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Burning the bondholders is morally right: Honohan


Central Bank Governor Patrick Honohan argues with Department of Finance official over payouts of €270m

Central Bank Governor Patrick Honohan argues with Department of Finance official over payouts of €270m

Pic Steve Humphreys

Department of Finance official Ann Nolan

Department of Finance official Ann Nolan

Tom Burke


Central Bank Governor Patrick Honohan argues with Department of Finance official over payouts of €270m

Central Bank governor Patrick Honohan has urged the Department of Finance to block payments to junior bondholders in the former Anglo Irish Bank, the Irish Independent has learned.

In emails with top Department of Finance official Ann Nolan, Professor Honohan said the "moral case" for ensuring that the surplus money from the liquidation of IBRC is returned to the taxpayer is "almost unassailable".

And he said that if the State cannot persuade an Irish lawyer to fight its case, it should engage top US debt lawyer Lee Buchheit.

Mr Buchheit, who has been described by 'The Guardian' newspaper as "a fairy godmother to finance ministers in distress" and by the 'Financial Times' as a "crusader for financially stricken countries", has worked with both the Greek and Icelandic governments.

Bondholders owed €270m are almost last in line to be paid from the liquidation of more than €21bn worth of Anglo Irish Bank and Irish Nationwide Building Society assets that have been sold off by the special liquidators. But bondholders would be in line for payment before the State can part-recover funds provided via the controversial promissory notes, which totalled around €30bn.

Ms Nolan, second secretary general at the Department, said the Attorney General was examining whether it was possible to have some of the promissory note funds repaid before junior bondholders get their money. But she conceded she wasn't optimistic.

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Mr Honohan, who announced his retirement last month, said European rules put in place after the financial crisis could help Ireland's case.

"The more I think about it, the more I am convinced that the State should take further steps to ensure that unexpectedly strong asset disposals by the IBRC liquidator return to the State and not to subordinated debt holders," the Governor said, in a March 4 email to Ms Nolan, released under Freedom of Information.

"Clearly the moral case for this is almost unassailable but there are also good financial economics arguments."

Mr Honohan, who has previously criticised the decision to guarantee junior bondholders in 2008, argued that while the sum involved isn't big in the grand scheme, it is still "worth a big legal battle".

"And the principle is important for our case in Europe and for the public acceptance of financial sector policy in general," he wrote.

Prof Honohan argued that, under new European rules to deal with failing banks, the taxpayer will no longer be tapped to bail out junior bondholders.

He said that if the State can't persuade a lawyer here to take on the case, then it should turn to Mr Buchheit.

He crafted the restructuring deal that cut Greek debt by €100bn in 2012 and inflicted huge losses on bondholders.

In a response on March 20, Ms Nolan said it had been the Department's preference that the promissory note funds would have been provided in such a manner that would have allowed the taxpayer to be repaid before subordinated creditors. But she noted this was "not acceptable" to the Central Bank or the European Central Bank.

"Having insisted that the funds be injected in a manner which did not enable repayment in priority to the sub debt, it is somewhat surprising that you now suggest that priority should be over-ridden," Ms Nolan wrote.

"This is even more surprising considering that you originally urged that the winding up of IBRC be conducted on the basis of a members voluntary liquidation, which would have required a declaration that the debts of IBRC (including the sub debt) could be paid in full within 12 months."

Ms Nolan said the Attorney General's advice had been sought to see if some of the money injected via the promissory notes can be recovered ahead of junior bondholders.

She said it was her strong preference that the State is paid ahead of the bondholders, but warned any proposal to alter this would not be legally straightforward.

In a response that same day, Mr Honohan was not convinced.

"Now, Ann, there's no need to take that approach," he wrote.

"We all know that there are things that can be contemplated now that would not have been safe or effective even a couple of years ago."

Junior bondholders in IBRC include Munich-based Xaia Investment GmbH, which is owed €17m. Its chief executive said he expects to get all of its money back.

Irish Independent