Thursday, 26 January 2012

Oh dem bonds, in layman's language

ELVs, Promissory Notes, senior/junior/secured/unsecured bondholders – if it’s all too much for you to get your head around, here is a summary of what’s happened to us, all in very simple straighforward language.

In the early years of the Noughties Anglo Irish Bank burst onto the Irish banking scene in a big way, began to make massive profits. In doing so, however, it was bending/breaking the most basic rules of banking. It gave out loans recklessly, not just by the hundreds of thousands but eventually by the hundreds of millions; it borrowed recklessly, not just by the tens of millions but by the tens of billions. Soon even the most established of Irish banks followed suit, and we had ourselves a property bubble.

Well, the bubble burst, as bubbles do, and when it did Anglo and the other Irish banks were left exposed, very exposed; in fact they too were burst. Also left very exposed, however, were those who had loaned the money to those Irish banks, the institutions we now know as the bank bondholders.

When the ECB, which had slept its way through the bubble years, woke up to what was happening the alarm bells went off. The bank bondholders – German and French banks especially – weren’t just exposed to the Irish banks, they were also exposed to Greece, to Portugal, to Italy, to Spain. If the Irish bank bonds weren’t paid, the whole house of cards could come tumbling down – one by one those countries would fall, would fail to pay their bonds, and one by one the big German and French banks would be in trouble, big trouble.

Oh, what to do? The ECB decided there was only one thing for it – they would hold back this tide, and the first line of defence would be the Irish banks. 

But, there was a problem – where in all the other nations the debt was sovereign, bonds taken out by the governments, in Ireland the debt was private. Those bonds were deals done between consenting adults in private for-profit arrangements and under normal commercial practice the bondholders would now suffer a hit, a haircut. They had been blinded by the possible rewards, they hadn’t properly assessed the risk, hadnt done appropriate due diligence (in many instances deliberately evading their own more assiduous regulator by setting up a little office in Dublin to close the deal, under the far softer Irish regulator); under another basic rule of banking – WARNING: YOUR INVESTMENT MAY FALL AS WELL AS RISE – they were now faced with the consequences of their failed investment. It didn’t happen – they were bailed out.

The ECB, now the European Canute Bank, stepped in, and to protect those big German and French banks placed a dam across this rising tide of bad debt. WE are that dam, we, the people of Ireland, have been blackmailed, bullied and betrayed. The ECB has used its financial muscle to blackmail a weak government of a weakened member state into making public what is a private debt; the EU – the twin-headed monster Merkozy especially - has used its political muscle to bully a weak government of a weakened member state into accepting this deal; our own governments, this one and the last, has betrayed its own people and bowed to the demands of the ECB and the EU.

IF we had never been burdened with this bank debt the probability is that we would never have needed intervention from the IMF or anyone else. We had a budget deficit, we had problems with massive waste in our public spending (too many politicians for starters, and obscenely overpaid), but we also had massive savings in our National Pension Plan. Without that additional bank-debt burden we would already be growing our way out of this mess; with it, we are crushed.

Our governent must end these payments now, immediately. Playing with the terms of repayment – interest rates or duration – is not the answer. It’s like the cartoon of the big fat man on the small thin man’s back – ‘I’ll do everything I can to lighten your load, but I’m not getting off!’

The ECB were the ones with the problem if those bank bonds weren’t repaid; the ECB should have taken over those bonds themselves, should have built a mechanism (we know how good they are at ‘financial engineering’) whereby they assumed responsibility for payment. Imposing them on the people of Ireland was wrong from the start, and wrong at every level conceivable.

If our government won’t act, then for the sake of ourselves, for the sake of comign generations, it’s up to us. Act. Follow our lead in Ballyhea and Charleville – march, protest.

Diarmuid O'Flynn.


  1. Inaccurate in a variety of respects:

    1. the trick in Anglo's business model wasn't reckless lending, but borrowing wholesale and lending retail.
    2. the sources of the money Anglo used were not "largely French and German banks" - that's often repeated, but has no evidence supporting it in Ireland's case. The German and French banks *were* heavily invested in their traditional investment markets such as Greece, but Ireland is not one of those markets - we are, instead, traditionally a US and UK investment market - and based on Central Bank figures, that is the most likely source of Anglo's funding.
    3. Anglo didn't create the property bubble - it helped fund development, but wasn't active funding mortgages
    4. the ECB has no bank regulatory function - the regulation of Anglo was in the hands of the Irish regulator
    5. "in all the other nations the debt was sovereign, bonds taken out by the governments, in Ireland the debt was private" - rubbish.
    6...and on and on.

  2. Ibis, inaccurate in a variety of respects:
    1. There was no trick in Anglo, it was reckless borrowing and reckless lending, and it started with the international financial institutions. The intro of the euro meant a glut of easy billions available at low interest rate to euro-countries like Ireland. Those who lending their tens of billions to the Irish banks, what due diligence did they do to see a) if their money was being wisely used and b) if it could be repaid? Very little, obviously; in fact many of them, to escape their own regulator in Germany, would negotiate the deal in Berlin or Frankfurt or however, then open a 'convenience' offic/branch in Dublin. Did Anglo do their due diligence on their loans? Did any of the Irish banks, eventually? Trick me arse - reckless, top to bottom, the basic principles of banking tossed in the bin.
    2. The source of the money - what do YOU know? Here's a link I used, go and argue it with this guy, if you like, but there are a hell of a lot of French and German banks in there.
    3. I didn't say Anglo 'created' the property bubble; I stated that 'it was bending/breaking the most basic rules of banking. It gave out loans recklessly, not just by the hundreds of thousands but eventually by the hundreds of millions; it borrowed recklessly, not just by the tens of millions but by the tens of billions. Soon even the most established of Irish banks followed suit, and we had ourselves a property bubble.' That it is absolutely accurate, every word.
    4. A few lines from the ECB's brief: 'For the performance of these Eurosystem tasks, the Statute of the ESCB assigns
    to the ECB and the euro area NCBs a wide range of functional and operational
    competences under Articles 17 to 24 of the Statute. In addition, the ECB:
    • enjoys regulatory powers and the right to impose enforceable sanctions in case
    of non-compliance with ECB Regulations and Decisions under Article 110 of
    the Treaty and Article 34 of the Statute (see Section 2.5.3);
    • monitors compliance by the NCBs with the prohibition of monetary financing
    and privileged access to financial institutions for the public sector (see
    Section 2.5.5).
    2.3.2 Other tasks
    In addition to its core functions, the Eurosystem has to contribute to “the smooth
    conduct of policies pursued by the competent authorities relating to the
    prudential supervision of credit institutions and the stability of the financial
    system” (Article 105(5) of the EC Treaty).' If you have a mind to do so you may read the rest of this document, but pay particular attention to the chapters from Page 41 onwards - here's the link:
    5. In Greece, Portugal, Spain, Italy, the major problem is sovereign debt, government borrowing; here, when the crisis broke, the problem was bank debt. At the time of the blanket bank guarantee, Sep 2008, our national debt was low and we had plenty in reserve; we did have a major problem with the deficit, a problem this government STILL hasn't had the guts to tackle, but the bank debt on top of that sank us. You didn't have to be an economist to do the simple arithmetic - the total bank debt was over €70bn which, with interest, would certainly top €100bn; stack that on top of the growing sovereign debt, what chance Ireland? With the banks having to plough every cent they made back into paying off bonds, with us having to supplement them with billions every year (the Promissory Notes, the capital 'injections), what chance growth?
    6 And so on and on.

  3. What do I know about Anglo bondholders? Hmm. Well, first, I know that the Golem list - originally from Guido Fawkes - is about as credible as a moving statue. It's a list of mixed types of bondholders, definitely junior and maybe senior, edited to remove any Irish bondholders. How do I know? Look halfway down the discussion on the blog that originally published the list, and you'll see a guy from Deka GmBh wondering why they're on the list - and Guido tells us - they own a junior Anglo bond. One which was written down 60%, not bailed out. And one which was also owned by Wexford Credit Union, but mysteriously they don't appear on that list.

    So we know it's a redacted list chosen to tell a particular story. Credible, not.

    Where else can you look for information about the origin of these bondholders? Well, a good start would be to look at the aggregated balance sheets of the bailed out banks - or "covered institutions" in Central Bank parlance. These are available from the Central Bank on their website, something apparently either unknown to, or of no interest to, Ireland's media:

    Table A4.2 is the one you want, liabilities in particular, and the securities columns. The origin of bondholders is tracked to Ireland, the eurozone, and rest of world - and you'll see that eurozone bondholders and depositors made up at most about 7% of the money base of the bailed out banks.

  4. Apolgies for the delay in getting back to you Ibis, busy times in my day-job.

    First, on the Guido Fawkes list: So, because an anonymous poster who claims to be from Deka GmBh wonders 'why they're on the list', that's enough for you to know that this is not a credible list? And have you met the guy from Nigeria who has millions stashed away for you in his bank, if you follow a few easy instructions? That list has been accepted as credible by far more learned people in the world of economics than myself, so I too accept it. If you disagree with it, I suggest you take it up directly with Guido - he's on Twitter, under just that name, Guido Fawkes.

    Your second point: Namawinelake informs me, and I quote - 'I believe that is wrong and will check with the Central Bank, but given the Central Bank regards all 450+ banks in the IFSC as Irish banks even though they don't service the domestic economy like Bank of Ireland or KBC, the point made by the commenter is moot, because "Irish banks and bondholders" would include banks that are simply located here for tax or regulatory reasons.'
    Again, I accept what Namawinelake says, again if you disagree, you can take it up directly with him on Twitter, again using that title - namawinelake.

    For myself, I wrote the above blog only to inform. Personally I don't give a damn who the bondholders are or where they're from; they made those deals, they're consenting adults, they're capitalists, they assessed the risk/reward involved, they would not have shared - never mind given in their entireity - their profits with the Irish people, they should now suffer - in their entireity - their own losses. If you're going to respond to me again, then before you engage in anything else please address this fundamental point.