Wednesday 27 March 2019

Seamus Coffey: So how much has been paid out to unsecured unguaranteed bondholders in the Irish banks?

WRITING in yesterday’s Sunday Independent Colm McCarthy argues that Ireland should take a legal action against the actions of the ECB in the autumn of 2010 which, according to the article, have had "enormous costs, running to tens of billions" which has "been arbitrarily added to the Irish debt burden".

There is little dispute that the unguaranteed unsecured bank bondholders were repaid, in part, at the insistence of the ECB. One member of the ECB’s Governing Council has told us why the unsecured unguaranteed bonds in Anglo and Irish Nationwide were repaid.

In a speech delivered in Dublin in April ECB Governing Council member, that Jörg Asmussen, admitted it was “to ensure no negative effects spilled-over to other Irish banks or to banks in other European countries.”

Asmussen only became a member of the ECB’s Governing Council in January 2012 so this a view that was subsequently relayed to him. The important clause referring to “banks in other European countries” was not in the original draft of the speech but was added by Asmussen in delivery. It was not by mistake.

At the time of the expiry of the blanket guarantee in late 2010, the ECB’s hope was to try and maintain a functioning market for bank bonds and inter-bank lending across the eurozone. This failed and the ECB had to step in with its three-year Long-Term Refinancing Operations (LTROs).

Given the failure of this policy is does seem appropriate that Ireland should seek redress for a forced policy that is unlikely to be repeated elsewhere. So how much has been paid out to unsecured unguaranteed bondholders in the Irish banks?

Across all the covered banks there was just over €2.4 billion of unguaranteed unsecured bonds repaid from the expiry of the original blanket guarantee in September 2010 to the end of December that year. Figures released by the Central Bank of Ireland show that on the 18th February 2011 the covered banks had €16.4 billion of unguaranteed unsecured bonds outstanding.

We don’t know the breakdown by institution for the €2.4 billion repaid in the last quarter of 2010 but this is provided in the Central Bank figures. There is also likely to have been some unsecured unguaranteed bonds repaid in the first seven weeks of 2011.

All told, it seems there was something close to €19 billion of unsecured bonds which became unguaranteed in September 2010. A recent parliamentary question to Michael Noonan tells us that there was just €5.2 billion of unsecured unguaranteed bonds left in the covered banks by the middle of July 2012.

Since the end of the original guarantee in September 2010 around €14 billion of secured unguaranteed bonds from the covered banks have been repaid. This is equivalent to around one-fifth of the €64 billion of recapitalisation funds the State has provided to the covered banks.

Anglo Irish Bank and Irish Nationwide Building Society account for around €4 billion of the total. These are the “bust banks” in which senior bonds should not have been repaid. This is a significant sum but it is not “tens of billions”. Allied Irish Bank is not much different to the initial two and the total amount of unsecured unguaranteed bondholders it had was likely to have been around €6 billion. It is hard to see if losses in Bank of Ireland, Permanent TSB, and the Educational Building Society would have made losses to senior bondholders a viable option.

After imposing losses on senior bondholders in two small banks, Denmark ceased this practice in order to improve access to funding for its remaining banks. The final haircuts to senior bondholders in the two banks averaged around 20%.

If there had been 50% haircuts applied to the unguaranteed unsecured bondholders in Anglo/INBS and say 33% applied to those in AIB the savings would have been of the order of €4 billion. Colm McCarthy points out the ECJ could rule that the ECB has to make good the losses imposed because of its actions. He quotes article 340 of the Treaty on the Functioning of the European Union:

". . . the European Central Bank shall, in accordance with the general principles common to the laws of the member states, make good any damage caused by it or by its servants in the performance of their duties."

€4 billion is a lot of money. Could we get it back to suing the ECB? I don’t know. We do know that there has been an October deadline set for some kind of announcement on a “bank debt deal for Ireland”. We also know that Jörg Asmussen played a role in Ireland’s explicit mention in the summit statement of the 29th of June which said that:

The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme.

We don’t know what the detail of this principle will be yet but hopefully it will be worth more than €4 billion. Of course, taking a case against the ECB would be more than just about money; it would be about establishing the boundaries in which European institutions can operate. Depending on the documentary evidence available (such as various letters from the ECB to the Department of Finance) it could be possible to prove that the ECB over-stepped its mandate.

Ireland’s ability to emerge from the public debt crisis is still far from certain. Every avenue to ensure that should be explored. The ECB have been portrayed as the bad guy who are the source of a lot of our ills. However, the ECB have admitted that Ireland “took one for the team” and their recent actions suggest they realise that some payback is due for this.

Taking legal action against the ECB may have a feel good factor about it but it is unlikely to achieve much. If nothing is delivered in an overall deal by October then pursuing the decisions in relation to the €4 billion of unsecured unguaranteed bonds in Anglo/INBS and €6 billion in AIB would be a distant second best.

While decrying the ECB is it important to recall that they has little to do with the introduction of the two-year guarantee in September 2008. This is a quite from the ECB’s opinion of the original guarantee which it published on the 3rd of October 2008:

"… the ECB notes that the Irish authorities have opted for an individual response to the current financial situation and not sought to consult their EU partners. In view of the similarities of the causes and consequences of the current financial distress across EU Member States and the potential interdependencies of policy responses, it would have been advisable to properly consult other EU authorities on the envisaged legislative plans."

The original guarantee was very much a solo-run and saw over €70 billion of senior bonds repaid by the covered banks over its duration. Even in the absence of a guarantee senior unsecured bondholders in viable banks were unlikely to have suffered losses (even if this viability only arises because of capital injections by governments). Senior unsecured bondholders in defunct banks should not be repaid in full. We will be able to see how this is played out in Spain over the next 12 to 18 months.

The ECB may have forced the repayment of €4 billion of unsecured unguaranteed senior bonds in Anglo/INBS but decisions in Ireland are even more culpable for the repayment of unsecured senior bonds in defunct banks.

Ireland has pumped €64 billion of money into recapitalising our delinquent banking system. It would be far better to focus on a deal that takes into account all of this money rather than a limited legal action against the ECB that focuses on just a small part of it.

Seamus Coffey lectures in economics at UCC

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