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Thursday, October 7, 2010

Should we burn the bondholders?

The Government mantra ever since the banking crisis began was that the debt obligations of all banks would be paid for in full. The extended Government bank guarantee included bondholders and subordinated debt. Minister for Finance Brian Lenihan has always insisted that Anglo Irish Bank’s senior bondholders – those with the lowest ranking debt in the bank – will suffer no losses.

In recent times the language has changed. He seems to be opening the door to cutting a deal with the bank’s creditors, particularly with subordinated bondholders. These are investors at the back of the queue whose debt is paid only after senior bondholders have been paid – who may be expected to share in the “burden” of bailing out the bank. The total state investment in Anglo will reach at least €34 billion and may increase further.

I do not intend to deal with the outrageous nature of this bailout and state ‘investment’ in Anglo. I have done that in other posts. I am however posing questions about the nature of the bank guarantee and in particular the protecting of bondholders. We are constantly told by Government that senior debt obligations rank equally with deposits and other creditors under Irish law. So what – laws can be changed. The total amount owed to bondholders is about €4 billion. Subordinated debt amounts to about €2.4 billion.

I pose this question – would the sky fall in if we burned the bondholders? The Armageddon scenario painted by the Government that it would undermine the entire banking system is without foundation and completely without credibility. The banking system has been undermined anyway despite state guarantees and a recapitalizing of the banks.

I would like to see Anglo wound up as quickly as possible. The terms of the state guarantee should be revisited with the protection of all bondholders removed. This would allow the Government to negotiate with the bondholders on their terms and in the interests of the Irish people. We must remember that Anglo Irish Bondholders invested in a bank that was behaving in a reckless and greedy fashion. Their money was being lent to people to speculate recklessly. The speculators gambled, the bank gambled and in a way so did the bondholders. So why should they be protected from any pain?

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