News Brendan Keenan

Tuesday 23 September 2014

A little done – a lot more to do – on exiting bailout and bank debt

Published 14/02/2013 | 04:00

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THE definition of a gambler, as distinct from a "gaming investor", is that gamblers put their winnings on the next turn of the card.

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They usually can't wait to do so either. The Taoiseach appeared to be showing the gambler's streak when, within hours of pulling off the deal on the former Anglo debt, he pledged to get an EU refund on the money put into the surviving banks.

There has been much talk of this from the beginning, although the Government seemed to make surprisingly little of the fact that they are going to get their money back from Bank of Ireland, thanks to the bank's own successes.

Perhaps it did not want to draw attention to the fact that it is far from this happy outcome with AIB/EBS, not to mention the former Anglo, whose €30bn was still haunting the scene.

Perhaps we will hear more of the BoI achievement now that the Anglo ghost has, as they hope, been exorcised. But getting Europe to replace the €17bn put into AIB looks, if anything, an even more daunting challenge than changing the terms of the IBRC promissory notes.

First of all, they are not loans. This is real money, aka capital, which the EU would be asked to put straight back into the government coffers.

Indeed, that is where almost three-quarters of it came from, via the national pension fund, rather than being borrowed, as in the Anglo rescue.

Presumably it would legally have to go back to the pension fund. But, like the accounts of Father Ted and a few other not imaginary characters, one suspects the money will only rest briefly in the fund before good causes are found for it, such as "creating jobs". That is already the remit of the pension fund.

From the Government's point of view, that means that, although the sum involved is little more than half the promissory notes, the prize is much greater. But the fact that it is real money is also the reason why it looks more difficult to get one's hands on it.

Direct payment

It would require a direct payment from EU institutions, presumably the European Stability Mechanism (ESM), which is very different from changing the terms of a loan – and look how difficult that was.

Then there is the little point that the shares acquired by the Government in AIB are worth just a fraction of what it paid for them – €2bn as compared with the €16bn provided by the pension fund.

The exercise would be pointless, unless the ESM paid a huge hope premium for the Government's 99pc stake. That would be a field day for lawyers, in Germany and elsewhere, quite apart from the political difficulties such a payment would pose for other eurozone governments.

Against that, is the little matter of the supposed promise to break the link between banks and sovereigns. But it is a vague promise, and it is hardly a surprise that creditor governments interpret it in terms of ensuring such a thing does not happen again.

The prom notes were, in their way, unique to Ireland and it could be argued that their treatment does not set a general precedent. Paying the Irish Government money spent covering past losses would be to open an enormous cheque book for other countries.

It would appear, then, that Mr Kenny would be betting against all the odds if he invests yet more political capital in this project. But he may feel that he still has an ace in the hole.

This is the completion of a successful exit by Ireland from the bailout. It is a reasonable assumption that Europe cannot afford to have that fail.

Playing the card

The card can be played again, with the claim that present debt levels, and contingent risks that the banks will need yet more money for more losses on mortgages, threaten 'Irexit' (doesn't really work as well as 'Grexit', or even 'Brexit', does it?).

The Government may well feel that it successfully called Europe's bluff over the prom notes – or at least the Bundesbank president's bluff. Technically, the ECB Council could still have delayed approval of the deal, but the decision to liquidate IBRC greatly increased the pressure on it for an immediate sign-off.

One does not have to have been educated by the Jesuits to see the difference between Mario Draghi's "unanimous noting" and unanimous approval. There is no sign that the ECB is particularly miffed but every good gambler knows that, if you call a bluff too often, you will eventually find that the other guy isn't bluffing.

Wiser counsels may prevail, once the euphoria has died down. The Government needs to do the equivalent of the old gambler's trick after a winning run of getting up from the table and having a break, before returning to the game.

After a bit of thought, they might decide to give up on the bank debt game altogether, and move to another table. As well as the risk that nothing will come of the ESM play, the fact is that the wheel has not stopped spinning in the prom note one, and there is still the possibility of political and financial losses.

Large payments are still due to senior bondholders, which will wipe out most of this year's gains from the deal. The defenestrated IBRC executives argued strongly that early sales of the Anglo loans would lead to more calls on taxpayers to cover the likely losses. One can foresee political trouble over the status of legal actions against the Quinns and Michael Fingleton.

There is another game in town, where the odds look better. This is the exit from the bailout, where the play is not only to ensure that it happens, but that maximum political advantage is gained. That requires adroit handling.

As NTMA boss John Corrigan says in his interview today, there is no particular day when the bailout ends.

Debate

There is the day when the final troika loan is taken out, but the real end will come with a run of successful bond auctions to raise government loans. If the debate is still about bank debt and defaults, no one may notice this remarkable achievement.

Especially since moving on from this success requires continued tight budgets. There are political dangers in the conditions which might be applied to any EU or ECB back-up for the exit, and financial dangers in not asking for back-up.

Continuing to obsess about bank debt while all this is going on could prove to be a foolish distraction.

Irish Independent

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