repayments is a way for all of the key parties to avoid a credit event in Ireland. Ideally this should involve write-down of the €30.6 billion principal but at the very least it should entail a five year holiday on repayments and an extension of the repayment schedule. Such a scenario would help give the economy a modicum of space to recover and offers the possibility that Ireland can manage its way out of the crisis. The alternative is to remain a ward of the official lenders for the forseeable future.

IBRC Restructuring Plan

Tom McDonnell: The Story.ie has obtained a restructuring plan 2011-2020 for the IBRC (Anglo/INBS). The plan was submitted to the European Commission last January by Anglo Irish/Irish Nationwide. The Story.ie is planning to release the full document.

Wiping Clean the Anglo/INBS Debt Slate

Tom McDonnell, Michael Burke and Michael Taft: The Anglo Irish and Irish Nationwide debt must become a major political issue. The Anglo/INBS debt-burden is an unjust and unwarranted charge which the Irish people ought have no responsibility for, a charge which will continue to drain the productive economy for years to come. In the following we discuss how we can expunge this debt based on (a) renegotiating the promissory note, (b) renegotiating a new repayment schedule (if any are needed), (c) writing down bondholder debt, and (d) political strategies to strengthen the Government’s negotiating position. The starting point should be a Government announcement this autumn that it does not intend to continue with the current promissory note payment schedule and will enter into renegotiation with the affected parties.

Many people are not aware that the vast majority of the Anglo/INBS debt has yet to be repaid. While the full amount has been placed on our general government debt, this was an accounting exercise. Under the current promissory note of €31 billion, of which Anglo Irish comprises €25 billion, the Department of Finance estimates the total cost to the state to be in the order of €65 billion, including interest on the promissory note, interest on borrowing and the capital payment made to Anglo Irish in 2009 (though this total could vary depending on future interest rates). This averages out to an annual bill of €4.2 billion over the next 14 years.

• In the next four years the cost of Anglo/INBS debt will make up almost a third of all state borrowing.;
• The annual repayments will exceed the entire budget for the nation’s primary school system;
• The average annual repayment for just one year exceeds the entire cost for a next generation broadband network;
• The total cost is equivalent in scale to half of our GNP this year.

The absorption of Anglo/INBS debt has currently added over 15 percent to total Government debt. Were it to be removed or substantially written down, Ireland’s debt levels would fall back towards the Eurozone average which stands at 87 percent of GDP. Even with the recent Anglo Irish interim report and the anticipated reduction in losses, the scale of future borrowing will be substantial.
In dealing with Anglo/INBS debt we have advantages. First, the promissory notes are not part of the EU-IMF Memorandum of Understanding. Therefore, further payments under the IMF-EU bail-out deal are not contingent upon maintaining the current promissory note schedule. Second, Anglo/INBS is for the most part detached from the European financial system; the issue of contagion to other financial institutions is extremely limited.

Bondholder debt makes up only a small part of Anglo/INBS liabilities – less than 10 percent. The major liabilities are made up of loans from central banks (€40.8 billion) of which the promissory note (€23.8 billion) makes up over half.

Renegotiating the Promissory Note

While the Central Bank of Ireland (CBI) is part of the Euro system of central banks (and, therefore, cannot act unilaterally), the promissory note is the CBI’s responsibility. The loans from other central banks look set to be covered by the non-promissory note assets on Anglo’s books (over €30 billion). Therefore, the renegotiation will, in the first instance, commence with our own Central Bank.

In a renegotiation, the Government should be seeking a complete write-down of the promissory note. This would require an innovative response from the CBI. We believe this will be done as the CBI has already accepted its critical role in the Anglo/INBS debacle.

In early January 2009, the Minister for Finance relied on advice from the CBI and the Financial Regulator when nationalising Anglo Irish. This led the Department of Finance at the time to state that Anglo Irish was ‘solvent’ and ‘open for business’. Subsequently, however, the CBI admitted they had been profoundly mistaken, stating that months before nationalisation and the bank guarantee both Anglo Irish and INBS ‘were well on the road towards insolvency’. Shortly after the Anglo Irish nationalisation, the CBI was compelled to notify the Gardaí and the Office of the Director of Corporate Enforcement (ODCE) of ‘certain matters’. These admissions are signals of a potentially positive response from the CBI to rectify some of the damage its mistakes have inflicted on the Irish public.

The crucial issue is the extent to which CBI can unwind its position without risking balance-sheet insolvency (through write-downs and other strategies). Anything short of that risk should be explored and negotiated. A Government announcement that it does not intend to proceed with the current repayment schedule would provide the incentive to parties to explore all the options.

Such a course would of course require sanction or, at least, tolerance from the ECB. However, it is a matter of debate as to what extent the ECB was aware of Anglo/INBS insolvency when negotiating with the Government over the fate of these banks. In this respect, it would be helpful in terms of accountability, transparency and clarification if the Government published all communication between itself, the CBI and the ECB regarding Anglo/INBS since the run-up to the bank guarantee starting in early 2008. Such publicly-released information can help progress the debate by establishing where different responsibilities lie for propping up insolvent banks with Irish taxpayer money and central bank loans.

A New Repayment Schedule

If, at the end of this process, an agreement is negotiated which imposes a debt on the Exchequer, the next issue is the repayment schedule. There are two approaches.

(a) Reschedule with the CBI

The debt could be repaid over a greatly extended period of time (e.g. 30/50 years) via a similar instrument to the existing one. The goal would be to significantly reduce borrowing in the short/medium term with either a repayment holiday for the period that we are reliant upon EU-IMF funding and/or a payment restructuring so as to back-load the annual liability. This also leaves open the possibility of revisiting the issue in the future with a view to further write-downs. This approach may provide the CBI with more flexibility than actually writing down the promissory note itself and could constitute an effective write-down via future inflation.

(b) Reschedule with the EFSF

Alternatively, the Government could seek to transfer the promissory note to the European Financial Stability Facility (EFSF) with whom the Government could then negotiate a greatly extended loan. As the EFSF can now lend to recapitalise banks, this would simply be taking advantage of a new opportunity. Even this option, on the basis of repayment of the Anglo Irish debt, would greatly reduce borrowing in the medium-term.

Restructuring the repayment schedule, even if there is no write-down of the promissory note, would provide the Irish economy with considerable breathing space. A further option would be to substitute a ‘bullet bond’ (similar to a normal Government bond) whereby only interest would be paid annually with the full amount redeemed after a greatly extended period (e.g. a 30-year bond). At the least, we could expect annual costs to fall by a minimum of two-thirds, saving the taxpayer €2 billion a year over the next 14 years and postpone the payment of the principle to a longer-term horizon where it would be easier and cheaper to roll-over the debt.

Bondholder Debt

Bondholder debt, estimated to be approximately €6 billion, would be the subject of separate negotiation/actions. There is a clear argument in equity, as mooted by the Minister for Finance, to unilaterally write-down the unguaranteed debt. The ECB is reported to be opposed to this strategy because of contagion fears. However, the markets have already distinguished between the debts of viable banks and those of the dead banks Anglo and INBS. Financial analysts continue to criticise and express bemusement that the Government is continuing to honour unguaranteed debt: ‘because the two banks are effectively in the process of being liquidated, burden sharing by senior unsecured bondholders does not constitute a threat to financial stability’.

As for the guaranteed bondholders, it would be argued that not honouring this debt would undermine the credibility of similar guarantees underpinning the pillar banks, with implications for their ability to access the market. That is why this debt should be negotiated.

A Political Debate – in Ireland and Europe

The Government has a strong opportunity to strike a new deal on the Anglo/INBS debt. We have outlined a series of approaches which can provide the Government an opportunity to expunge this unjust debt. By opening up renegotiations on the entire amount of Anglo/INBS debt, the Government would give itself (and other parties) more flexibility across a range of issues (the promissory note, restructuring the payment schedule, and bondholder debt). This could allow for more give-and-take than focussing on one issue such as the unguaranteed senior debt.

It is important the Government keep the Irish public abreast of its goal and strategies and that this be done in an open and transparent manner (hence the publication of communications between the Government and the CBI/ECB regarding Anglo/INBS). For this is essentially a political project – to reverse the decision by the previous Government to place the private debt of dead banks on to the public balance sheet. That the new Government had no part in this vast transfer of resources (over €14,000 per person living in the State) gives it clean hands and greater moral capital.

But this is a Eurozone issue as well and it is necessary for the European public to become aware of the immense burden Ireland is carrying for non-existent banks. For instance, how would the German public react if they had to repay an equivalent dead-bank debt of over €700 billion, with annual repayments of around €50 billion for over a decade? Or if the French had to pay over €550 billion with annual repayments of around €40 billion (nearly four times the amount of the recently announced austerity package)? The appropriate Government Ministers could launch a Eurozone-wide information campaign – informing the public, commentators and policy makers of the immense debt burden that is Anglo/INBS. We believe this would elicit considerable sympathy (and not a little bit of shock), thus strengthening the Government’s negotiating position.

There are reasons why the ECB, under a new President, would be open to such a renegotiation. The Anglo/INBS debt is relatively small in comparison to the amount that the viable banks (e.g. AIB, Bank of Ireland) owe the ECB. The elimination or write-down of Anglo/INBS debt would reduce the burden on the economy. A strengthening economy, in itself, will increase the chances that the viable banks can return to private funding and that the ECB will be repaid in full.

This debate must be taken up by all sections of society – by individuals, civil society organisations, political parties; for the Anglo/INBS debt is a key component of the economic and fiscal crisis. While we cannot pre-empt or predict the ultimate outcome, we can call for the Government to suspend the current repayment schedule for the promissory notes (which requires a further €3.1 billion payment in March of next year) and enter into a renegotiation.

And if there are other, better alternatives than the ones outlined here, we welcome that. For we are only concerned here with starting the debate, not writing the last word. But that debate must start now before we spend one more cent on this invidious debt.

What to do about Anglo Irish Bank?

Jim Stewart: Much comment argues that the increasing cost of Irish Government borrowing (the second/third highest in the eurozone and over twice the cost of German Government borrowing) is a direct consequence of Government economic policies in relation to the banking system. Other policies are also likely to be a factor, such as the emphasis on fiscal austerity in the belief that this will restore confidence and lead to economic success - what Paul Krugman has called the ‘confidence fairy’.

Removing the blanket guarantee on all bank liabilities, rather than extending it, is very likely to reduce the cost of Government borrowing (on August 19th, the Minister was quoted in the Irish Times as saying that "Elements of the guarantee will not be continued from September”).

However, amending the guarantee also gives an opportunity for a much more radical intervention.

In his Beal na mBlath speech, the Minister recently restated the Government’s policy of supporting the existing debt of Anglo Irish.

“...we must stand behind our banks in order to ensure that a sustainable financial system is established and, in the case of Anglo, to ensure that the resolution of its debts does not damage Ireland’s international credit-worthiness and end up costing us even more than we must now pay”.

It is false analysis to present the options in relation to Anglo Irish Bank as allowing it to fail (liquidation) or continuing to support it. Those who advocate continued support may justify this position by calling for a type of Special Resolution regime in Ireland for failing banks, to reduce the risk of bank failures in the future. As has been pointed out by others – most recently the Bank for International Settlements, p.3 – a Special Resolution regime within one country is unlikely to work for a large institution whose operations straddle a number of different countries. Assets in other countries cannot be seized unilaterally. Legal systems have differing requirements for creditor protection in the event of a firm being forced into liquidation, further complicating the efforts of any single regulator.

A third and less costly option is to negotiate with all bond holders and purchase bonds, not at face value but at some fraction of face value. Writing down the 2009 balance sheet value of Anglo Irish debt by 50% would reduce balance sheet liabilities by €8.7 billion. Writing debt down to 10% of face value (a generous value in the event of liquidation) would reduce balance sheet liabilities by €15.6 billion.

There are some implications: Anglo Irish must not be allowed redeem any existing bonds, as it has done in the past, and then declare the difference as profit.

Such a solution is consistent with proposals for reform in the consultative document recently published by the BIS, which addresses the issue of banks which received public sector funds but most of whose long term capital did not suffer any losses.

What are the costs?

It is important to note that it is normal commercial practice to renegotiate with debt holders in the event of a corporate financial crisis. A well known example is Eurotunnel.

It has been argued that the costs in terms of reputational damage to the State would be large, the credit rating on existing Government debt would fall, and government debt yields would rise. The fact that Anglo Irish is State-owned gives some credence to these views. However, continuing with current policy to undertake to redeem most long-term debt at face value will ensure continued risk and uncertainty in relation to State finances.

These costs are likely to be exaggerated. Those firms who advise bond holders, and who may have a financial interest in maintaining the value of bank debt, are likely to complain the loudest.

Issues might arise in relation to increased risk to depositors and deposit withdrawals. The largest single source of deposits in the most recent accounts consisted of bank deposits (€33 billion), of which the largest single component is likely to be Irish Central Bank/ECB, whose deposits are automatically guaranteed. However, a risk of deposit withdrawal could be met with an extension of the guarantee to all depositors in Anglo Irish alone. The risk of not being able to issue new debt would be covered by specific guarantees.

There are fundamental changes taking place in the structure of Irish banking (the closure of Bank of Scotland, Halifax, Post Bank; the re-emergence of a banking system dominated by two banks). Government policy in recent years has been far too quick to allow – and even encourage – abandonment of the mutual form of ownership/control. This policy is continuing in the case of the EBS (see Irish Times 4/8/10 and Financial Times 4/8/2010).

Mutuals and credit unions play a key role in the financial architecture of all EU states (and for very good reasons). The largest and best-known is Rabo Bank in the Netherlands. With appropriate policies, these benefits could also accrue to Ireland (See here).

The costs associated with, and the excessive focus on, Anglo-Irish means that there has been little analysis of, or comment on, the important changes taking place in the structure of Irish banking and the implications for the sector’s likely future conduct and performance. Coupled with the absence of specific policies to provide finance to indigenous firms (a loan guarantee scheme as in the UK and other countries; a State Development Bank) these changes are unlikely to be conducive to economic success.

The rising cost of supporting Anglo Irish bank has at least clarified one issue – nationalizing this bank did not reduce the cost to the tax payer.

We need more public agreement and disagreement

Nat O'Connor:An article in the Irish Examiner presents the recent encounter between the Secretary-general of the Department of Finance (Kevin Cardiff) and the Dáil Public Accounts Committee, on the subject of available economic expertise and advice.

"Quizzed about the department’s performance during the current economic crisis, Mr Cardiff acknowledged that it needed to be more open to a wider range of advice than in the past."

"Conceding the department did not have enough expertise among its staff, Mr Cardiff nevertheless said it received expertise assistance from the National Treasury Management Agency, the Central Bank, the Financial Regulator, as well as Merrill Lynch and Rothschilds."

I hope the above list is an example of the narrow range of advisors that the Department intends to broaden out from. In fairness, I don't think that well-evidenced reports or submissions are dismissed out of hand by Finance, regardless of their source. But the methods that are used in business, economics and finance are ultimately social scientific methods. They are built upon a set of philosophical or ideological assumptions; even when these are part of statistical models and must be identified from the exclusion of 'externalities' that are difficult to measure. Hence, there is real value in seeking out and listening to different interpretations of the same factual information, as different assumptions can lead to radically different conclusions. It would be useful for the Department to continue to publish a list of who it goes to for advice, or even to institute a semi-permanent panel for this purpose.

Our decision-makers may well listen to a wide range of advice from different sides in private, but they should be more confident about publicly agreeing and disagreeing with specific ideas. Currently, it seems to be politically impossible for policians to agree in case it undermines the competition between their respective political parties. Instead, alternative perspectives are more likely to be dismissed out of hand with a refusal to engage with evidence or argument. Likewise, even the rationale and evidence underpinning official decisions are rarely given in public, in case it provides ammunition to rivals.

Ideally, our politicians and other senior policy-makers would be obliged to publish (or at least publicly explain and justify) the arguments and evidence for major decisions. The public debate on the issues should also allow room for dissenting minority opinions and alternative perspectives that were heard, even if ultimately rejected. We have a problem that public disagreement is seen as 'disloyal' and a threat to the public's confidence in Government decisions. On the contrary, the public might have much more faith that the State can deal with current crises if more information on decisions was forthcoming.

For example, Alan Dukes, now chair of Anglo Irish Bank, has stated that keeping the bank open remains the best option for taxpayers, based on calculations available (e.g. on RTÉ News). I heard him give the explanation on radio that they commissioned a range of studies and keeping the bank open was better than closing it quickly, for fear of losing more of the €70 billion or so that is owned to Anglo. It was much more convincing to hear him give some of the detail and rationale for the decision, yet the detailed studies are not available and even the level of explanation he gave was after some questionning. Why not have more faith in the public's intelligence and give a clear rationale for decisions from the outset? And if civil society counters that with better evidence, all the better for the quality of decisions made on behalf of the public.