No Losses Imposed On Senior Bondholders of Zombie Banks

Oh God.  It’s just depressing, and I apologise most sincerely for banging away at this, but someone has to do it.

Professor Patrick Honohan, Governor of the Central Bank, is an excellent fellow.  A straight talker and a man fully in control of his brief, Honohan has pointed out that the socialisation of losses, as he put it, has been rightly criticised.

What does he mean?

Simple.  The Irish people were forced to pick up the tab for the failure of two badly-run businesses, Irish Nationwide and Anglo, at a cost of something like €34 billion.

That word, failure, is very important.  Public money was poured into AIB, Bank of Ireland and Permanent-TSB as well, but at least — in the long term — those companies had the potential to earn profits and pay us back.

Nationwide and Anglo were different, in the sense that they were dead.  They were never going to make a single penny in profit ever again, and had no chance of reviving. Therefore, the money  handed over on our behalf was not a bailout of those banks.  It was, by definition, a bailout of investors who had made a very bad business call.  Those investors were ready to accept their losses and walk away, but somehow, through the intervention of the ECB and the pusillanimous, craven attitude of the two Brians, instead they won the banking Lotto and treated the bailout as manna from Heaven.  It had already been written off as a loss, and here was the Irish government giving them the biggest profit of their lives.  Result!

In recent times, we’re starting to get to the bottom of the whole stinking mess that characterised the 2008 bank guarantee.  We saw some correspondence between Trichet and Lenihan, showing how much pressure the ECB put on the two buffoons in charge of our government, and in time, more will emerge.  Already, we can see that the ECB, since Trichet has gone, is willing to contemplate the unthinkable, buying up government bonds of those countries that apply for a bailout programme.  And you know, a bailout is not the worst thing that ever happened.  After all, a programme is simply a scheduled series of loans at rates we’d never get on the open market.

It’s true that the interest rates initially were punitive, but they’ve come down, and there is a strong case for rebates on that money.  Furthermore, it’s looking more and more like Ireland will be in a strong position to demand relief on the Anglo promissory notes, and I think that eventually some sort of fudge will be devised.  Perhaps some sort of long-term loan whose value will be rendered minuscule over a century due to inflation, or some other device.  After all, it seems to be accepted now throughout the Eurozone that we had inordinate burdens placed on us, including the requirement that this tiny country should single-handedly save the common currency.

It all gets so confusing, doesn’t it?  Promissory notes, bailouts, troikas, central banks.  You want to run around with your hands over your ears screaming Lalalalalala!!!  The good Prof Lucey did his best to explain it here, but I suspect people are still utterly baffled, as I am myself.

As far as I can work it out, the whole thing comes down to this.

First, the government is spending too much.  It hands out more than it takes in, and the difference every year is about €15 billion.  That can’t go on and we have to try and balance the books.

Second, some of the banks are nearly dead, but still have a pulse.  If the government puts money into them, we hope they’ll eventually get better and pay back what they were lent.  This is the bank bailout.

Third, two banks, Anglo and Nationwide, never had a hope of surviving.  They were stone dead but the government gave them money anyway.  None of this money will ever come back to us, none of it benefited the Irish people, but you and I, and our great-grandchildren,  will spend the rest of our lives paying it off.


Well, that’s the €34 billion question, and that’s the question we’ll be expecting the ECB to answer in coming months.  Some people suggest that the collapse of Anglo and Nationwide would have led to an unravelling of the entire European banking system with catastrophic results, so why was Ireland expected to save the Euro on its own?  Was it not a common threat?  I hope the government has some dirt to dish on the ECB, and on Trichet in particular.

Honohan says the ECB would never have approved burden -sharing on senior bondholders, regardless of whether a guarantee existed or not, and that in itself raises very difficult questions.  Does it mean that a bank is never a private company in Europe?  Are governments always responsible for the actions of their management?  And if so, why are private individuals accorded such power?

If banks are not private companies, if their losses can be imposed on European taxpayers, then why are they not at all times subjected to the most minute scrutiny imaginable? That certainly didn’t happen here, or in Britain, or anywhere else for that matter.

Does it happen now?  Could the whole disaster erupt all over again?

I think so.  Lessons learned: zero

Economy Favourites

Irish Fiscal Madness for Dummies

I’d like to introduce the latest member of the Bock Collective.

Brian Lucey is Professor of Finance at the School of Business, Trinity College Dublin, which means he knows a lot more than I do about the state of our economy.  I asked him to contribute an article for BTR and, after he stopped laughing, he said, Why not?

So here we go.  This is a piece on the insane Anglo bailout and a brief explanation of how the central bank is burning your money.



This recession has been a mixed blessing.  There has been some sense of recovery of a realisation of what’s importan , the gaudy lustre of the boom having faded.  Family, friends, light, heat, carbohydrates, that sort of thing. At another level it is a blight on the landscape, what with emigration returning like a nasty social disease we though we were too posh to suffer from, the persistent sucking sound that is the national wealth being siphoned off to the banks, the realisation that we overspent massivly in the boom and, banks aside, would STILL be broke. And then there is the explosion in social meeja.. We have seen the veritable good, bad and ugly of twitterati, bloggerati etc emerge, each vying for our spare time.

Among the more evolved blogs to emerge is this very site. For years now Bock, bless his black blood pumping organ, has been publicly, vocally, eloquently and occasionally accurately, analysing the mess we find ourselves in.  Schloss Bockstein must be a veritable hive of activity daily as minions scurry, henchmen worry and sycophants curry favour with The Bock, all to create what is a unique if somewhat dyspeptic view on the world. Has it been only 6 years since he sashayed onto the virtual stage? It seems much much longer….

One of the things that our genial host has been concerned about is the Anglo Irish Promissory Notes.  These are quare things that the 2008 geni loci, the cabinet of curiosities that was then our government, issued to Anglo, late of solvency. The point in doing so was to allow Anglo to ruck up to the discount window (second floor location ) of the central bank and swap them for money. This was because Anglo had run out of everything else to swap: normally and quite reasonably banks swap illiquid assets for liquid assets, pledging say a billion in commercial loans repayable in 4 years for 0.997b in cold hard cash to be repaid in a weeks time. If this sounds like pawning your coat, be assured that it is almost totally not.  The ECB does not have three balls.  Anglo had, in 2009, run out of everything to swap. Even the fairly liberal acceptance policies of the ECB had baulked when they turned up with crayoned letters issued as documentation for a loan on a soggy field in north Leitrim inhabited by rabid geese. So, they were in danger of going bust, and that we are told is A Bad Thing. So, to keep the show on the road and repay the bondholders the then government gave these PromNotes to Anglo, who swapped them for money at the Central Bank of Ireland.

Now, central banks create money out of thin air. That’s what they do and that is what my colleague Patrick Honohan did.  The problem is, what if everybody did that? It’s one thing a chap in Dame Street creating €30 billion and therefore allowing the repayment of bondholders. What if someone in Madrid did it? Or a fella in Rome? Sure we could find ourselves in Europe with a couple of trillion (remember when we used to care about millions) in extra euro floating about. This would make the Bundesbank, the core of the ECB, angry, as Germans have had … unfortunate… experiences with inflation what with the collapse of the Weimar republic, the rise of Hitler, genocide, the obliteration of Dresden, invading Russia and all that.  And inflation is a function of too much money chasing too few goods. So, no, to stop this dreadful spectre, the ECB demands that the Irish central bank gradually destroy the money it has created. The accounting treatment of this is enough to make an angel weep, but in essence this is the central bank each year getting 3.1b from Anglo (who haven’t got it so it comes from the State, you dear reader, having been borrowed from the Troika) and then offsetting that against the same amount of real money they earlier created.  Its borrowing money to destroy it. Which makes as much sense as wearing a dead badger round your neck to keep from getting toothache. In the context of a maximum of a couple of trillion (2) in a Europe that has about ten (10) trillion of money already sloshing around it may make even less.  And when you consider that the ECB has already in effect injected the thick end of two trillion into banks through a device called LTRO , allowing them to rebuild their shattered balance sheets, it may make even less sense. Europe, never mind Germany, is not on the verge of hyperinflation, so one sees here how culture beats strategy every single time.

So, we find ourselves caught. We have no friends in the Eurozone, only creditors. Our best friend in this crisis (because we are so intertwined economically that our mess is theirs) has been what my granny called Pagan England, who have created money hand over grubby fist to keep the show on the road. Meanwhile, in Frankfurt the ECB look with fearful eyes at the experience of the Weimar republic in the 1920’s (too much much too much waaaayyyy too much money) rather than the USA in the 1930s (too little, system seizing up due to too little money).

Lets do the time warp again ….




Previously on Bock