The Financial Times urged the government to force a debt-for-equity swap on the banks. At first, I didn’t understand what that meant, but have a little patience and I’ll tell you what I learned.
In a straight-talking editorial that seems to have shocked our leaders, the FT suggested as follows:
It is time to staunch the bleeding. As Irish state guarantees near their expiry date, some banks will not be able to refinance their balances. The government should prepare insolvent banks for forced debt-for-equity swaps, which would instantly recapitalise the banks in question and cap the government’s exposure. This cannot be done frivolously; European institutions are exposed and EU partners must be consulted. But someone must put an end to the practice of handing banks blank cheques. Some Irish pluckiness would benefit us all.
No. I didn’t understand it either. How could the banks be instantly recapitalised while at the same time limiting the exposure of the taxpayer? Was this magic?
As it turns out, there’s no magic in it. The Financial Times is simply suggesting that the government should force the bondholders to accept the reality that their investment failed, as they would have to do if they had invested in any other kind of business.
The letter would go like this.
We were sorry to hear that your investment went belly-up, but that’s going to happen when you take a risk. After all, you were hoping to get a big pay-off if the gamble worked out.
Unfortunately, your gamble didn’t work out, but not to worry.
You’re now the proud owner of a bank.
Best of luck for the future,
Brian Lucey sets out the argument clearly HERE