Sunday 4 December 2016

There's no escape from looming Anglo bond

The decision to honour an unsecured bond for Anglo has been met with resentment, writes Barbara McCarthy

Published 30/10/2011 | 05:00

THANKS a billion, Anglo. Thus was the reaction of many people across the country as the Government promises to honour a €718m unsecured, un-guaranteed bond for the now renamed Irish Bank Resolution Corporation (IRBC) on Tuesday.

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Just days after European leaders provide debt relief for Greece by recapitalising its banks, experts say we have ended up with a crew cut, while they wangled a haircut and blow-dry.

Minister for Finance Michael Noonan said the overnight deal would leave Greece with up to 16 years' austerity, hence for the sake of sovereignty it was important to conform -- but many people dispute this, saying the Government is just playing softball.

"It's unprecedented that we continue to honour these bonds. Anglo is insolvent. There is no logic to this decision," said political activist Declan Ganley. "Come Tuesday, the unsecured guys who gained their position at a big discount, get their free billion."

Mr Ganley added that trading activity meant the bonds may have changed hands and that very few of the original holders were still in position.

Brian Lucey, a finance professor at Trinity College, agreed. "The Government should refuse to put any more money into Anglo and should require the ECB to put in place proper a medium-term liquidity programme for the covered Irish banks," he said. "But the Government doesn't answer to the people of Europe, it answers to the people of Ireland and it's us who matter."

Though Enda Kenny recently promised that no taxpayers' money would be used, economist Constantin Gurdgiev argues otherwise. "Anglo made over €3bn from sales of its US loans to bondholders, but that's not their money to use. Taxpayers have injected the capital. The first and foremost liability is to repay money the Government owes, not to pay unsecured un-guaranteed bond-holders, thus destroying the clear structure of prioritisation that a resolution company or a liquidation process should have."

Anglo is government-owned and it should manage its overall liabilities so as to ensure that the debts incurred in the process of liquidation are paid down first.

In normal circumstances un-guaranteed, un-secured bondholders would have walked away with nothing," he added.

The chances of them taking the bank to task are slim, so why pay 100 per cent, without any kind of reduction? Clearly, Mr Noonan is weighing up the €150bn of cheap funding provided through the ECB and trying to gain a few brownie points with Europe -- and especially Germany, which is up to its front teeth with the Greeks.

But the government move is not totally unsupported.

"This ensures that Ireland rapidly returns to markets on its own feet," said Graham O'Neil, director of investment policy at TierOne. "Relying on Europe or the IMF for funding is risky and would ultimately lead to loss of sovereignty. Also, the ECB would fear that investors would treat all senior bank debt as risky and push up funding costs for banks in Europe. That could make supporting the banks even more expensive for taxpayers."

Ryan McGrath, a bond trader at Dolmen Securities, said we didn't have an option.

"Debts are debts. We sold our sovereignty already after overspending as a nation. If you borrow, you have to pay it back -- and unfortunately there is very little we can do about it now."

The government move is getting some good press abroad. Franklin Templeton, one of the world's largest bond fund management companies, sees Ireland as an "inspiration" -- and has bought sovereign bonds itself. In an article that appeared in the Wall Street Journal earlier this month, Dr Michael Hasenstab, a senior vice president, explained that we were doing sterling work.

"The IMF now expects it to return to a surplus of 2.3per cent of GDP by the end of next year. This is in sharp contrast to Greece and Portugal, which both have current-account deficits still hovering around 10 per cent of GDP."

But what about the bond owners? Who would buy into a distressed bond?

"They would be institutional professional investors, hedge funds, and distressed debt players rather than retail investors," said Mr Gurdgiev. "Either way, they took a smart bet. These were extremely high-risk positions, with an 80 per cent or higher probability of default.

"The current bondholders bought them for up to 20¢, and in some cases probably even less. Now they are being repaid at €1 on their money -- courtesy of the Irish Government's misguided policy that has no precedent in the real world of finance."

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