ft.com/cms/s/0/7189814a-bd04 … ab49a.html
Please leave Anglo Irish bonds in a bog
By John Dizard
Published: September 12 2010 11:12 | Last updated: September 12 2010 11:12
Looking back, investors in bank debt should have known that something called “Anglo Irish” wouldn’t be around forever, what with the country having been independent for nearly 90 years.
Next month, Anglo Irish Bank’s subordinated debt holders may have their own version of The Troubles. The European Commission might exercise its power to relieve the Irish state of some of its overly-broad guarantees of bank obligations.
Should this happen, it will come as a surprise to some of the recent speculative buyers of Anglo Irish debt. Last Thursday, the price of some Anglo Irish subordinated floating rate notes rose by over 30 per cent, to 27.5 cents on the euro, on an announcement that the bank’s board had asked the government to approve a buy-back of the paper. The new buyers may wish they had waited before seizing this opportunity. Euro-officialdom may prevent the buy-back from going ahead, pour encourager les autres.
If the Anglo Irish bondholders finally do sink into a bog, their fate will be noted by holders of other bank bonds. The European authorities are aware of this, and may use the opportunity to reintroduce bank default risk, forcing investors to improve their homework.
While an EU bond bail-out veto may lead to another short term crisis in European bank issuance, it would open the way to a reconstitution of the financial system on a sounder basis.
Up to now, US regulators and policy people have privately touted their system’s apparently stronger balance sheet. However, the example of an Anglo Irish bond default may force them, ultimately, to impose similar reductions in principal value, on US banks’ bondholders.
At the time of the financial crisis in the autumn of 2008, the Irish government gave a two- year blanket guarantee to all the deposits and debt obligations of the country’s banks. This was good for the bank bondholders, but bad for Irish sovereign credit, which rose to crisis-level spreads last week as the market raised its estimate of the prospective losses engendered by the guarantees. The state’s ultimate losses on the now-nationalised Anglo Irish Bank are estimated at about €25bn ($31.8bn), or over €5,600 for every man, woman, and child. That might make it, proportionately, the worst financial institution in the world. For now.
Last week, Brian Lenihan, finance minister, issued a careful statement on the prospective winding-up of Anglo Irish. He reiterated the state’s support for depositors, but was less definitive in backing the bondholders.
The most interesting phrase was that the winding up plan “is being prepared for submission to the [European] Commission for approval”. The EC’s Competition Commissioner, Joaquin Almunia, issued a simultaneous statement that “a number of important aspects need to be clarified, and a new notification received, before the Commission is in a position to finalise its assessment and to take a decision”.
In plain language, that means while Anglo Irish might propose a buy-back of its subordinated bonds, and that buy-back might be included in an Irish government proposal, Brussels might not approve the plan. That would be consistent with growing support for bondholder “risk sharing” in the European policy community. The Irish government would then be able to say that it was forced to comply with Europe’s restrictions on subsidy payments, in this case to bank bondholders.
It is expected that the Commission, through Mr Almunia, will give its formal decision on the Anglo Irish plan in October. Coincidentally, that will come just about the time of the International Monetary Fund/World Bank meetings in Washington. There the governments of member countries are expected to agree a series of measures to expand the bail-out resources of supranational institutions and central banks. So if there is a European bank funding crisis as a consequence of a prospective Anglo Irish default, the financial supremos could write a gigantic cheque to cover any systemic risk.
While such fireworks would have much demonstration value, the actual prospective bondholder losses are not so large as to cause a systemic crisis. We’re not talking Lehman. Since the original issuance of the bank guarantees, the scope of the covered paper has been narrowed by extensions and amendments.
Deposits for all banks, including Anglo Irish, will continue to be covered, but after the end of this month, bonds issued before September 2008 that have yet to mature are at risk if a bank has insufficient means to back them.
After previous buy-backs, Anglo Irish has about €2.4bn of sub debt. Depending on which lawyer, official, or bank analyst you consult, another €5bn or so of senior debt might also be at risk if Europe disallows further Irish bail-outs.
A European veto of further bond guarantees could be a blessing for the Irish state and the citizens. It would draw a line under the country’s most serious liability. Please, Mr Almunia. Do the right thing.