Tuesday 21 May 2019

Dermot O'Leary: Greeks' burden sharing is a gift we should use to our advantage

As in law, precedents are influential in financial markets. The past 12 months have taught us exactly that. Cries that Ireland was different from Greece, followed by objections that Portugal was also somehow different, were all in vain as each succumbed to market forces and were forced into IMF/EU programmes.

As European policymakers struggle to get an agreement on a second aid programme for Greece, one should be acutely aware that the conclusions reached in the coming days and weeks are likely to have very important implications for Ireland. A template is now being set for countries that go back to the well for further funds.

Despite the official insistence that Ireland will return to markets in a small way in late 2012, this now has to be considered a low-probability event; market interest rates have risen further into unsustainable territory than ever before, well above rates prevailing at the time of the initial intervention last November.

Some of the conditions of the 'bailout', which it has incorrectly become known as, have increased the probability of an Irish sovereign default sometime down the road, as reflected in the markets' view. It should not have been so.

When paying tribute to the late Brian Lenihan on TV3's Vincent Browne show last week, Central Bank governor Patrick Honohan was more candid than heretofore in discussing the events leading up to the Memorandum of Understanding (MoU) with the IMF/EU/ECB.

Once it became clear that Ireland would need to request external assistance, Honohan hinted that Lenihan had a sense of optimism that an agreement could be reached that would represent a significant step forward in Ireland's fight against the banking and fiscal crises. This optimism turned out to be misplaced, as only a "plain vanilla" programme, as Honohan described it, was agreed.

Lenihan must have believed that the Troika would accept some collective responsibility for Ireland's plight, but as it turns out, all Ireland was provided with was time away from funding markets to get its own house in order. Honohan's description of Lenihan as "crestfallen" following the negotiations is telling.

Although Honohan didn't name names, it is commonly understood that the stance of the ECB on the issue of burden-sharing was the major roadblock to a more comprehensive solution to Ireland's banking problems.

It continues to be the main opponent to meaningful burden-sharing, but recent developments suggest that further private sector participation in the resolution of the crisis in Europe is coming. Having previously been ruled out at a European level until 2013, it is now back on the radar, courtesy of Germany's insistence on involving private sector creditors in the second IMF/EU programme for Greece.

The ECB continues to oppose coercive involvement of the private sector, but Standard & Poor's comments this week, when downgrading Greek debt further into junk territory, indicate that "voluntary restructuring" is actually an oxymoron.


It would be unwise to make a call on what conclusion will be reached at next Monday's meeting of eurozone finance ministers, but with Germany being the biggest financial backer for the euro project, there is likely to be some sort of private sector contribution to the next programme for Greece. Some sort of Vienna Initiative approach (named after the approach taken in Eastern Europe at the height of the financial crisis in 2009) is likely that involves negotiation between private and public sector institutions.

This will be an important precedent. If private investors can indeed be encouraged to retain their exposure to sovereign debt, then why not employ this approach with banking debt too? In hindsight, a Vienna Initiative may have made it possible to retain some of the funding for the Irish banks last September that had to be replaced by the ECB (an event in turn that triggered the ECB's concern over its exposure to Ireland).

It may also represent an opportunity to argue the case again for burden sharing with the senior debt-holders in banks in wind-down. Such an event would be beneficial as a test case for Europe to limit taxpayer exposure to banking failures.

It is an outrage that this issue seems to have passed so quietly in the public domain and that investors in unsecured debt in institutions that have cost the Irish taxpayer €35bn appear likely to be repaid in full.

Significant domestic focus has been placed on the issue of Ireland's attempts to achieve a reduction on the interest rate from its European loans to the level of Portugal. Once the full €40bn of European loans is drawn down, a 0.6pc cut would represent a saving of €240m per year. Based on the €3.8bn in senior unsecured bonds still left in the lenders formerly known as Anglo Irish Bank and Irish Nationwide, a 50pc haircut on these bonds would be the same as eight years of savings on the interest rate. It would not have a dramatic effect on the debt dynamics of the country but it would bring some element of fairness to the banking resolution.

Ireland cannot get any external assistance in closing the gap between government revenues and expenditure, apart from time. Ireland has showed its commitments on this front by way of the measures it has taken since July 2008, when the first fiscal measures were introduced. There are many more years of commitments to come on this front.

What it can, and should, do is get more assistance in resolving its banking problems. Even the IMF has called recently for a more comprehensive European approach to solving the problems. A "Dublin Initiative" would involve a medium-term liquidity facility from the ECB at the very least, but also risk-sharing mechanisms to make the Irish banks a more attractive proposition for prospective foreign suitors.

Collective responsibility would show the markets that eurozone leaders mean business in their efforts to solve the crisis. So far it has failed miserably in doing just that.

Dermot O'Leary is chief economist with Goodbody Stockbrokers

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