Thursday 23 November 2017

Max Doyle: Short view

UPSIDE and Repayment are two main principles of lending. If things work out, lenders get repaid plus some interest. Contrast with equity holders who can enjoy multiple returns but never have the ability to demand repayment.

Debt repayment is binary: one either repays on time or defaults. But there are many other hues of default that lenders build into documents which can trigger unwelcome repayment events.

An informal discussion about restructuring one's debts, or indeed acting like one is insolvent, can lead to default outcomes. Even though Anglo Irish has not defaulted on its subordinated bonds (rather it swapped them for new securities), a trigger event will result in a payout in the credit derivatives market. This is why Ireland has to be very careful and expertly advised, if we are about to embark on a plan to restructure our debts and share pain. We don't want to set the hares running too early, though running they will be.

The objective of Europe, the ECB and the IMF is to take Ireland off the pitch in the short term, while Europe and the markets slug it out. At stake is the euro. (This explains the convenient oversight of the destruction that the Budget will actually inflict on the economy and the ludicrous growth assumptions.)

In effect, Europe has given us 12 months to plan a debt restructuring within the euro (if it survives). The markets want a broad guarantee for euro sovereign debts, same as the US -- a one-in all-in approach -- but that's not a runner now. The alternative may be to allow the ECB to jettison its raison d'etre and start printing money, thus inflating asset prices.

Take the money now and let's figure out a future proposal for our creditors. Just let's not shout about it.

Max Doyle is a principal of Prime Focus Management Ltd, specialising in investment and turnaround of Irish companies

Sunday Independent

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