Getting out of this guarantee ?

I know we like to complain a lot about various things but the real killer for Ireland the banks and the guarantee. This is what makes us potentially worse than Greece. Two million Irish taxpayers offering to indemnify the European interbank lending market from the consequences of its stupidity and greed is the dumbest thing we have done since we invited Strongbow over here in 1169. I think how we wriggle of out this is the key element in whether we survive or not as a nation with any sovereignty at all.

It looks like the Irish banks’ losses on developer loans will exceed € 50bn and they will also take significant losses on the €150bn residential mortgages outstanding and the government bonds they bought in 2008-9. Plus they are doing a good job losing money on their loans overseas (witness the fiascoes in the US). So the hit here could easily exceed €70bn or so if nothing changes. Remember, NAMA is a sideshow; as long as the guarantee is in place, we own this crap already.

So how to get out of the guarantee ? Since the government issued its guidance last December on the guarantee extension, it has been relatively silent on the matter. I have not seen the extension actually go through the process or get turned into law (please alert me if you have). The draft paper was pretty much a 5 year extension of the original guarantee but it has gone nowhere (at least in public).

Assuming DoF and NTMA can handle primary school arithmetic (I have my doubts sometimes) the game is to make sure that as much of the losses hit the bondholders and as little as possible hits the taxpayer, the depositors and the ECB (who are a collateralised lender as opposed to unsecured, which is the case for much of the bonds and whom we need to keep sweet).

We have I think 2 useful weapons in this battle; one is the NTMA who are reasonably skilled at dealing with bondholders and the second is examinership. As long as the banks don’t actually go bust before September 2010 (because that would trigger the payouts to bondholders before the old guarantee expires) then the bondholders can be threatened with examinership or converting to equity (which will rapidly be consumed by the losses) as September 2010 approaches. Examinership is a useful process because the banks could operate some of their essential functions while ignoring their creditors. It is also useful because it happens on our turf and in front of our courts.

The government could revise the guarantee to protect depositors (or provide more bonds to be repo’d to the ECB) while the examiner goes about his / her business. An examiner has a lot of freedom to restructure businesses (fire the senior management, cut salaries etc.) and sell assets (Zachodni, M&T Bank, Burdale etc.). Many of the bonds are unsecured and are medium to long term duration, which makes their negotiating position with the examiner and the incoming investor (the government / NPRF) pretty weak. It should be possible to agree a settlement that is favourable to the taxpayer, provided the clowns keep their nerve.

This may explain the recent noise around things like delaying recognition of losses at the banks, the continuation of denial etc, the lack of change at the top, the bondholder muttering. The real game is to screw the bondholders without going under too early, thereby allowing us to recapitalise the banking sector without it costing € 50bn+ which will sink our economy completely. And frankly, anyone who bought bonds off Goggin, Sheehy, Fitzpatrick et al. deserves to lose their shirts.

So the taxpayer hit looks like maybe €15-20bn rather than € 50-70bn. This is painful but probably manageable. Right now, I see this is the best strategy for our glorious leaders but am interested to hear what other Pinsters think.

Escaping with only 20 bn in losses would indeed be a miracle.

I see pretend and extend until September 2010 as the only way out, frankly.

It is not true, though, to say that the new guarantee is the same as the old one. The new one is much more restrictive, mainly guaranteeing new bonds issued under the first guarantee, but looks like it is facing opposition from europe, as it guarantees some classes of subordinate debt (basically the debt buyback stuff, I think - some backfired stroke there “buy this lads, and we’ll guarantee it for you” EU: “Computer says no”).

But wouldn’t many of the bondholders be insurance/pension funds?
Thus creating a new pension problem? :slight_smile:

Tell a lie, looks like it has been approved by europe. The only wrangles now are about the price.

@Fooled by randomness

great post.